Midwest Airlines - Business Information Systems, Competitive Advantage, and Service Improvement - Example

Advanced Category Management Name: Tutor: Course: Date: Executive Summary This report explores the impact of business information systems, competitive advantage analysis and service improvement in performance of a company. Midwest Airlines (MA) is a regional airline with great opportunity to expand and grow. However, the company’s procurement systems and management are outdated and uncompetitive. The company urgently requires systems to improve its purchasing methods and control its expenditures. The company regularly procures equipment, aircrafts, human resources, new bases, in-flight meals and warehouse machinery. It is planning to adopt category management plan and quality supply chain so as to maximize profits and improve costs, delivery and quality of procured services and goods. In developing a sustainable supply chain, MA is implementing solutions based on business process re-engineering and approaches to reduce inventories. The reports finds out that business information systems (ERP), category management methodology (Kraljic model) and tools of service improvement (Porters value chain and Benchmarking) as critical in the success of procurement processes and other organizational functions. Table of contents Executive Summary 1 Table of contents 2 List of Figures 4 List of Tables 5 1.0 Introduction 6 1.1 Procurement objectives 6 1.2 Developing and use of systems to improve and control expenditure 6 1.2.1 Overview 6 1.2.2 ERP systems 6 Figure 1: Proposed ERP systems for Midwest airlines 8 1.2.3 Deploying ERP systems 9 Figure 2: ERP systems configurations 10 1.2.5 Application of ERP systems 11 Figure 3: Using ERP systems to control personal and non-personal expenditure in a company 11 Figure 4: Detailed breakdown of expenditure on ERP systems (city of San Diego, 2012) 12 1.3 Category management 12 1.3.1 Overview 12 1.3.2 Portfolio analysis (Kraljic Matrix) 12 Figure 6: Purchase classification using Kraljic model 14 1.3.3 Porter’s five forces 14 Figure 7: Porters five forces model for Midwest airlines 16 1.3.5 Strategic positioning 16 Table 1: Portfolio analysis in procurement 17 1.3.6 Action plans 17 1.4 Supply chain service improvement 18 1.4.1 Overview 18 1.4.2 Porters value chain analysis 18 Figure 8: Porters value chain analysis for Midwest airlines 19 1.4.3 Benchmarking 19 Figure 9: Responsiveness and efficiency trade-offs in service improvement 20 Table 2: Benchmarking metrics and attributes 20 1.5 Recommendations 21 1.6 Conclusion 22 Bibliography 24 List of Figures Executive Summary 1 Table of contents 2 List of Figures 4 List of Tables 6 1.0 Introduction 7 1.1 Procurement objectives 7 1.2 Developing and use of systems to improve and control expenditure 7 1.2.1 Overview 7 1.2.2 ERP systems 7 Figure 1: Proposed ERP systems for Midwest airlines 9 1.2.3 Deploying ERP systems 10 Figure 2: ERP systems configurations 11 1.2.5 Application of ERP systems 12 Figure 3: Using ERP systems to control personal and non-personal expenditure in a company 12 Figure 4: Detailed breakdown of expenditure on ERP systems (city of San Diego, 2012) 13 1.3 Category management 13 1.3.1 Overview 13 1.3.2 Portfolio analysis (Kraljic Matrix) 13 Figure 6: Purchase classification using Kraljic model 15 1.3.3 Porter’s five forces 15 Figure 7: Porters five forces model for Midwest airlines 17 1.3.5 Strategic positioning 17 Table 1: Portfolio analysis in procurement 18 1.3.6 Action plans 18 1.4 Supply chain service improvement 19 1.4.1 Overview 19 1.4.2 Porters value chain analysis 19 Figure 8: Porters value chain analysis for Midwest airlines 20 1.4.3 Benchmarking 20 Figure 9: Responsiveness and efficiency trade-offs in service improvement 21 Table 2: Benchmarking metrics and attributes 21 1.5 Recommendations 22 1.6 Conclusion 23 Bibliography 25 List of Tables Executive Summary 1 Table of contents 2 List of Figures 4 List of Tables 6 1.0 Introduction 8 1.1 Procurement objectives 8 1.2 Developing and use of systems to improve and control expenditure 8 1.2.1 Overview 8 1.2.2 ERP systems 8 Figure 1: Proposed ERP systems for Midwest airlines 10 1.2.3 Deploying ERP systems 11 Figure 2: ERP systems configurations 12 1.2.5 Application of ERP systems 13 Figure 3: Using ERP systems to control personal and non-personal expenditure in a company 13 Figure 4: Detailed breakdown of expenditure on ERP systems (city of San Diego, 2012) 14 1.3 Category management 14 1.3.1 Overview 14 1.3.2 Portfolio analysis (Kraljic Matrix) 14 Figure 6: Purchase classification using Kraljic model 16 1.3.3 Porter’s five forces 16 Figure 7: Porters five forces model for Midwest airlines 18 1.3.5 Strategic positioning 18 Table 1: Portfolio analysis in procurement 19 1.3.6 Action