Khan Corporation is a midsize, privately owned, industrial instrument manufacturer supplying precision equipment to manufacturers in the Midwest. The corporation is 10 years old and uses an integrated ERP system. The administrative offices are located in a downtown building and the production, shipping, and receiving departments are housed in a renovated warehouse a few blocks away.

QUESTION

Question 1:

Khan Corporation is a midsize, privately owned, industrial instrument manufacturer supplying precision equipment to manufacturers in the Midwest. The corporation is 10 years old and uses an integrated ERP system. The administrative offices are located in a downtown building and the production, shipping, and receiving departments are housed in a renovated warehouse a few blocks away.

Customers place orders on the company’s website, by fax, or by telephone. All sales are on credit, FOB destination. During the past year sales have increased dramatically, but 15% of credit sales have had to written off as uncollectible, including several large online orders to first-time customers who denied ordering or receiving the merchandise.

Customer orders are picked and sent to the warehouse, where they are placed near the loading dock in alphabetical sequence by customer name. The loading dock is used both for outgoing shipments to customers and to receive incoming deliveries. There are ten to twenty incoming deliveries every day, from a variety of sources.

The increased volume of sales has resulted in a number of errors in which customers were sent the wrong items. There have also been some delays in shipping because items that supposedly were in stock could not be found in the warehouse. Although a perpetual inventory is maintained, there has not been a physical count of inventory for two years. When an item is missing, the warehouse staff writes the information down in log book. Once a week, the warehouse staff uses the log book to update the inventory records.

The system is configured to prepare the sales invoice only after shipping employees enter the actual quantities sent to a customer, thereby ensuring that customers are billed only for items actually sent and not for anything on back order.

Questions:

a. Identify at least three weaknesses in Khan Corporation’s revenue cycle activities.

b. Describe the problem resulting from each weakness.

c. Recommend control procedures that should be added to the system to correct the weakness.

Question 2:

What are the advantages of the REA data model over the traditional AIS model?

Question 3:

Identify and discuss two methods of production planning.

ANSWER

Question 1

 Three weaknesses in Khan Corporation’s revenue cycle activities are:

Inadequate credit screening and verification: Khan Corporation is experiencing a significant amount of bad debt write-offs, including instances where first-time customers deny ordering or receiving merchandise. This suggests that the company’s credit screening and verification processes are insufficient. Without proper credit checks, the company is at risk of extending credit to unreliable or fraudulent customers.

 Lack of inventory management and control: The company has not conducted a physical count of inventory for two years, relying solely on a perpetual inventory system. This lack of physical verification increases the chances of errors and inaccuracies in inventory records. The missing items and delays in shipping indicate a breakdown in inventory management and control processes (Harrington et al., 1990).

 Inefficient order fulfillment and shipping processes: The increased volume of sales has led to errors in sending the wrong items to customers. Additionally, delays occur when items that are supposed to be in stock cannot be found in the warehouse. These issues point to problems in order fulfillment and shipping processes, likely caused by inadequate organization and tracking systems.

The problems resulting from each weakness are:

Inadequate credit screening and verification can lead to an increase in bad debt write-offs. The company may extend credit to customers who are unlikely to pay, resulting in financial losses. Additionally, fraudulent orders can further impact profitability and customer trust.

The lack of inventory management and control can lead to inaccuracies in inventory records. This can result in inefficient order fulfillment, delays in shipping, and errors in customer orders. Ultimately, it can lead to dissatisfied customers, increased costs due to rework, and potential stockouts or overstock situations.

 The inefficiencies in order fulfillment and shipping processes can result in customer dissatisfaction and decreased customer loyalty. Sending wrong items can lead to product returns, additional shipping costs, and potential loss of future sales. Delays caused by missing inventory items can disrupt production schedules and impact customer satisfaction.

 Recommended control procedures to correct the weaknesses

 Strengthen credit screening and verification processes by conducting comprehensive background checks, obtaining credit references, and implementing credit limits based on customer financials. This will help minimize the risk of bad debt and fraudulent orders.

Conduct regular physical counts of inventory to reconcile with perpetual inventory records. Implement cycle counting procedures to ensure ongoing accuracy and address discrepancies promptly. This will improve inventory management and control, reducing errors and delays in order fulfillment (DeHoratius et al., 2008).

Implement barcode or RFID tracking systems to improve the organization and tracking of inventory. This will enhance visibility and traceability, reducing errors in order fulfillment and enabling efficient location of items in the warehouse. Additionally, consider implementing an order verification process before shipment to minimize the chances of sending wrong items to customers.

Question 2

The REA (Resources, Events, Agents) data model offers several advantages over the traditional Accounting Information Systems (AIS) model. Some of these advantages include:

Comprehensive representation of business processes: The REA data model provides a more holistic view of an organization’s business processes compared to the traditional AIS model. It captures not only financial transactions but also the resources (e.g., assets, people) involved in those transactions and the events (e.g., sales, purchases) that occur. This allows for a more comprehensive understanding of the interrelationships and dependencies within the organization.

