MASTERS OF IT PROGRAM IT INVESTEMENT HIGHER COLLEGES OF TECHNOLOGY

GRADUATE STUDIES & RESEARCH

Done By: AbdulRahman AlKaabi Abdulla Juma Al Shamisi Presented to: Dr. Baha AlAbed

May 13th, 2012

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Executive Summary

This report presents several of the aspects associated with IT investment in one of the leading cloth manufacturing company called Creative Cloth Company. The aim of this report is to analyze the strategy of company and accordingly investigate into its IT needs and requirements. Furthermore, the report brings the suggestive implementation of IT aligned with the corporate objectives and goals of the company. Investment in IT infrastructure has become one of the most necessary aspects in most of the industries. It causes the improvements in the companys effectiveness in bringing the best values to its customers while enhancing the core capabilities of the organization in meeting its strategic aims with best of efficacies. The report contains an in-depth analysis of available alternatives for making the IT investments in three different ways and concludes with the best alternative along with the required justifications and recommendations.

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Contents
Executive Summary....................................................................................................................................... 2 Strategic Planning ......................................................................................................................................... 4 Strategy of Company................................................................................................................................. 4 Fit of IT investment in overall strategy ..................................................................................................... 5 Chart of IT implementation Plan ............................................................................................................... 6 Need Analysis ................................................................................................................................................ 7 Target to Achieve ...................................................................................................................................... 7 Current System Description ...................................................................................................................... 8 Capacity and deficiencies .......................................................................................................................... 9 Alternative IT investments to achieve the solution .................................................................................. 9 Outsourcing or in-house ......................................................................................................................... 10 Measuring IT performance ......................................................................................................................... 10 Performance Measures of IT................................................................................................................... 10 Cost of IT ................................................................................................................................................. 11 Analysis of Alternative IT investments ........................................................................................................ 12 Using Basic Financial methods; other Financial Methodologies & Cost- benefit Analysis ..................... 12 Using Balanced Scorecard Method ......................................................................................................... 22 Multi Factor Scoring Method .................................................................................................................. 27 Conclusion and Recommendations ............................................................................................................ 27 Bibliography ................................................................................................................................................ 29

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Strategic Planning
Strategy of Company
The selected company Creative Clothing Company FZC is based in SAIF Zone, Sharjah, UAE which was started with 36 employees and 28 machines in a premise of 800 square meters. The company started with producing the designer babywear namely Pompiedom and Nino-Nina for the European markets and Sweetbaby for UK (Creative Cloth Company, 2012). The chief strategy of the company is to gradually increase its reputation in the market and consequently increasing the demands of its products. Company considers these aspects as a turning point of their business. Along with this, the company believes into the continual innovations and thus has evolved into the American CMT work and then began the designing and manufacturing of the fashion wears for ladies and girls, outerwear, club wear, and sportswear, etc for the European market. Today, the company has three factories including one print shop, knitting factory with 550 sewing machines and 750 skilled workers to enhance the garments (Creative Cloth Company, 2012). One of the important prospects of Creative Clothing Company is to provide its customers with a complete in-house solution to all their garment manufacturing needs. Although company can outsource the fabrics and trims and get the pattern making and grading done yet the entire garment cutting and making up is done in-house without allowing any work to be outsourced. This brings the complete control over the products which can be closely monitored for the maintenance of exceptionally high quality standards of products. In order to produce the quality clothing, company employs the quality people right from the top to bottom. The management team of Creative Clothing Company comprise of the highly trained professionals those are selected as much for their technical skills as their commercial creativity.
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The company is quite enthusiastic for the development of special understanding and relationships with its customers by always working closely with them. The companys strategy also involves the constant investing into the new technology for enhancing the customer satisfaction and people for increasing the capability of gaining more business from the existing customers. Moreover, the aspects like building solid base of experience, an established customer portfolio, and ability to fulfill the customers need right from the designing, timely production, range building are important elements of companys strategy.

