W10_GGS_Materials Procurement, Logistics and Warehousing System Selection Alt.3

Problem Statement

Being late in materials delivery, will create significant impact to the project objective. Case study in a mining company has been selected to be explored to answer the problem: what are the feasible solutions that the project team in the company can use, in order to ensure the materials will be available for the project when needed?   

Feasible Alternatives

The five alternatives to consider in order to answer above problem have been explained in blog W9

Analysis and Criteria

Force Field Analysis technique will be used to analyze the alternatives. The selection criteria of the five alternatives will be the highest score on positive forces and the lower effort to reduce the impact of negative forces. The decision will not be made until all alternatives have been completely evaluated.

This blog will discuss alternative no. 3 if this alternative is applied in the company. Based on the author’s observation and discussion with the others project team, the following are the proposed simplification and improvements that can be offered to the SCM Department:

Procurement:

  1. Review and improve procurement business process. Improve process of Purchase Requisition to Purchase Order. Currently this process are not controlled by project team as client or user
  2. Dismiss silo organization/mindset. Increase communication chain between Procurement and Project team, the purpose of procurement department is to support project needs by following the set up regulation, not just to follow the regulation
  3. KPI (Key Performance Indicator) of Procurement  Department must be integrated with the KPI of user, so they can support each others
  4. Recruit more staff depend on load, but with engineering background. It is better to have Procurement Analyst not just a Buyer
  5. Punishment and reward system to suppliers must be strongly and consistently implemented
  6. Improve tracking of materials supply. It is currently not fully supported by system – or limited access given to the project team
  7. Update vendor list regularly and engage more manufacturer or at least official agent in the list, not a second hand or third hand who does not have enough technical knowledge of materials/equipment
  8. Improve automatic order when warehouse minimum stocks have been achieved.

Logistics and Warehousing:

  1. Prioritize shipping schedule, it should be mainly applied FIFO       
  2. Centralized Warehousing and Lay Down material for project          
  3. Improve material record status system. In and out materials from Warehouse record must be updated and actual
  4. Improve materials delivery status and quantity. Data  in the system and actual MUST be the same
  5. Punishment and reward system to transporters must be strongly and consistently implemented
  6. Improve tracking of materials delivery and record. It is currently not fully supported by system – or limited access given to the project team
  7. Improve material check process when arriving to site (quality and quantity)

The force field analysis of the third alternative if the above recommendations are followed, is shown on the following tables:

Figure – 1 Procurement Field Force Analysis – Alt 3

Figure – 2 Logistic and Warehousing Field Force Analysis – Alt 3

Conclusion and selection of preferred alternative

The positive forces score from the three area of concerns (Procurement, Logistics and Warehousing) above are higher than the negatives forces. The details action plan to strengthen the positive forces and to reduce the impact of the negative forces will be explored in the last blog of the preferred alternative selection.

Next Step

 

Post evaluation and monitoring for the preferred alternative will be described in the last blog of the preferred alternative selection.

Reference:

  1. Brassad, M., Ritter, D. (2010), The Memory Jogger 2, Second Edition, GOAL/QPC
  2. Richardson, G., T., W., Supply Chain Management. Retrieved from: http://www.witiger.com/internationalbusiness/SupplyChainManagement.htm
  3. Mindtools, Force Field Analysis. Retrieved from http://www.mindtools.com/pages/article/newTED_06.htm
  4. Meringer, J., James (2003), Procurement Management Plan for the EMD Project. Retrieved from: http://edhs1.gsfc.nasa.gov/waisdata/emd/pdf/117emd001.pdf

 

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W10.0_Ary_Tax Savings from Asset Depreciation

Problem Recognition and Definition

Continuing last week topic W9.0_Ary_Asset Depreciation Using MACRS, in this time author will extend the topic to study and comparing tax savings from asset depreciation. It is important to study which depreciation method provides the largest tax savings to the company.

Alternatives

A new asset installation in PT Vale Indonesia will be used as a study case and there are four depreciation methods of calculation will be compared. The methods are:

1. Straight-Line (SL) Method

2. Declining-Balance (DB) Method

3. Sum of the years Digits Method

4. Modified Accelerated Cost Recovery System

Analysis and Criteria

Depreciation is an income tax deduction that allows a taxpayer to recover the cost or other basis of certain property. It is an annual allowance for the wear and tear, deterioration, or obsolescence of the property.

Depreciation is part of company cost of goods sold or operating cost that must be clearly stated in the company earning statements. Therefore, by applying depreciation on the company fixed asset, the value of taxable income will be discounted by the value of depreciation. The following is the formula to determine taxable income.

Taxable income = Gross income – All expenses except capital investment – Depreciation

The after tax MARR is calculated using the formula of:

15% / (1 – company tax rate) = 20% per year.

It is assumed that revenue or income from the asset during 20 years of service is constant.