plans 19 1.4 Supply chain service improvement 20 1.4.1 Overview 20 1.4.2 Porters value chain analysis 20 Figure 8: Porters value chain analysis for Midwest airlines 21 1.4.3 Benchmarking 21 Figure 9: Responsiveness and efficiency trade-offs in service improvement 22 Table 2: Benchmarking metrics and attributes 22 1.5 Recommendations 23 1.6 Conclusion 24 Bibliography 26 1.0 Introduction Business information systems are vital for companies in gaining competitive advantage and edging their competitors. More important is the need to conduct portfolio analysis of companies and industries they operate. In service improvement, quality is a critical concept that has to be approached keenly by any company intending to leverage and increase their performance. In this report, special attention is given to the use of Enterprise Resource Planning (ERP) systems and Kraljic matrix in performing portfolio analysis. Finally, service improvement exploits the value chain analytical approach and benchmarking. 1.1 Procurement objectives 1. To develop and use systems that improves procurement and supply chain of Midwest airlines by 97% in the next two years 2. To assess some categories of expenditure used and suggest to by Midwest airlines for implementation in the next financial year 3. To identify suitable approaches for service improvement in supply chain management and recommend to senior management of Midwest airlines 1.2 Developing and use of systems to improve and control expenditure 1.2.1 Overview This section explores Enterprise Resource Systems (ERP) and its deployment and application in Midwest airlines. The aim is to understand ERP systems and how it is applied in a company context. 1.2.2 ERP systems Enterprise resource planning (ERP) is a management software used in business to collect, store, interpret and manage data for activities such as product planning, manufacturing, sales and marketing, inventory management and shipping and payment (Gill, 2011). ERP supports Supplier Relationship Management (SRM) in procurement to maximize cost savings in logistics processes and an end-to-end procurement. Essentially, ERP systems manage connections to external stakeholders and facilitate information flow between all business functions. In the procurement department, ERP standardizes business process by using massive databases for decision making in business management and planning. Users of ERP systems in the company will use online analytical processing (OLAP) present in multidimensional databases to analyze information one at a time (Sheilds, 2005). The cost of the software will be based on user numbers since it is typically made for multiple user environments. In Midwest airlines, it will have access to spend data owing to supplier segmentation process and strategic sourcing practices. The company will be able to negotiate prices of aircrafts, equipment and new bases by relying on purchases from leveraged volumes. Figure 1: Proposed ERP systems for Midwest airlines From figure 1 above, Midwest airlines find its own specialty by adopting a system with three main parts; execution, management and decision making at all levels. 1.2.3 Deploying ERP systems Category teams including multiple stakeholders will be driven by transformational value and intangible value such as ownership improvement costs and innovation. Deploying ERP systems will be change catalyst especially when larger providers of System Application and Products (SAP) are used (Gill, 2011). The company needs to measure its expenditure so as to standardize transaction channels such as purchase orders, online vendor websites and purchase cards. By implementing ERP systems, the company instead of navigating the back channels will be ‘forced’ to adopt the systems. All users in procurement will go through the authorized purchase channels and may not dodge approved suppliers and contracts (Loh et al. 2005). This means that there will be better data accuracy, better control of organizational spend and better analytics. On-line analytical processing (OLAP) will play two important roles; business analysis applications and support management of critical tasks (O'Brien, 2011). Under business analysis application, OLAP will analyze complex data, permit timely decisions and provide the supplies management with ‘real-time’ information. Some other support features include what-if analysis, ad-hoc reporting, information retrieval, modeling and decision support. Regarding supports management, it involves complex data from data warehouses in terms of consolidation to roll-up data, drill-down for uses see data in incremental forms and dicing and slicing to examine data, trends and patterns (Gill, 2011). In terms of configurations, ERP systems will adopt the client server network topology. This will