Fit of IT investment in overall strategy

For having the competitive success in the companys overall strategy, we would be invest in IT to enhance the overall value chain of the company. The designed of the IT strategy for the company would be based on the activity based management by treating the value chain as the independent system with a network of activities. The activities are to be linked with the help of IT capabilities and assets that would be having a number of optimistic impacts over the cost and effectiveness of the companys operations. The strategic components that would be involved with the IT investments include computerization, automation, and strategizing for establishing a dominant coordination between the different aspects of the value chain by reducing the cost, enhancing the information for control purposes, and substituting the more expensive operations with the less expensive ones (Remenyi, 1999).

Incurring Supplies

Supervising, Processing, Cutting, Packaging, etc

Advertising, marketing, etc

Selling to the customers

Figure 1: Value Chain Analysis for Creative Clothing Company

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The above figure explains the value chain of Creative Clothing Company FZC. Now, the IT investment can be made in each of these phases to enhance the overall productivity and effectiveness of the complete value chain that would be bringing enormous financial benefits for the company. Also, the investment in IT is quite aligned with the overall strategy of company as company is quite enthusiastic about investment in the new technologies to appraise its value in the market. Also, the aspects such as maintaining the customer satisfaction, improving the quality, reducing the time, etc can all be fulfilled more efficiently with the incorporation of IT in business. (Creative Cloth Company, 2012)

Chart of IT implementation Plan

Following is the chart of IT implementation into the business activities of Creative Clothing Company: Automating & simulating the fabric and clothing design Keeping the track-record of availability of products in Inventory (Inventory Management System)

Management Information System

Marketing and Advertising products through IT

Automating online payment

Online Customer feedback and reviews

Financial Reporting and Accounting

Figure 2: Flow chart of IT implementation in Creative Clothing Company

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Need Analysis
This section provides the in-depth details of needs that are required to be fulfilled by the proposed IT investment into the business operations of Creative Clothing Company.

Target to Achieve
Following are the main targets that we would be trying to achieve with the IT investment in our business (Read, 2009): Better Co-ordination and Strategic Planning: The first and foremost benefit to be attained with the implementation of IT in the companys operation is to have a more efficiency through better co-ordination between the different components of the organization. As the companys size is growing at an enormous rate, there is a need to switch to a more faster and reliable system which can provide productive information for better strategic planning of the company. Also, the effective communication can be achieved through the strategic deployment of IT investment leading to better co-operation of the employees and managers. Quality Improvements: Another objective of IT investment in Creative Clothing Company is to support the quality improvement measures taken by the management. The proposed IT assets and techniques can be extremely helpful while evaluating and measuring the quality of manufactured products especially through the online evaluation of customers feedback on the quality provided to them. The management information system is also extremely beneficial for tracking the quality check and quality assurance stuffs.

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Driving Innovation: IT investment has also been found to be driving innovations in many businesses. Thus, for Creative Clothing Company, the aspects such as automating the fabric and cloth design, experimenting with the simulations over design, etc can be vitally helpful for the company to drive innovation. This is another prospect that we would be trying to achieve with IT implementation.

Reducing Delays: Another important need of the IT investment is reduction in delays through the strategic innovations. With the implementation of IT, we can easily keep the track of inventory through inventory management system. Also, the orders can be booked in shorter time along with supporting the timely delivery of items with Management Information System.

Customer Satisfaction: Last but not the least; customer satisfaction is another leading aspect that we would be attempting to achieve through IT investment into business operations. The reduction of time, improvements in quality, and provision of automated customer services would automatically bring the desired customer satisfaction. Moreover, the online customer feedbacks and reviews would assist the customers to provide quick assessment of customers regarding companys products/services. Schniederjans, 2010) (Marc J.

Current System Description

The current system is totally manual in nature with the use of manual registers to maintain and present the information. The orders are booked over phone or through direct salespersons with casual provision for customers feedback. Also, the inventory is managed through manual track recording and maintenance of items list, etc. The designs of fabric and clothes are also done on

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paper which is provided to designers for manufacturing the clothes. But, each and every of these things are done in-house without any external help.

