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ABSTRACT


Telestar Electronics Ltd. is a Hong Kong-based electronics trading company that has been established for 20 years. The period from 1990 to 1997 showed rapid business expansion as the firm opens branches in Shenzhen and in Shanghai (China). But after 1997, there has been a marked decrease in sales as a recession transpired in Hong Kong. As a result, some of the unsold stocks have been in storage in the warehouses for more than three years and has become ‘dead stock’, which significantly affected Telestar’s cash flow. Moreover, the electronics trader kept many different electronics parts to meet the market requirement, but some of them are not suitable for the target markets.


Stocks are vital to the successful functioning of an electronics trading organisation. This project basically deals with maintaining the various aspects of the stock and presenting information for the use of the company as a whole, which is important for analysis of stock control. There are three management concepts associated with the problem stated above: inventory management, with specific focus on stock control, information management and theory of free cash flow. A literature review of the concepts is presented and assessed as to their value to the project. The methodology presents various strategies for gathering information and chooses to utilise the structured interview and the documentary secondary data to gather the needed information for the project. Finally, the findings and recommendations show what was learned from the project and the suggestions which are considered feasible and which are strongly advised by the author to be heeded by Telestar.


INTRODUCTION


            Telestar Electronics Ltd. is a Hong Kong-based electronics trading company that has been established for 20 years. The company mainly sells electronics parts (transistor, integrated circuit) to manufacturing firms and other trading companies. The company is also actively involved in the sales and distribution services of electrical parts and components, steels and metals as well as engineering plastic resins. Telestar started out small, in a few years becoming known in the electronics market and growing into a medium-sized venture. They now have approximately eighty employees on payroll. The period from 1990 to 1997 showed rapid business expansion as the firm opens branches in Shenzhen and in Shanghai (China). But after 1997, there has been a marked decrease in sales as a recession transpired in Hong Kong. As a result, some of the unsold stocks have been in storage in the warehouses for more than three years and has become ‘dead stock’, which significantly affected Telestar’s cash flow. Moreover, the electronics trader kept many different electronics parts to meet the market requirement, but some of them are not suitable for the target markets.


            Their role as a consumer-oriented company has challenges that do not end in delivering high performance electrical parts and components.
Telestar aims to continue pioneering the creation of new markets and conducting the business with integrity and quality. They constantly attempt to operate corporate activities based on a high standard of product and aim to maintain their market position despite economic low downs. The organisational mission is to be recognised as the market leader in the electronics trading field in specialist high technology, high reliability sectors in low and medium volumes to customers who are market leaders in their respective field. Based on the efforts of the Marketing, Purchasing, Finance, Research and Development, Manufacturing, Engineering and Sales departments, along with the elite group of innovative and enterprising spirits, Telestar aims at the ultimate goal to be a leading edge research and development oriented company of the industry, which will provide products and services of superior quality and value to customers.


THE PROBLEM


            Stocks are vital to the successful functioning of an electronics trading organisation. It is the major investment, the most important profit source, and the chief problem of everyday control for a trade firm. Nowadays, businesses that buy and sell face tougher competition that presses their margin of profit. A marked decrease in sales as a recession transpired in Hong Kong after 1997 resulted to unsold stocks being in storage in the warehouses for more than three years and has become ‘dead stock’. The electronics trader also kept many different electronics parts to meet the market requirement, but some of them are not suitable for the target markets. This led to the main problem of increased holding costs and restricted cash flow. The problem could have been readily solved, but due to poor management information system within the company, which prevents Telestar from having an effective inventory management through reporting functions that give detailed and current information about quantities, prices, item movements and sales history, the root problem of having dead stocks is still not resolved.


The problem identified relates to three concepts of management: inventory management, with specific focus on stock control, information management and theory of free cash flow. As identified above, Telestar apparently needs to better manage their inventory in stock in order to improve cash flow. Stocks are equivalent to money, as obviously, they took money to make. Telestar keeps dead stocks, thus money lying idle when it could be put to better use restricts the cash flow of the company. The lack of a systematic information management between the departments of Telestar contributes largely to worsening the problem that they are facing, as the excellent organisation of inventory data helps decision making processes regarding production easier and more accurate. Information flow from and to the different business units should, as a rule, be smooth to pave way for continuous and hassle-free conduct of business activities.