be a three tier configuration used in the Wide Area Networks (WANs) and the clients will be able to link to the application server and then initiate a second connection to database server. Figure 2: ERP systems configurations Although an ERP system can standalone without a data warehouse but a serious organization looking for competitive advantages should adopt a separate data warehouse and operational databases (Loh et al. 2005). The processes for data warehousing are modeling data, extracting data from operational databases, cleansing extracted data, transforming data and loading the data into the database of the data warehouse. In relational theory, modeling of data does not apply in the data warehouse system (Sheilds, 2005). Therefore, wherever possible consolidating de-normalized tables in selected events may be necessary. Some of the ERP products include Oracle, PeopleSoft and Baan. With Oracle is possible to be tailored to e-business, while others can have internet based or client server application (Loh et al. 2005). With PeopleSoft, it is possible to have a modular and open architecture that allows rapid integration with current systems. On the other hand, Baan applies ‘best-of-class’ applications. However, SAP is the largest ERP vendor that incorporates new features such as XML, e-commerce, B2B and SCM (O'Brien, 2011). The modules are also customized and allow either standalone or integrated systems. 1.2.5 Application of ERP systems ERP systems will help in developing and changing the annual expenditure. As in the case of suggested expenditure for the financial year 2011 and 2012 can be as shown below, ERP systems can help to budget, adopt and make changes to expenditure categories in procurement. Figure 3: Using ERP systems to control personal and non-personal expenditure in a company Figure 4: Detailed breakdown of expenditure on ERP systems (city of San Diego, 2012) From fig. 4 above, ERP systems can be used to generate both personal and non-personal expenditures in a company. By adopting ERP systems, Midwest airlines can be able to generate the data on personal and non-general fund revenues similar to the one depicted in figure 3 and 4 above. 1.3 Category management 1.3.1 Overview The main aim of this section is to explore the methodologies in the analysis of category management. The specific areas of interest are portfolio analysis (Kraljic matrix) with the support of Porters five forces. 1.3.2 Portfolio analysis (Kraljic Matrix) Kraljic matrix is one of the strategic tools that formulates strategies and recognizes weaknesses that may culminate to supplies disruptions (Padhi et al. 2012). It involves a quadrant of financial and supply risks. The key items in the matrix are the leverage, strategic, routine and bottleneck projects. Midwest Airlines being an internal airlines company can review one of the items in the purchases such as jet fuel in the last two years. Owing to the broad nature of transportation such as ocean freight, ground and air, the company may find it essential to for air, truck and shipping freight division to purchase their own fuel. In order to reduce costs that is ultimately scattered, a Kraljic portfolio model is necessary. Kraljic model is used by purchasers to reduce costs and maximize supply security, hence moving from a transactional to strategic activities. The model involves four steps; purchase classification, market analysis, strategic positioning and action planning (Padhi et al. 2012). Under purchase classification, the company will classify all the services, products, components and commodities based on potential profit impact and supply risk. When an item is a scarce material, its supply risk is high. For example, natural disasters or political volatility affects the supply of jet fuel and gasoline. On the other hand, when an item has significant value on the output of an organization, its profit impact is high (Padhi et al. 2012). For instance, jet fuel has high impact on the proportion of flights and profitability. The purchase classification of Kraljic model as used in Midwest Airlines is as shown in figure 5 below. Figure 6: Purchase classification using Kraljic model 1.3.3 Porter’s five forces The second step is undertaking marketing analysis using Porters five forces. The model investigates the power of suppliers and purchasing power of their customers hence helping in the analysis of the competitive environment of the company (Porter, 1980). The five forces as described by Michael Porter include; supplier bargaining power, customer bargaining power, threat of substitutes products, and threat of new entrants, and competitor rivalry. This model has been criticized by doubtful assumptions and the presence of the 6th force (complementary force-government or public). In the