Capacity and deficiencies

Following are the main capacities with the current system of Creative Clothing Company: Highly skilled and trained manpower who are working satisfactorily with the current manual system. Efficient machinery and deployment of latest technologies related to fabric designing and manufacturing that can be easily optimized with the possible future implementation of IT. Effective maintenance of inventory as well as the customer related reports though manually yet that could be extremely helpful while switching to a new system. Following are the main deficiencies existing with the current system: Complications during the work due to piling up of papers. Unexpected delays due to the lack of co-ordination among the various departments. Customers feedback and reviews are not well incorporated into the operations. Quality checks and quality assurance sometimes fall short of the standards of company. (Read, 2009)

Alternative IT investments to achieve the solution

We can have the following three alternative IT investments which are as follows: Alternative 1: Full-fledged implementation of ERP system in companys business operations. Alternative 2: Making the IT investment in the inventory management system only Alternative 3: Making the IT investment for marketing and sales only.

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Outsourcing or in-house
Although the required assets like hardware and software required for IT implementation are to be sourced from outside yet the actual implementation would be done in-house. For this, some level of training and development of employees and managers would be required which is to be made with the help of outside consultancies but once the training is complete and IT assets are installed in the company, all the operations would be done in-house. (Read, 2009)

Measuring IT performance
Performance Measures of IT

As all of us know that IT investments considered a unique type of investments because they naturally have both tangible and intangible effects on an organizations. This led us to have an objective and subjective measures. These measures will help us and the top management to assess the impact of these IT investments benefits on the company. We will conduct measurement of IT effects at all the company levels. At the general level we will assess the business value of IT and the overall effectiveness of IT. At the lower level we will assess the effectiveness and efficiency of IT. The assessment of business value of IT will be achieved by assessing the financial performance of the company and this includes return on investment as an example. The effectiveness and efficiency at the lower level will be measured by determining and evaluating how these IT investments will support the business processes, employees and how it will meet the business requirements.

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Cost of IT
Following are the main cost measures of IT implementation as shown in the figure below. Purchase of computer systems Purchase of computer software Training Staff . Expenditures over maintenance of computer systems and software.

This figure shows the estimated costs and benefits of the three IT investment alternative chosen by the IT department of Creative Clothing Company. Each alternative has its total cost and benefits as shown in the spread sheet. In fact we analyzes the basic costs of implementing three different alternatives of IT investment for the Creative Clothing company to have a good estimate of the net cash flow. The net cash flow is analyzed over a three years period.
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Analysis of Alternative IT investments

Using Basic Financial methods IT investment in a fully fledged manner. The different figures for the company we have are: (in $) Year 0 Initial Investment Cash inflow 80000 100000 140000 200000 Year 1 Year 2 Year 3

The opportunity cost has been found to be 10% p.a.

Using Basic Financial methods; other Financial Methodologies & Cost- benefit Analysis
Using Basic Financial methods: 1) Break-even Analysis The breakeven point is the point in which the total initial investment is regained from the cash inflows coming from the

investments to the company. From the given data we get that the break even is achieved in the 2nd year of running when the tangible inflows account for 180000 (80000+100000). This force the IT tools to facilitate the human personnel with the intangible profits worth 20000 as shown

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in the balance sheet above. The intangible inflows are calculated by the experienced managers and should carry out with utmost care. So, this alternative can be found as a profitable one and we can be able to cash in more inflows in the coming years. (Remenyi, 1999) 2) Payback Period The payback period is calculated with the number of years that will be required to fully return the initial cost incurred by the company upon investing in the alternative. Here the payback is done on the 3rd year after the investment. This has to be compared with the companys policy and the standard payback period being set by the management. If the standard payback period is more than 3 years then the company can again be in a comfort zone and will enjoy benefits of the IT investment alternative.