To calculate revenue from individual asset, fixed turn over ratio formula is used:

Fixed asset turnover ratio = Sales revenue / total fixed asset

Using PTVI financial report as of 31 December 2011, the following information is used for the study.

  • Company gross income (revenue) 2011: $ 1,242,555,000
  • Tax rate: 25%
  • Fixed asset value (as of 31 Dec 2010): $2,747,740,000

Therefore, fixed asset turnover ratio is 0.45

Revenue from the new asset is calculated using the formula:

Revenue from new asset = New asset value x fixed asset turnover ratio

Calculated revenue from the new asset is $ 1,582,734 per year

After tax cash flow during the service of new asset will be calculated using the formula:

Where

ATCF = After tax cash flow

BTCF = Before tax cash flow

CFIT = Cash flow for Income Tax

t = tax rate

Present worth of net revenue and tax savings are calculated with formula

In this study, comparison of tax savings from available depreciation methods will be done and the largest savings to the company (calculated using Present Worth) might be proposed for depreciation application. Assumption is made that all others expense is fix and will not sensitive to the comparison of tax calculation for all available alternatives.

Result / Selected Alternative

After tax cash flow has been calculated and plotted into a graph as shown below:

Figure 10.1 After Tax Cash Flow from different depreciation methods

Figure 10.2 Present worth of net revenue and tax savings

As shown on above figure 10.1 the curve of ATCF is similar to depreciation curve as explained in the previous blog post.

Present worth of net revenue using sum of years digit method result in the largest tax savings while the smallest savings is from straight line method.

Post Evaluation

As this analysis is prepared for study purpose, assumption has been made that asset turnover ratio is constant while in fact company earnings from certain periods are very dynamic (increased). Further study on the asset turnover ratio using 5-10 years past company earning information will much help in calculating more accurate projection for the following year ratio.

References:

  1. Sullivan, W.G. Wicks, E.M. Koelling, C.P (2012). Engineering Economy, Fifteenth Ed. (chapter 7, page 288-304).New Jersey: Prentice Hall.
  2. US Internal Revenue Services. (Feb 2012). A Brief Overview of Depreciation. Retrieved from: http://www.irs.gov/businesses/small/article/0,,id=137026,00.html
  3. Ready Ratios (2011). Fixed Asset Turnover. Retrieved from: http://www.readyratios.com/reference/asset/fixed_asset_turnover.html
  4. PT Vale Indonesia Tbk. (March 2012). Financial Statements 31 December 2011. Retrieved from: http://www.valeindonesia.co.id/doc/Laporan%20Keuangan%20PT%20Vale%20Indonesia%204Q11.pdf
  5. Financial-accounting (2010). Sum of Years Digits Method (Depreciation Methods) in Financial Accounting. Retrieved from: http://www.financial-accounting.us/fa/6/sum-of-the-years-digits-syd.php. 

W10_IQB_Estimate Gas Turbine Price Using CER

Problem Statement

I need to estimate gas compressor price but what I have now only historical data from vendors. Commonly, price of gas compressor is related to its Hp Output.

What is the formula I should use to estimate 21000 hp gas compressor?

Feasible Alternatives

The method is using Cost Estimating Relationship (CER) from Engineering Economics p.89

Criteria Selection

Using the CER method, the result should show the equation for every hp output of gas compressor.

Analysis and Comparison of criteria

The data from vendors is shown in the below table. The prices already multiplied by factors.

Using the example from engineering Economics p.91-92 the result would be

Selection of the preferred methodology

From the analysis we can conclude that the gas compressor price equation should be

Cost = 3.4407 + .00019x (in million USD)

x = hp Output

Conclusion and Monitoring

I will compare the price using the equation to contractual price from manufacturer and see what the range of different from those prices.

 

Bibliography

Sullivan, W.G., Wicks, E. M., & Koelling, C. P. (2011). Engineering Economy, (p.89-p.93).

 

 

W11_Rifai_His saving at year 2030

1.      Problem recognition, definition and evaluation.

A friend of mine wants to know how much his money if he save 20% of his annual salary until he retires in year 2030. He wants at 2030, he has real money equivalent with 2 million rupiahs this year.

Using Engineering Economy Chapter 8, I will try to check his need.

2.      Development of the feasible alternatives

The alternative for him are:

–         Still saving 20% as his plan if he can get his target.

–         Increase the percentage of his saving to meet the target.

–         Put his money to different instrument to get his target.

 3.      Development of the outcomes

First option is his target. If he can get it, he will insist to consistently saving at this percentage. If second options must be taken, he has to make sure his financial condition is still health. A third option is favorite option. He needs to learn about business out there if he wants to play savely at this option.

4.      Selection of criteria

For the purpose of calculation, I will scale his salary into USD. The data below would be use for the calculation:

His annual salary                                   : USD 50,000

Annual Salary increase                          : 12%

Saving interest rate                                : 6%

Average inflation rate                            : 7.5%

Desired amount in 2030 equal 2012      : USD 222,000 equal with 2 million rupiahs.