 Improved decision-making support: The REA data model supports more robust decision-making by capturing a wider range of information. It enables the integration of both financial and non-financial data, facilitating analysis beyond traditional financial metrics. This broader perspective allows managers to make more informed decisions based on a deeper understanding of the organization’s resources, events, and their interconnections.

 Flexibility and adaptability: The REA data model is more flexible and adaptable to

 changes in business processes compared to the rigid structure of the traditional AIS model. The REA model’s focus on capturing relationships between resources, events, and agents allows for easier modification and expansion as business needs evolve. This flexibility enables organizations to respond quickly to changes in their environment, such as new business opportunities or regulatory requirements.

Integration with other information systems: The REA data model facilitates integration with other information systems within an organization. It can be easily combined with other models, such as customer relationship management (CRM) or supply chain management (SCM) systems, to provide a comprehensive view of the organization’s operations. This integration enhances data consistency, reduces redundancies, and enables more efficient information sharing across different functional areas.

Enhanced transparency and accountability: The REA data model promotes transparency by explicitly capturing the relationships between resources, events, and agents. This transparency improves accountability within the organization as it becomes easier to trace the flow of resources and identify responsible agents. It also supports auditability, making it easier to identify and investigate potential irregularities or errors.

In summary, the REA data model offers advantages over the traditional AIS model in terms of providing a more comprehensive representation of business processes, supporting improved decision-making, offering flexibility and adaptability, enabling integration with other systems, and enhancing transparency and accountability within an organization.

Question 3

There are several methods of production planning that organizations can employ to optimize their manufacturing processes. Two commonly used methods are Material Requirements Planning (MRP) and Just-in-Time (JIT) production.

 Material Requirements Planning (MRP):

Material Requirements Planning is a method that involves planning and controlling the procurement and production of materials based on demand forecasts and production schedules. It focuses on determining the quantity and timing of raw materials, components, and subassemblies needed for production (Japanese Manufacturing Techniques, n.d.). MRP uses a bill of materials (BOM) and a master production schedule (MPS) to calculate the required materials and generate purchase orders or production orders.

Advantages of MRP:

– Improved inventory management: MRP helps organizations maintain optimal inventory levels by calculating precise material requirements based on production schedules and demand forecasts. This reduces the risk of stockouts or excess inventory.

– Enhanced production efficiency: By synchronizing material availability with production schedules, MRP ensures that all required materials are available when needed, minimizing production delays and downtime.

– Cost savings: MRP enables organizations to minimize inventory holding costs by ordering materials in a timely manner. It also helps identify opportunities for bulk purchasing or negotiating better pricing terms with suppliers.

Just-in-Time (JIT) Production:

Just-in-Time is a production strategy that aims to eliminate waste and improve efficiency by producing items in response to actual customer demand, with minimal buffer inventory. JIT relies on close coordination between suppliers and manufacturers to deliver materials and components just when they are needed on the production line. This method emphasizes a continuous flow of production, reducing inventory carrying costs and maximizing resource utilization.

Advantages of JIT:

– Inventory reduction: JIT production minimizes the need for excess inventory by producing items only as needed. This reduces inventory carrying costs and the risk of obsolete or perishable inventory.

– Increased production efficiency: By focusing on eliminating bottlenecks and streamlining production processes, JIT reduces lead times, eliminates unnecessary waiting, and improves overall production efficiency.

– Quality improvement: JIT emphasizes quality control at every stage of production. With a reduced inventory buffer, defects and quality issues become more visible, prompting quick corrective actions. This leads to improved product quality and customer satisfaction.

– Cost savings: JIT reduces waste, such as excess inventory, overproduction, and unnecessary transportation or handling costs. This results in cost savings and improved profitability.

In conclusion, Material Requirements Planning (MRP) and Just-in-Time (JIT) are two effective methods of production planning.

 MRP focuses on optimizing material procurement and production schedules, while JIT aims to eliminate waste and improve efficiency by producing items just in time to meet customer demand. Organizations can choose the most suitable method based on their specific needs and requirements to optimize their production processes and achieve operational excellence.

References

DeHoratius, N., Mersereau, A. J., & Schrage, L. (2008). Retail Inventory Management When Records Are Inaccurate. Manufacturing & Service Operations Management, 10(2), 257–277. https://doi.org/10.1287/msom.1070.0203 

Harrington, T. C., Lambert, D. M., & Vance, M. P. (1990). Implementing an effective inventory management system. International Journal of Physical Distribution & Logistics  Management.https://www.emerald.com/insight/content/doi/10.1108/EUM0000000000376/full/html 

Japanese Manufacturing Techniques. (n.d.). Google Books. https://books.google.com/books?hl=en&lr=&id=S7Jd8dLdEwwC&oi=fnd&pg=PR7&dq=here+are+several+methods+of+production+planning+that+organizations+can+employ+to+optimize+their+manufacturing+processes.&ots=b-ki8MwyN_&sig=SZwVTV_d9f6RAEHNCCkZOahqYVU