Developing Supplier Performance

Summary

The reading examines the various techniques that a supply chain manager can use to evaluate capital project expenditures. Three main techniques have been discussed, and are not limited to simple payback, net present value, and internal rate of return. Simple payback is an evaluation technique that represents the length of time that is required to recover the cost of an investment project without taking into account the time value of money. However, this technique is most appropriate for investment projects which are not overly complex and situations where the management intends to get a quick snapshot of an expected payback period. The method does not take into consideration the time value of money, and this attribute makes it easier to calculate the expected payback (Trent, 2016). Moreover, considering that the method enables the management personnel to determine how soon an investment project will recover the invested funds, it is best suited for a supply chain organization that is in a tight cash position. The evaluation method becomes more straightforward if the expected benefits or cash flow from an investment project are uniform in every year.

The net present value is an evaluation method that represents the current value of the anticipated future benefits or cash flows that have been discounted at an appropriate cost of capital of the investment project. The evaluation technique is complex compared to the simple payback technique. Net present value is a multistep process that entails estimating the primary capital expenditure, establishing annual increment operating cash flows, anticipating the terminal cash flow, determining the present cash flows of the future cash flows and establishing the net present value of the project (Trent, 2016). The method is best suited for complex investment projects, which requires maximum attention of the management personnel. The major challenge that the supply chain managers experience while using this method is arriving at the most accurate investment costs and incremental savings. The internal rate of return method of investment evaluation is almost similar to the net present value method. However, the technique goes a north higher by determining the discount rate that makes the net present value of all future cash flows or benefits of an investment project equal to zero. Precisely, for the case of internal rate of investment, the output of the investment analysis is a rate of percentage return, which makes the present value of the discounted cash flows balance with the cost of project investment.

Meaningful Ideas

There are a number of meaningful insights I can deduce from the week`s reading. First, the aspect of evaluating project expenditures. The supply chain is a capital project itself, and evaluating the cost incurred in its operations and calculating the flow benefits within a given period is advantageous in the long run. The supply chain management personnel is able to establish whether the investment project will make a profit at the end or not. Like any other business or investment, the most important aspect is the amount of revenues that will be generated from the investment. If a returns from an investment are less compared to its overall cost, it means that the investment is operating at a loss, and this can be detrimental to the entrepreneur (Heller & Yukl, 2012). If the management personnel of a supply chain organization fails to evaluate the returns of an investment from the start, they may end up realizing that the investment project is or has been operating at a loss when it is too late. The use of investment evaluation methods can greatly help the supply chain management to establish the expected returns every financial year and the time that the project will take in order for the cost of investment to be fully recovered.

Additionally, the aspect of identifying costs and benefits of an investment project before the project is implemented also plays a fundamental role in as far as making an informed decision regarding whether to proceed with the investment or not (Eisenhardt & Zbaracki, 2012). For example, if an investment project has less benefits than the costs, the management personnel of a supply chain organization can decide not to proceed with the investment, as the overall outcome of the project will be an expense to the organization. The supply chain managers need to list every cost and benefit in order to determine the investment returns accurately. It is worth noting that some of the funds that a supply chain organization can have in order to launch an investment project come from loans with the hope that the investment project will be successful. However, without an investment model, the chances that the project will be successful are minimal. Determining the costs and benefits or what is broadly termed as populating the model with accurate data tends to be challenging. It is cheaper for the management personnel to list direct costs, but when it comes to miscellaneous costs, it might be challenging, especially if the management fails to record every aspect of the investment.

Personal Connection

As a supply chain manager, I will be involved in numerous supply chain investment projects. I will try my best to ensure that every investment project that I will be managing will emerge successfully. I will achieve this through the implementation of the knowledge and skills that I have gained from this week`s reading. Precisely, I will always ensure that I list all the costs and benefits that the investment project will most likely have in the long run. However, I will need to overcome some of the challenges that are associated with the process, including the aspect of populating the investment model with accurate data. I do contemplate that some items are not easily modeled, and this contributes to the occurrence of soft or indirect costs or benefits. To overcome this challenge, I will keep and update the project inventories as well as work collaboratively with the junior staffs (Harrison & Lock, 2017). Precisely, working as a team during project implementation enables the organization to achieve the set goals and objectives within the set period and budget. As a team, we will manage to brainstorm extensively, especially on the projected benefits and cash flows.

Moreover, I will make use of the project evaluation techniques in order to determine the cash flows and benefits of an investment, and the duration that it will take in order for the cost of investment to be fully recovered. I use a combination of more than one project evaluation technique in order to enhance my level of confidence that the data is accurate (Rossi, 2015). For example, I will use simple payback since it is cheaper and quicker for a supply chain manager to get a snapshot of an expected payback period. I will then use either the net present value or the internal rate of returns technique, especially if I am implementing a complex investment project.

Smart Changes

I will involve the junior staffs in order to ensure I include every cost and benefit that an investment project will have, especially before I proceed to implement it. By so doing, I will create a culture of teamwork, and this will help in brainstorming, which will, in the long run, help me to list all the possible costs and benefits that the investment project will have. I will manage to list both the direct and indirect costs and benefits, and this will enhance the accuracy of the data that I will be evaluating. Including all the cost and benefit categories for an investment, the project specifies the financial model of the project, and this makes the investment to appear more attractive. Additionally, I will ensure that I implement one project at a time, as this will help me to do away with ambiguities and confusion regarding which costs or benefits are for which project. Additionally, focusing on one investment project at a time will enhancing the accuracy of data since no costs form one project can be listed as a cost for the other project. When accurate data is compiled, I will be having the confidence of presenting it to the other stakeholders of the supply chain organization, especially the donors and the owner of the organization. Consecutively, I will use more than one project evaluation technique in every investment project that I will be managing (Rossi, 2015). For example, I will incorporate the simple payback technique with either the net present value or the internal rate of investment technique.

References

Eisenhardt, K. M., & Zbaracki, M. J. (2012). Strategic decision making. Strategic management journal, 13(S2), 17-37.

Harrison, F., & Lock, D. (2017). Advanced project management: a structured approach. Routledge.

Heller, F. A., & Yukl, G. (2012). Participation, managerial decision-making, and situational variables. Organizational Behavior and Human Performance, 4(3), 227-241.

Rossi, M. (2015). The use of capital budgeting techniques: an outlook from Italy. International Journal of Management Practice, 8(1), 43-56. Trent, R. J. (2016). Supply chain financial management: Best practices, tools, and applications for improved performance. Fort Lauderdale, FL: J. Ross Publishing, Incorporated

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