 5.      Analysis and comparison of the alternatives

Using excel spreadsheet and follow Engineering Economy chapter 8 page 360, here is the calculation:

From calculation above, he can’t meet his target if he saves only 20% of his income.

Using Goal Seek, here is the calculation if he wants to get his target:

 

 He can get his target if he can save about 29% of his annual income.

What is interest rate that could help him to meet his target if he is only able to save 20% of the income?

Here is the calculation:

From calculation above, he need 11% saving interest rate to get his target.

 

  1. 6.      Selection of the preferred alternative

From above calculation, he decided to still saving 20% from his annual income. But he will try to find another instrument who can give interest rate about 11%.

7.      Performance monitoring and post-evaluation of results

Above calculation is based on inflation rate and his history salary increase rate. The actual condition may be different, depends on above assumption. He should monitor this assumption and will make an adjustment if one or two assumption is changed.

 

 References:

  1. Sullivan, W.G., Wicks, E. M., & Koelling, C. P. (2011). Engineering Economy, Chapter 8 page 360.
  2. Trading Economy (2012), “Indonesia Inflation rate”. Retrieved from http://www.tradingeconomics.com/indonesia/inflation-cpi
  3. Investopedia (2012), “Purchasing Power”. Retrieved from http://www.investopedia.com/terms/p/purchasingpower.asp#axzz1q0qeGIoo

 

W9_YE_Selection of Overhead Method by using Force Field Analysis

1. Problem recognition
In this weekly Blog, I will elaborate 2 types of Overhead method.
Problem Statement: To figured out the best method of overhead cost allocation

2. Feasible Alternatives
There are 2 methodologies can be used for Overhead cost allocation in oil and gas company, i.e.:
a) Direct Method
b) Activity Based Costing (ABC)

3. Development the outcomes of each alternatives
To decide which method should be choosed I use Force Field Analysis as a tools.

4. Criteria Selection
The method to be selected based the criteria as follows:
• Has highest score in positive driver
• Has lowest score in negative driver

5. Analysis and Comparison of Alternatives
• Direct Method
Overhead cost allocated to cost object (to each project) based on project’s consumption of some measure of activity, usually based on labor hours or relative square meters occupied by each project. The direct method ignores services from other departments when any given services department’s cost are allocated to each project in Project Department. For example the fact that HR Department provides services for project personnel is ignore since the costs are allocated based on the relative square meters occupied by each project. Below is the Force Field Analysis of this method.

• Activity Based Costing (ABC)
ABC allocates based on multiple cost activities and each activity own each cost drivers. Once the project or service activities are identified, costs are allocated to the project according to the amount incurred by those activities. This method is especially effective when a company has a highly diverse or heterogeneous project type, size and total Incurred cost. The ABC method is usually more complicated, high cost, requires a certain skill, need more time consume of resources and it can be expensive to implement it however it more precise and accurate at calculating of overhead cost. Below is the Force Field Analysis of this method.

6. Selection of the preferred alternatives

Based on the above comparison between 2 methods by using the Force Field Analysis, the preferred alternatives is Direct Method since it has highest Positive drivers and lowest negative drivers.

7. Conclusion and Recommendation
Even though the direct method is not the new and robust method, it is still wide use in many companies, especially in oil and gas company because it is simple method, cheap cost for implementation, result of report comply to GAAP (Generally Accepted Accounting Principle) and no need to maintain dual system for internal and external purpose. Moreover, in oil and gas does not need to focus on unit cost product which different with manufacturing company which produce a product and they need to determine a unit cost of product that’s why they preferred using activity based costing method.

8. Monitoring and Evaluation
Need to do monitoring and evaluation on other overhead allocation methods and compare with the Direct method to proof this method is still the best.

References:
1. Bassard, M and Riter, D (2010), The Memory Jogger (2nd Edition), Canada, GOAL/QPC.
2. Brinker, B.J.,(1994), Activity Based Management, USA, Warren, Gorham & Lamont.
3. Cokins, G. (1998). ABC Can Spell a Simpler, Coherent View of Costs, Computing Canada, Sep 1, 24 (32): 34-35.
4. Cokins, G. (1998). Why Is Traditional Accounting Failing Managers? Hospital Material Management Quarterly 20 (2): 72-80
5. Giammalvo, P. D. (2007). Activity Based Costing (ABC) -The Other Side of the Earned Value Coin? PM World Today – May 2007, IX, (V). Retrieved from http://www.pmforum.org/library/papers/2007/PDFs/Giammalvo-5-07.pdf
6. Giammalvo, P. D. (2012). AACE Certification Preparation Course Handouts
7. Sullivan, W.G., Wicks, E.M. & Koelling, C. P. (2012), Engineering Economy 15th Edition, Singapore: Prentice Hall, Inc.
8. Weil, R.L, Maher, M.W., (2005). Handbook of Cost Management, USA, John Wiley & Sons, Inc.