LITERATURE REVIEW


This literature review focuses on the three above-mentioned concepts of management, namely inventory management, with specific focus on stock control, information management and cash flow management, with emphasis on the theory of free cash flow. Materials from this review came from books, journals, magazines, newspapers, the Internet and other scholarly publications. Every effort will be made to incorporate relevant data from completed studies into the findings to be found in the latter part of the project report. Project participants will be informed that these studies have been reviewed and that redundant input will be kept to a minimum.


Inventory Management. All organisations keep inventory. According to Muller (2003), inventory includes a company’s raw materials (used to produce partial products or completed goods), work in process (Items are considered to be work in process during the time the raw material is being converted into partial products, subassemblies, and finished products), supplies used in operations and finished goods (product ready for current customer sales) and is accompanied by costs which consists of money, space, labour (to receive, check quality, put away, retrieve, select, pack, ship and account for), deterioration, damage, obsolescence and theft.


Further according to Muller, inventory costs generally fall into ordering costs and holding costs (2003). Ordering, or acquisition costs, comes about regardless of the value of the goods. On the other hand, holding costs include the cost of capital tied up in inventory (the opportunity cost of money); storage costs such as rent; and costs of handling the product such as equipment, warehouse, and stock-keeping staff, stock losses, wastage, taxes and so on. In just-in-time (JIT) manufacturing environments, inventories are considered as waste. However, in an environment where an organisation suffers from poor cash flow or lack of strong control over electronic information transfer among all business departments and all significant suppliers, keeping an inventory is essential (Muller 2003). The business field has understood for sometime, at least in principle, that sound and careful inventory management is critical to a firm’s strategic viability but one of the most significant developments in the world economy over the last two decades have sharpened the field’s appreciation of that fact (Zipkin 2000). The key factors underlying the extraordinary success of Japanese companies in Western markets seems to be the ability of Japanese firms to operate with substantially lower inventories than their Western counterparts. Thus, inventory has become one of the dimensions upon which companies compete on a global scale.


The problems of inventory management, particularly stock control, are fundamentally alike, each involving some aspects of cost as mentioned above, service and usage. The objective in any given situation is to make that set of decisions which will minimise total costs and provide an acceptable–or economical–level of service at the expected demand or usage rate. The problem is solved on an item basis where it is required that the following information be determined–and continually reviewed–for each item: (1) appropriate costs; (2) expected service level–permissible incidence of stock shortages; (3) forecast of usage.; and (4) replenishment characteristics, e.g., lead time (Dalleck & Fetter 1961). Stock control exists at a crossroad in the activities of a company. Many of the activities (operating efficiency, customer service, low inventory, purchase price reduction, etc.) depend on the correct level of stock being held, but the definition of the term ‘correct level’ varies dependent upon which activity is defining the stock.


According to Wild (2002), stock control is definitely a balancing act between the conflicting requirements of the company and the prime reason for the development of inventory management is to resolve this conflict in the best interest of the business. A contemporary organisation has many sub-units, and each of them will have a particular view of the role stock control. Finance departments, for one, have a problem with stock because it consumes vast amounts of working capital and upsets the cash flow (Wild 2002). They would always argue for a minimum investment in stocks so that the funds can be used elsewhere for better purposes. One benefit of stock from a financial standpoint is that provisions can be made in case the stocks turn out to be unsaleable, and this vale can be adjusted to modify the profit figure in times of good or bad financial results. However, the existence of these stocks in the first place is detrimental to the firm’s finances. The development of stock control practice has been given impetus by the move toward total quality management (TQM) and JIT concepts. These have focused on the possibility that good management, particularly, is both desirable and profitable, and has brought into question all the attitudes of the different sub-units of a firm as views of stock control. Stock control is a dynamic activity which requires both communication skills and professional inventory techniques. Optimising the balance of stock has been slow and gradual, created by technology, financial need and competitive pressure (Wild 2002).


In an article edited by Budding (n.d.), it was stated that to maintain an in-stock position of wanted items and to dispose of unwanted items, it is necessary to establish adequate controls over inventory on order and inventory in stock. There are several proven methods for inventory control, it noted. They are, from simplest to most complex: (1) visual control, which enables the manager to examine the inventory visually to determine if additional inventory is required. In very small businesses where this method is used, records may not be needed at all or only for slow moving or expensive items; (2) tickler control, which enables the manager to physically count a small portion of the inventory each day so that each segment of the inventory is counted every so many days on a regular basis; (3) click sheet control that enables the manager to record the item as it is used on a sheet of paper. Such information is then used for reorder purposes; (4) point-of-sale terminals that relay information on each item used or sold. The manager receives information printouts at regular intervals for review and action; and (5) off-line point-of-sale terminals relay information directly to the supplier’s computer who uses the information to ship additional items automatically to the buyer/inventory manager. Budding’s (n.d.) article stated that the final method for inventory control is done by an outside agency. A manufacturer’s representative visits the large retailer on a scheduled basis, takes the stock count and writes the reorder. Unwanted merchandise is removed from stock and returned to the manufacturer through a predetermined, authorized procedure. A principal goal for many of the methods described above is to determine the minimum possible annual cost of ordering and stocking each item. Two major control values are used: 1) the order quantity, that is, the size and frequency of orders; and 2) the reorder point, that is, the minimum stock level at which additional quantities are ordered.


