Question

John Smith is the CEO of Alpha Manufacturing Pty Ltd. This company manufactures high value products in the form of small model aircraft jet engines that are mainly sold online.  The raw materials input for the Jet engines are a series of high value easily marketable items mainly exotic metals and electronic systems that support the engine controllers. There are five models of engine produced, each requiring about 25 components, including screws and fuel connectors. About ten of these components are made in house from the exotic raw materials. The controllers are assembled in house from about 10 electronic components and are common to all the engines. The business has been enjoying a long period of several years of continuous growth both in sales and profit. However, compared to the growth of sales net operating profit growth seems lower. John contracted with a business consulting firm to identify the reasons for this inconsistency. The consultants came up with a series of findings, the principal ones being:

• A poor inventory management system meant that it was impossible to properly identify the cost of production of the finished goods.
• The result is that management reports do not indicate the true costs of production.
• The Online Sales system was not integrated with either the inventory control system or the financial recording system.
• Alpha Manufacturing offered its own credit terms to customers but had no formal credit process.
• The computer system was linked to the internet to support the Online Sales System, but had no security system monitoring it.

In addition, the present accounting system is a hybrid of electronic and manual kept records. The result is that the growth rate of sales had diverged from the growth rate of net operating profit. The analyst has suggested redesigning the whole accounting process with a contemporary integrated accounting solution for the business.

John has taken the issue to the board and has decided to appoint you to implement an efficient automated accounting information system. As you have technical knowledge, you need to give a detailed plan about the new efficient information system including its possible cost and benefits. In addition, if the project plan is approved you need to implement this information system as project in-charge for the business.

You required

Following the receipt of your reports, John has attended a conference, in which salesmen from three organisations made sales pitches about outsourcing. As a result John is considering outsourcing the entire record keeping operation. Prepare a report for John detailing the advantages and disadvantages of continuing to run the information system in house with the different outsourcing arrangements such as arranging for an outsourcing vendor to own and operate a small onsite data centre for you, a service bureau, an applications service provider (ASP), Business Process Outsourcing (BPO), and software as a service (SaaS).

Answer 1

Advantages of Continuing to run the information system in house:

• As per the information provided the main elements for the production are prepared in house so it is easier for monitoring them by running them in house
• Outsourcing Cost can be eliminated by maintaining the information system inhouse
• The problems in the credit process can be overcome by arranging the Business Process Outsourcing agencies
• The various problems in the online sales system, inventory management system etc can be fixed by arranging Service bureau and application service provider(ASP) etc

Dis- Advantages of Continuing to run the information system in house:

• As per prevailing flaws in the information system, continuing to run the information systems in house can be vulnerable to the business
• The payments for the automation and the redesign of the information system will be material
• The monthly payments for all the agencies like Service bureau and application service provider etc will be more comparing to the the monthly paymnet made to the outsourcing agencies
• Due to the several payments made to the various agencies the net operational profit will be reduceed