3) Accounting rate of return The accounting rate of return is the ratio of the average annual returns upon the investment of a particular sum in any project. The ARR technique is found to be effective one in making decisions. The depreciation rate for the three years has been found to be: Year1: 30000 Year2: 45000 Year3: 90000 Hence, the total profits in the three years come to be Using (total cash inflows - depreciation)

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Year1: 50000 Year2: 55000 Year3: 60000 The average profit annually = (50000+55000+60000)/3 =55000 ARR = profits/initial investment = 55000/200000 * 100 = 27.5% The ARR calculated must be equal or higher than the standard rate proposed by the management of the company. Using other Financial Methodologies 1) Net Present Value The NPV method involves the calculation of the present value of the cash inflows that will be coming out by considering the opportunity cost paid by choosing this alternative. The opportunity cost has been set by the company as 10% Now finding the present values of the coming three years inflows at 10% cost: Year1: 80000/ (1+0.1) = 72727.3 Year2: 100000/ (1+0.1)2 = 82644.6 Year3: 140000/ (1+0.1)3 = 105184.1 The total cash inflows (sum of all the above) = 260556 So the benefit obtained is the difference of cash inflows with the total initial investment That equals to, (260556-200000) = 60556 This is the total profit obtained upon choosing the full implementation of IT. 2) Return on investment

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This method involves the calculation of the profit as the percentage factor of the total initial investment. The ROI is calculated by dividing the total profit obtained by the initial sum of investment. ROI = 60556/200000 = 30.23% The alternative should be chosen which provide the higher rate. 3) Internal rate of return This method is used to find out the rate at which the NPV value comes to be zero. It is the maximum permissible cost of opportunity that a company allows in order to avoid losses. The greater the IRR, the better the alternative is. It is calculated by the trial and error method in which the rate is chosen arbitrarily and then is made work in finding the NPV value to be zero. Here by the trial and error method we have to find the value of x. 80000/ (1+x) + 55000/ (1+x)2 + 60000/ (1+x)3 = 200000 The value of x comes to be 0.242 and the rate is thus 24.2% (Remenyi, 1999) Using Cost/benefit Analysis The costs will be much higher if the total implementation of IT takes place in the company as the cost incurred will be in the form of: Hardware Software Training Maintenance

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Whereas, the benefits of the extensive use of IT in the company are the highest. The benefits include: Increased productivity Increased coordination among employees Database integration of all the department for smooth workflow Transparency in the work

Now the alternatives can be compared with the tangible values of the different costs and benefits. Making the IT investments only in the inventory management system The different figures for the company we have are: (in $) Year 0 Initial Investment Cash inflow 30000 50000 60000 100000 Year 1 Year 2 Year 3

The opportunity cost has been found to be 10% p.a. Using Basic Financial methods: 1) Break-even Analysis The above given data lets us find out the breakeven point that can be achieved in the 2nd year of our investment on IT in the Inventory management system. The tangible inflows can be seen to account for 80000 (30000+50000) as shown in the figure below.

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Thus, the required amount of return in the value of the intangible assets should be worth 20000 in order to attain break-even. 2) Payback Period The payback period calculated from the above given values comes to be equal to the 3rd year after the investment. The companys policy for the standard period will be again taken into account for the analysis but it has to be lesser than the other alternatives to be beneficial. 3) Accounting rate of return The depreciation rate given on the investment of IT in the inventory management for the coming three years after investments are: Year1: 15000 Year2: 20000 Year3: 25000 The total profits for each year (total cash inflows - depreciation): Year1: 15000

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Year2: 30000 Year3: 35000 The average profit for each year comes to be 80000/3 = 26666.7 ARR = profits/initial investment = 26666.7/100000 * 100 = 26.7% Using other Financial Methodologies 1) Net Present Value The opportunity cost has again been set by the company at 10% The present values of cash inflows have been calculated similarly as before at 10% cost: Year1: 30000/ (1+0.1) = 27272.7 Year2: 50000/ (1+0.1)2 = 41322.3 Year3: 60000/ (1+0.1)3 = 45078.9 The total cash inflows are equal to 113673.9 The net present value now found out to be (113673.9-100000) = 13673.9 2) Return on investment The ROI is calculated below and is found out to be: ROI = 13673.9/100000 = 13.67% 3) Internal rate of return Again, using the trial and error method to find the value of x: 30000/ (1+x) + 50000/ (1+x) 2 + 60000/ (1+x) 3 = 100000 The value of x comes to be 0.242 and the rate is thus 16.9%