            The above review of literature is a combination of the basic concepts of inventory management, stock control and some suggested stock control techniques by authors. A knowledge of the above literature would pave the way for better understanding of the problem that Telestar is facing, which would lead to a better formulation of the project plan, to be carried out in the firm. The review helped reveal the project study in a historical and associational perspective and in relation to earlier and more primitive attacks on the same problem. More importantly, it provided new ideas and approaches that have occurred to the author at the start of this project.


Information Management.


            2. It can illuminate a method of dealing with a problem situation that may suggest avenues of approach to similar difficulties you may be facing.


            3. It can reveal to you sources of data that you may not have known existed.


            4. It can introduce you to significant research personalities, of whose work and collateral writings you may have had no knowledge.


            5. It.


            6. It can to you.


            7. It can help you evaluate your own research efforts by comparing them with the similar efforts of others


Cash Flow Management.


Cash flow is simply the money going into a business and out again–cash on hand and/or in a business account that’s used to pay company bills, salaries, and other expenses. Companies that are cash flow negative are simply spending more than their revenues bring in (Mccrea 2002). Cash flow may be viewed as the lifeblood of a corporation and the essence of its very existence (Cook, Hay & Rujoub 1995). Numerous empirical studies that use financial and accounting measures to predict business performance (i.e., success or failure) emphasize the importance of cash flow information in predicting bankrupt and non-bankrupt firms (BarNiv 1990; Carslaw & Mills 1991). If sales vary during the year because of seasonality, growth, or uncertainty, then working capital is difficult to control. The firm’s current assets and liabilities (in particular, receivables, inventory, and short-term payables) change in response to sales fluctuations. As a result, cash flow may sometimes be inadequate to sustain operations, even though profitability is satisfactory over the whole year.


Thompson (1986) stated that evidence suggested that many firms are ill-equipped to make the difficult decisions involved in cash flow management. Poor financial control is a major factor contributing to the demise of many small firms. Inadequate financial control and a lack of cash flow and working capital analysis are often associated with financial difficulties. Perhaps the major danger is a belief by some owners that if profits are adequate, cash flow will take care of itself. A number of studies have found common deficiencies in the management of assets and liabilities, where it revealed inadequate control of receivables, payables, and inventory as well as cash receipts and disbursements.


The review revealed investigations similar to the author’s own, and showed how the collateral researchers handled these situations.


METHODOLOGY


            This section discusses the available means of gathering information for a project, more specifically, their advantages and disadvantages. Further on, the methodology presents the chosen strategies for obtaining the information needed for this project. When discussing different data collection techniques and their advantages and disadvantages, it becomes clear that they can complement each other. A skilful use of a combination of different techniques can reduce the chance of bias and will give a more comprehensive understanding of the project. Following are some of the data collection techniques which are commonly employed, along with their strengths and weaknesses.


Documenting Secondary Data. There is already a large amount of data that has already been collected by others on the subject of customer service, although it may not necessarily have been analysed or published. Locating these sources and retrieving the information is a good starting point in any data collection effort. Moser and Kalton (1989) noted that the advantage of using existing data is that collection is inexpensive and permits examination of trends over the past. According to Stewart and Kamins (1993), the use of secondary data is advantageous for a researcher since one can already evaluate the suitability of a data as it is already in existence, thus, much time can be saved. Needless to say, an evaluation of potential secondary data is very important before one incorporates it in his/her study. However, it is sometimes difficult to gain access to the records or reports required, and the data may not always be complete and precise enough, or too disorganised. Also, ethical issues about confidentiality can arise.  Examples of tools used in this technique are checklist and data compilation forms.