case of Midwest Airlines, the company can assess its competitors and establish their bargaining power. The result will be an analysis of the company from the perspective of the industry it falls. The framework for Midwest Airlines is as shown in the figure 7 below. Figure 7: Porters five forces model for Midwest airlines 1.3.5 Strategic positioning Portfolio analysis will help in developing procurement strategies since it acts as an indicator for customer purchasing and supplier account positioning of their respective portfolios (Porter, 1985). Table 1: Portfolio analysis in procurement Using portfolio analysis in developing procurement strategies Customer purchasing portfolio positioning Supplier account portfolio positioning Develop-Grow Core-Invest Exploit-Harvest Nuisance-Divest Bottleneck Accept dependency on Boeing Reduce consequences Accept dependency on Boeing and reduce consequences Reduce consequences of a expensive supply chain and reduce dependency on few firms for jet fuel and aircraft models Reduce dependency on Boeing and find another supplier like COMAC Strategic Exploit; Build partnership with jet fuel suppliers and destination airports Maintain partnerships with trainers of pilots, jet fuel and suppliers of Boeing aircrafts Avoid unsustainable procurement practices; Accept locked-in partnerships Avoid companies engaging in terrorism or unfair advertising; Terminate partnership with rogue suppliers Leverage Exploit; Partner if risk increases such as increasing cost of maintain certain flight routes Exploit; Partner if risk increases such as increasing cost of maintain certain flight routes Exploit short-term; bookings for special conferences and games Convenience buying when the price of jet fuel is low for storage and use during peak seasons Non-critical Pool requirements; merge with destination hotels and car rental companies Seek efficient processes such as online booking and ticketing for hotels and resorts Pool requirements where attractiveness of the flight route is increasing Convenience buying of entertainment equipment for use in-flight plus meals 1.3.6 Action plans Three purchasing strategies are; exploit, balance and diversify (Porter, 2008). Under exploit, items under high purchase power are made to secure long-term contracts and good prices. The first option is to secure celebrity terminals, mergers with regional airlines and partnerships with companies of jet fuel and spare parts. It helps to reduce supply risks. The second option is making ‘spot purchases’ of individual items such as COMAC aircrafts if the supplier has a better deal. However, caution need to be taken when making aggressive approach to COMAC or 5-year jet fuel agreement in case the circumstances of the agreement changes. Balance means taking a middle path between diversification approach and exploitation approach. The balance between securing new bases and making long-term concessions on jet fuel agreements need to be balanced. Diversification involves reducing the supply risks by seeking alternative products such as car rentals or alternative suppliers such as COMAC or equipment suppliers through shipment. For example, instead of relying on trucking companies, a railroad delivery can be an option. Besides, consolidating to one single supplier of aircrafts, jet fuel, in-flight food and beverages and on-board utilities can help in negotiating for better pricing. 1.4 Supply chain service improvement 1.4.1 Overview This section analyzes the relevance of value chain analysis and total quality approaches in supply chain management. This involves the use of Porter’s value chain and Benchmarking to improve the supply chain process. 1.4.2 Porters value chain analysis Porter (2008) observes that the analysis of value chain is undertaken when, in the development of competitive advantage, a systematic approach is sustained. Porter’s value chain consists of primary activities such as inbound logistics, operations, outbound logistics, marketing and sales, and post-sale services. These activities directly affect the business in a short time period and are easy to monitor. On the other hand, support activities are needed within the value chain to support the main business activities. Although their impact may not be direct, they cannot be dismissed as inconsequential (Porter, 2008). The elements that constitute support activities are firm infrastructure, human resource management, technology development, and procurement. Inbound logistics are goods received from suppliers while operations involve preparing services and goods for customers. Outbound logistics provides ready products for consumer consumption while marketing and sales is reaching the customer to buy the service or product. Post-sale services involve communication and feedback from