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Using Cost/benefit Analysis Although the costs will be much lesser than the full fledged implementation of the IT tools but the returns can also be seen as substantially lesser. The overall development in the company would be limited and only the Inventory department will be able to work out with the incremented efficiency. It will be beneficiary of course, but will be just a share of facto in the total benefits provided by the alternative first. Though being relatively better than the 3 rd alternative it lies behind the 1st one. (Remenyi, 1999)

Making the IT investments only in the Marketing and Sales Department The different figures for the company we have are: (in $) Year 0 Initial Investment Cash inflow 20000 30000 40000 90000 Year 1 Year 2 Year 3

The opportunity cost has been found to be 10% p.a. Using Basic Financial methods: 1) Break-even Analysis The breakeven point is again achieved only after the 3rd year of our investment on IT in the Marketing and Sales System. The tangible inflows can be seen to account for 90000 (20000+30000+40000) as shown in the figure below.

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Thus, the required amount of return in the value of the intangible inflows is much greater to achieve break-even in the second year itself. 2) Payback Period The payback period comes out to be the 3rd year after the investment. 3) Accounting rate of return The depreciation rates are given on the investment of IT in the Marketing and Sales in the coming three years after investments are: Year1: 15000 Year2: 20000 Year3: 25000 The total profits for each year (total cash inflows - depreciation): Year1: 5000 Year2: 10000 Year3: 15000 The average profit for each year comes to be 30000/3 = 10000

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ARR = profits/initial investment = 10000/90000 * 100 = 11.11% Using other Financial Methodologies 1) Net Present Value The present values of cash inflows are calculated again at 10% cost of opportunity: Year1: 20000/ (1+0.1) = 18181.8 Year2: 30000/ (1+0.1)2 = 24793.4 Year3: 40000/ (1+0.1)3 = 30052.6 The total cash inflows are equal to 73027.8 The net present value now found out to be (73027.8- 90000) = -16972.22 The negative value of the NPV tells us that the alternative is very risky and returns are not available in the future. 2) Return on investment The ROI is calculated below: ROI = 16972.22/90000 = -18.85% The negative rate shows that there will be lesser cash flows than the initial investment. 3) Internal rate of return Since the total sum of the cash flows itself does not exceed the initial investment of 90000, the internal rate has no significance. (Remenyi, 1999) Using Cost/benefit Analysis The third alternative is the weakest of the three in terms of benefits. Though the cost in a little lesser than the 2nd alternative, the benefits are not at all in comparison to the other. Using this strategy will result in taking of too much risk and very low outputs.

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Using Balanced Scorecard Method

Critical Success Factors (Marc J. Schniederjans, 2010):

Alternative 1 Quality Improvements Timely information

Alternative 2 Reduced Errors Reduction in production time Better co-ordination between inventory management and

Alternative 3 Improvement in sales Customer Satisfaction

Reduction of delays in delivery Effective Marketing

Improvement in sales

rest of the departments

Less Errors More co-ordination Increase in job satisfaction among managers Reduction in production time Reduction in delivery of products in market Customer Satisfaction

Intelligence

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Delphi Method: Following is the analysis of all the three alternatives using Delphi Method (Marc J. Schniederjans, 2010): Alternative 1 Goals (out of 5) Quality 4 Improvement Employees 4 Satisfaction Customer 5 Satisfaction Decrease in time Reduction of 4 Cost Others Total 4 25 (out of 30) 3 18 (out of 30) 3 18 (out of 30) 3.33 20.33 (out of 30) 3 2 3 4 3 3 3.33 3 5 4.33 3 2 3 3 3 3.33 (out of 5) (out of 5) Alternative 2 Alternative 3 Mean (out of 5)

As analyzed with the help of Delphi method, the Alternative 1 comes out to be the best alternative.
Balanced Scorecard Method (Marc J. Schniederjans, 2010):

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Alternative 1

Financial Perspective

A.