Documenting secondary data, accordingly, are the ones often used in research projects that also use primary data collection data methods, although such data can also be used on their own or be combined with other secondary data. This type includes: written documents (notices, correspondence, minutes of meetings, reports to shareholders, diaries, transcripts of speeches, administrative and public records, as well as articles from books, journals, magazines and newspapers) that can be important raw data sources on their own right, a storage medium for compiled data, provide qualitative data, and can be used, as well, to generate statistical measures (e.g., data on absenteeism derived from company records); and, non-written documents (like tape and video recordings, pictures, drawings, films and television programmes, digital versatile disks and CD-ROMs) that can be analysed both quantitatively and qualitatively, as well be used to help  triangulate findings based on other data such as written documents and primary data collected through observations, interviews and questionnaires (Saunders et. al. 2003).


Observing. This is a technique that involves systematically selecting, watching and recording behaviour and characteristics of living beings, objects or phenomena (Patton 1990). This technique gives more detailed and context-related information, permits collection of information on facts not mentioned in an interview and allows tests of reliability of responses to questionnaires (Moser & Kalton 1989). Observations of human behaviour form part of any customer service study, but as they are time consuming they are most often used only in small-scale studies. Also, ethical issues of confidentiality and privacy may arise, and the presence of the data collector may influence the situation being observed. Likewise, observer bias may also occur. The observer’s eyes and other senses, pen/paper, watch, scales, etc. are some of the tools utilised in observation.


            Interviewing. This is a data-collection technique that involves oral questioning of respondents, either individually or as a group. Answers to the questions posed during an interview can be recorded by writing them down (either during the interview itself or immediately after the interview) or by tape-recording the responses, or by a combination of both. This technique permits clarification of questions and has a higher response rate than written questionnaires. There are three types of interview: structured, semi-structured and in-depth. The structured interview, specifically, is the most common form of interview utilised by researchers. The interview strategy is a popular and common strategy in business projects because it allows the collection of a fairly large amount of data from a sizeable population in a highly economical way (Saunders et. al. 2003). Accordingly, the survey strategy gives a researcher more control over the research process; however, the data collected by this strategy may not be as wide ranging as those collected by other research strategies. Also, reports of events may be less complete than information gained through observations. Structured interview guide, checklist, questionnaire, telephone and audio recorder are tools employed in interviewing.


            In structured interviews, a researcher uses questionnaires based on a pre-determined and standardized or identical set of questions, which typically have pre-coded answers; herein, the researcher reads out each question and then record the response on a standardized schedule. Saunders et al (2003) said questionnaires collect data by asking people to respond to exactly the same set of questions, and they are often used as part of survey strategy to collect descriptive and explanatory data about opinions, behaviors and attributes, where data collected are normally coded and analyzed by computer. Accordingly, the choice of questionnaire is influenced by the research questions and objectives, as well as the resources, available, therefore, a researcher must know precisely, prior to designing a questionnaire, what data is needed to be collected in order to come up with answers that will address the research questions and objectives. In addition, in designing a questionnaire, one should consider the wording of individual questions prior to order in which they appear, and the order and flow of questions should be logical to the respondents (Saunders et al, 2003). Structured interviews differ from semi-structured and in-depth interviews in the sense that herein, there is a defined schedule of questions from which interviewers should not deviate (Saunders et al, 2003, p. 282). Accordingly, while there is social interaction between the researcher and his/her respondent (e.g., providing necessary explanations), the researcher must read out the questions in a tone of voice that is devoid of any bias (or may indicate as such).


Administering written questionnaires. A written questionnaire (also referred to as self-administered questionnaire) is a data collection tool in which written questions are presented that are to be answered by the respondents in written form. This strategy is employed mostly as a survey instrument. According to Moser & Kalton (1989), written questionnaire can be administered in different ways, such as by: sending questionnaires by mail with clear instructions on how to answer the questions and asking for mailed responses; gathering all or part of the respondents in one place at one time, giving oral or written instructions, and letting the respondents fill out the questionnaires; or hand-delivering questionnaires to respondents and collecting them later. The questions can be either open-ended or closed (with pre-categorised answers). This technique permits anonymity, thus potentially resulting in more honest answers. However, it has a lower rate of response than an interview and questions, and the respondents, when they aren’t given the chance to clarify the questions, could misunderstand them.