the customer. Technology development reduces cost and improves operational efficiency while human resource management extols the power of employees in driving competitive advantage (Porter, 2005). Firm infrastructure includes strategic planning and support activities for business. In Midwest Airlines, the value chain will constitute primary and support activities as shown in the figure below. Figure 8: Porters value chain analysis for Midwest airlines 1.4.3 Benchmarking Benchmarking analysis helps to identify the position of the company in the airline industry relative to best practice (Brewer et al. 2001). It is an assessment process that measures performance of the supply chain of an organization by considering time, value and quantity. For example, inventory efficiency may require identifying the current position using the efficiency frontier. Best practice is borrowed from the Japanese automotive sector, manufacturing. The aim of benchmarking is to reduce aircraft and jet fuel sourcing costs by 40% (saving of $1.2 million per year) and improve operational performance of supply chain by 60% in the next one year (Cooper & Ellram, 1993). Performance benchmarking is critical in Midwest airlines and more important is internal benchmarking that will contrast and compare similar supply chain processes. For example, receiving time standard deviation based on a standard way of key performance indicator determination. If the receiving time standard deviation is 0.034 and the standard deviation recommended is 0.045 (theoretical optimum), then a collaborative effort is sought by a manager visiting other processes to discover best practice. The process to bench mark is receiving after which performance indicators are set as shown in the graph below. Figure 9: Responsiveness and efficiency trade-offs in service improvement From the graph above, the manager will prioritize areas of improvements by adopting best practice. Finally, performance of procurement needs execution for results to be realized. In Midwest airlines, it will use a supply chain benchmarking model that adopts a traditional approach on basic evaluation and later advanced in integrated examinations. The metrics and performance attributes are as shown in the table below. Table 2: Benchmarking metrics and attributes Metrics Performance attributes Customer facing Internal facing Responsiveness Flexibility Reliability Costs Assets Order fulfillment cycle √ Perfect order fulfillment √ Supply chain adaptability (upside) √ Supply chain flexibility (upside) √ Supply adaptability (downside) √ Supply chain cost management √ Cost of services sold √ Cash-to-cash cycle time √ Supply chain fixed assets returns √ Working capital returns √ Supply chain management and improvement is vital because it influences financial performance (Brewer et al. 2001). Senior managers will be motivated in taking a closer look at surveys, customer feedbacks, balance sheets and profit-and-loss statements. By measuring the overall efficiency and performance Midwest airlines is able to balance efficiency and performance from operational level metrics to high strategic levels with a given timeframe. 1.5 Recommendations Midwest airlines have greater opportunity to take advantage of the available business information systems, knowledge and information management methods, and service quality improvement techniques. The report recommends the following for adoption by the senior management of Midwest airlines; 1. Deploy and implement customized ERP systems; this will enable the company to monitor expenditure not only in procurement processes but also across the organization. 2. Incorporate OLAP to analyze complex data, permit timely decisions and provide the supplies management with ‘real-time’ information as well as customized information using System Application and Products (SAPs) 3. Exploit strategic opportunities such as looking for a new aircraft supplier (e.g. COMAC) and engaging in convenience buying when the price of jet fuel is low for storage and use during peak seasons when their prices are low 4. Invest more or create an adequate budget for procurement and technology in order to gain leverage and win greater competitive advantage. 5. Benchmark with Japanese automotive industry such as Toyota for best practice and performance 1.6 Conclusion This report has provided in-depth analysis of systems to improve expenditure, and identify key stages in implementing category management using ERP systems. There are tools and techniques such as Kraljic matrix and value chain analysis that helps in the analysis of category management and finally facilitating process improvements in the organization. References Brewer, A.M., Button, K.J. & Hensher, D.A. (2001). 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