Increase the sales

B. Increasing the margins

Customer Perspective

E. Increasing D. Achieving favorable feedbacks

the return rate of customers

C. Overall Satisfaction of customers

F. Increased value to the customers

Internal Perspective

G. Innovation in
Products/Services

H. Organization and Cost

Effectiveness Taskforce

I. Improving Internal Performance

Learning and Growth Perspective

J. Training Employees

K. Making employees competent with

latest technologies

L. Increased employees
satisfaction

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Alternative 2

Financial Perspective

A.

Improvement in margins

B. Reduction of cost

Customer Perspective

C. Reduction in delivery Delays

D. Quickly replying to customers needs

E. Increased value to the customers

Internal Perspective

F. Innovation in
Products/Services

G. Improvements in internal
operations

H. Better co-ordination between

different departments

Learning and Growth Perspective

J. Technically sound Employees

K. Inventory management efficiency in

employees

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Alternative 3

Financial Perspective

A.

Increase the sales

Customer Perspective

D. Enhanced C. Better reach to customers

number of returns by customers

B. Better Customer Services

E. Increased value to the customers

Internal Perspective

F. Better co-ordination of
marketing and sales department with other departments of company

G. Better communication with

external environment

H. Better responses of managers

to customers need

Learning and Growth Perspective

I. Responsible Employees

J. Better interaction with customers

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Multi Factor Scoring Method

Following is the multi factor scoring analysis of all the three alternatives: Factors Flexibility Price Outcomes Flexibility Robustness Total Alternative 1 4 3 5 4 4 20 Alternative 2 4 4 3 4 4 19 Alternative 3 5 4 3 3 4 19

Based on the multi factor scoring method, alternative 1 again comes out to be the best alternative

Conclusion and Recommendations

IT investment in the business operations of Creative Cloth Company is an extremely vital necessity of the company to remain competitive in its industry. Furthermore, it would be enhancing the core capabilities and competencies of the company in meeting its corporate strategies of getting the customers satisfaction and quality excellence. There are several of the alternatives and notably we have discussed the three important of those alternatives keeping into the consideration the required infrastructure, cost/benefit analysis, balanced scorecard analysis, multi factor analysis, etc. The three alternatives can be observed by the different techniques used above and the comparison can be laid down. The third alternative is the least productive one and does not
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generate any amount of profits. So it should be eliminated in the initial stage itself. Now the competition is between the first and the second alternative. The main criterion that is considered to be the most effective is the NPV method. And in the comparison, we can find out that the option one has much higher NPV returns than option 2 (60556 > 26666.7) Given the both NPV values had been same, then we would have gone with the comparison of their ROI and the higher one would have been chosen. Based on this analysis, following recommendations can be made for Creative Cloth Company: Company should implement a full-fledged implementation of information systems that could handle its inventory, management, employees, and customers. The investments made on the IT infrastructure should continuously be evaluated using the different measures of IT as specified in the report. Enough training and development should be provided to the managers before implementing the IT infrastructure in the routine operations of the company.

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Bibliography
1. Creative Cloth Company. (2012). Creative Cloth Company Profile. Retrieved May 7, 2012, from Creative Cloth Company: http://www.creativeclothingco.com/ 2. Marc J. Schniederjans, J. L. (2010). Information Technology Investment: DecisionMaking Methodology. World Scientific. 3. Read, T. J. (2009). The IT Value Network: From IT Investment to Stakeholder Value. John Wiley & Sons.
4. Remenyi, D. (1999). IT Investment:Making a Business Case. Butterworth Heinemann.

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