Case Study

Aotearoa Auto Parts Limited

Aotearoa Auto Parts Limited (AAPL) is one of New Zealand’s successful distributors of auto parts to retailers across the country. Robert Smart and his wife Jane Smart began this business in 1999 and had been running it from their Auto Shop in Central Auckland.

With the increasing number of vehicles on the road, the demand for auto parts has been growing steadily. Consequently, their business continued to grow and they decided in 2004 to register it under the company name: Aotearoa Auto Parts Limited. In the same year, they purchased a double-story warehouse building and an adjoining Preparation and Packing Shed in the industrial area of the suburb of Avondale in Auckland.

These premises have now become the headquarters of the company and have been used as a central distribution point for supplying auto parts to retailers.  Auto parts are stored on the ground floor of the warehouse building, the first floor is being used as office space for management and operations staff of the company.

The company has been making good profit in each year that they have been in business. Last year their profit was about $2 million from sales of about $10 million to 90 retailers in the North Island and 30 retailers in the South Island.

Results of a feasibility study carried out by Tawhiri Research Group in 2011 indicated the viability of the auto parts business in the South Island of New Zealand.  Accordingly, a branch of the company was opened in Christchurch in January 2012.

The Christchurch branch was initially a small rented distribution centre from which auto parts were distributed to retailers in the South Island. As the business was very successful, a warehouse similar to the one in Auckland (but smaller in size) was built in Christchurch in 2013 to store auto parts sent by air freight from the headquarters in Auckland three times every week to satisfy the needs of all customers in the South Island.

Packaged products (auto parts packaged ready for selling) are dispensed from Auckland and Christchurch after receiving orders by e-mails or phone calls from the retailers. The packages are prepared in the Preparation and Packaging Shed at the headquarters in Auckland. For deliveries to local retailers the company has a fleet of ten cars and five vans in the North Island and five cars and two large vans in Christchurch on the road six days a week.

Although the business is running smoothly, the management of the company is now concerned about the huge increases in cost of transport (due to rising fuel prices) that are cutting into profits. Application programs and systems in use are being severely stressed and becoming inefficient. Demands for auto parts have led to increasing number of orders.

Each retailer is now placing at least three orders per week. Each of these orders is for 20 to 80 packages of auto parts. Also, many retailers are placing multiple orders with different delivery addresses. As a result, the operational staff is finding it difficult to cope with the disparate systems and the problems that need to be worked around. Communication is working only because of the close bonds between the company staff.

The employees of the company at the headquarters include the following: Robert Smart is the Managing Director (MD). As he co-owns the company along with his wife Jane Smart, he also manages the warehouse in Auckland. Jane Smart is Financial Manager (FM); their elder son Richard Smart is Human Resource Manager (HRM) while the younger son, David Smart, is in-charge of Preparation and Packing Shed and is the Supervisor of casual staff at the headquarters; he reports directly to HRM.

Linda Bolton, Jane’s sister is the Marketing Manager (MM) and Joseph Smith is the North Island Distribution Manager (DM).  Andrew Jones is the Information Systems (IS) Support Technician. Jane Farthing is the accounts clerk and reports directly to the FM while Emma Baily, in her role as an office assistant, reports to HRM. Lisa Smart works as the receptionist.  In addition, there is a large pool of casual workers for packing auto parts. Casual labourers are brought in during peak periods.

The Christchurch Branch is managed by Bruce Fielding who is assisted by Angela Smith as the receptionist and John Brown who is in charge of the warehouse.

Robert manages and directs the company.  He is responsible for planning and strategic direction. Appropriate to his role in the company, he aspires to increase the company’s presence in the South Island, most likely in Westport and Timaru, and is also ambitious regarding expansion to overseas markets in the next two years.

Robert has great insight into the retail business and runs a very friendly and streamlined business. Jane spends approximately three days and evenings a week on the accounts and finances of the company. It should be noted that the company believes in being a family business and all permanent and many casual employees are related to the owners.

AAPL has been using several different automated systems running on Windows XP Professional operating system installed on Hewlett Packard (HP) personal computers (PCs) that are connected using star network topology. Charles Butler, who has migrated with his family to Australia, had designed and developed a simple Warehouse Management System and Andrew had developed a simple Distribution System, both using a MS Access database management system (DBMS) software.

The home-grown Warehouse Management System, which integrates with the Distribution System above, has limited functionality and uses an inefficient import/export program to use relevant data and information. HR application which was developed by Andrew is also being used, but it does not integrate with any other system.