From the four most common data collection techniques discussed above, the author deemed that documenting secondary data and performing a structured interview will be the fittest strategies to employ in this project. As for the documentation of the secondary data in this study, the researcher adopted the three-stage process devised by Saunders et. al. (2003), whose first stage is assessing the overall suitability of data to research questions and objectives, involves paying particular attention to measurement validity (measuring / estimating whether the secondary data will result to a valid answer to the research questions and objectives) and coverage (this includes ensuring whether or not the data is wanted and can be included, as well as making sure that sufficient data remain for analyses to be undertaken once unwanted data have been excluded). The second stage involved evaluating precisely the suitability of data for analyses needed to answer and meet the research questions and objectives. At this stage, the author made sure of the validity and reliability of the secondary data by assessing how it was previously gathered, who are its sources, and the likes. Also, the author was cautious not to commit measurement bias (which can occur due to deliberate distortion of data or changes in the way data are collected) had been paid close attention to. Finally, there is the judgement whether to use data based on an assessment of costs and benefits in comparison with alternative sources. Structured interviews are necessary for this research, because by conducting personal interviews on the selected respondents, their comments and reactions may be gathered regarding the project topic.


Documenting relevant secondary data involves two interlinked stages. The first stage is identifying whether or not the data that a researcher looks for are available as secondary data, while the second stage is finding the precise data that is needed for the study. (Saunders et al, 2003). For this study, the author was able to establish that the pertinent data needed for the fulfilment of this research’s objectives are available through the literature review previously conducted. Because of the review, the author was able to gather full references to the sources of the needed data. Tertiary literature (like indexes and data archive catalogues) also helped especially those on-line indexes and catalogues of Universities, organisations and Governments. After determining the availability of the data, the next step was to locate them. As a result, the author had gone to several libraries within the area of vicinity in order to locate the books, journals and magazines that are needed. Also, through the Internet, the author was able to gather the websites of numerous organisations and institutions that have provided the pertinent secondary data needed.


As for the structured interview, all respondents will be asked the same set of questions in the same way. The results will then be quantified and presented in numerical form. One advantage that the author saw is that it permits the estimation of how common certain beliefs are, that is, what percentage of respondents expresses them. For validation purposes, the author pre-tested a sample of the set questionnaires. This was done by conducting an initial structured interview to at least five respondents from Telestar Electronics Trading. After the respondents answered, the author then asked them to cite the parts of the questionnaire that needs improvement, also even asking for suggestions and corrections from the respondents to ensure that the questionnaire is effective. Automatically, these five respondents were not included as respondents for the next batch of interview.


The respondents for the actual interview were then selected. The respondents came from Telestar itself. The financial, purchasing, manufacturing and sales managers were interviewed, as well as the staff of all the above-mentioned sub-units of the business. These respondents were selected through purposive sampling. Purposive sampling is a non-probability sampling technique where usually, there are one or more specific predefined groups, and this technique can be useful in situations where there is a need to reach a targeted sample quickly and where sampling for proportionality is not the primary concern; through this technique, one is likely to get the opinions of a target population (Trochim, 2002). This part of the study is important so as to gather the sufficient data needed for the fulfillment of the objectives of the project.


These data collection techniques were chosen for two reasons: first, these approaches are quick and will allow for a flexible approach, thus, when important new issues and questions arise during the duration of the project, a further investigation may be allowed; and second, with these types of approaches the author will be allowed to drop unproductive areas of research from the original plan of the study.


FINDINGS


This section presents the results of the structured interview that was conducted by the author to the financial, purchasing, manufacturing and sales managers, as well as the staff of all the above-mentioned sub-units of the business. Regarding stock control, the author sees several shortcomings related to the replenishment method and safety stock target-decisions. Following is the result of the structured interviews conducted to purposively sampled respondents.


The main causes of the stock control concern that Telestar is facing, according to the respondents are due to the lack of consideration of: (1) ordering and holding costs; (2) unit value; (3) lead time and its reliability; (4) variance of the demand during lead time; and (5) target customer service level. As a consequence, the respondents see non-optimal replenishment quantities and safety stock targets are set. On a higher level, these entail low performance of the previously mentioned indicators.


RECOMMENDATIONS


            Monitor inventory levels. A company’s profitability depends on the successful and timely sale of its products and services. Maintaining inventory levels at less than what is needed to support demand may result in lost sales and delays for customers. On the other hand, excess inventory places a burden on cash resources. Compare inventory turnover with industry norms, and rely on historical sales data and forecasts to set inventory levels Stock sitting on shelves for long periods of time ties up money that could be used for other cash outflows. Sell off outdated, slow-moving merchandise. Donate what can’t be sold. Communicate and manage cash flow strategies. Be sure to inform staff members how they can contribute to improving cash flow and monitor their efforts. If cash is tight, consult with your CPA for more specific strategies on improving the company’s cash flow.



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