The company also uses ACCPAC Inventory System, which has good functionality. The acquisition, in 2004, of ACCPAC, a commercial off-the-shelf package that was customized for Aotearoa Auto Parts, was essential for the viability of the company. It contains a Sales Module, an Inventory Module, an Accounts Module and an Asset Management Module.

The following are the different responsibilities of the staff involved: As the Warehouse Manager, Robert Smart is responsible for inventory management (stock flows (receiving and forwarding of auto parts), quantity on hand and reorder points), maintenance (capacity planning), forecast, costing, and management of suppliers.

As the Financial Manager, Jane Smart is responsible for funds management – general ledger, accounts receivable (AR), accounts payable (AP), payroll, cash flow forecasting, budgeting, reports, billing and invoicing to customers and suppliers. The Marketing Manager (Linda Bolton) is responsible for acquiring new clientele, providing the best product at least cost and timely promotion of the company – advertising and personal selling and processing of orders.

The Distribution Manager (Joseph Smith) is responsible for scheduling, maintenance and coordinating of vehicles in the best way to distribute auto parts to retailers in North Island and managing the air freights to the South Island branch in Christchurch. Joseph works very closely with Robert and David.

As David is in charge of the Preparation and Packing Shed and is Supervisor of casual Auckland staff, he is responsible for: ensuring that the stock in the warehouse is there for the minimum time, ensuring that auto parts are loaded in chronological order, monitoring the preparation and packing system, producing delivery and barcode labels, overseeing the packaging, maintaining the packaging supplies and employing casual staff.

Bruce Fielding, as the manager of operations at the Christchurch Branch, is responsible for the delivery of the bulk parts to the Christchurch warehouse, the acquisition of new customers, increasing orders from existing customers, ensuring that the deliveries are timely and keeping all records for the accounts which are maintained in Auckland.

The IS Support Technician, Andrew Jones, takes care of the local area network (LAN), provides IT support, and resolves hardware and software issues.  Andrew is on call 24×7. This may sound harsh, but there are rarely any callouts, as most staff can sort out minor problems themselves. Andrew can always call in his cousin (Julie Carpenter) to help if he isn’t available.

Requests for changes are treated as problems.  Problems with the system are listed on a board and accorded a priority rating, but time constraints mean that often a simple non-urgent problem is fixed before a complex urgent one.  There are procedures for introducing fixes before they are put into production, but they are often bypassed, with only occasional disasters.

Backups for each of the component systems are done nightly and backup discs are stored off-site. Since the last disaster, a copy of the previous night’s backup is also being kept on site. There are procedure manuals that are nearly up-to-date, but most of the staffs just ask their colleagues if they have problems.

Additional information for Assignment 2

AAPL has been the subject of a review by AlphaIT Solutions Ltd (AITS).  AITShas listed the problems that they have identified and have estimated some of the associated costs.

1. AOTEAROA’s information systems are becoming unmanageable. Staff are putting in a total of around 80 hours extra per week just working around the problems.  At an average pay rate of $30 per hour, these costs are taking a large bite out of the profits.
2. The distribution schedule is so tricky to work out that, when Joseph (the distribution manager) is not available, the schedules are very inefficient, causing extra trips or longer journeys than necessary. They estimate that an unnecessary extra 10,000 kilometres (km) are covered each year. Since the cars and trucks have a running cost of $10 per km, this is significant.
3. The overtired staffs are stressed and more mistakes are occurring. The mistakes have led to cancelled orders which the company estimates as being worth an average of $300 per week.
4. Communication between major stakeholders has been deteriorating. Linda Bolton, the Marketing Manager, as well as the retailers often have trouble getting up-to-date information on products and prices.  Linda reckons that she could increase sales by about 30% if she had better access to information.  On current sales, this could be worth around $5 million a year in turnover, which would be likely to realise about $1.8 million per year profit.
5. Staffs are looking forward to changes being made so that stress and overwork are reduced.
6. Management would like to have part, if not all, of the new information systems operational in three months.

After an analysis of the problems, AITS identified the following requirements:

1. All subsystems need to communicate with each other.
2. Staffs from all locations need access to the whole system, except the scheduling.
3. The system should allow for potentially 700 customers, although that target is not expected to be reached for several years.
4. The system should allow for potentially 10,000 products because new products come out frequently.
5. The average number of ordered product types per customer is expected to treble within the next year, when a large range of new products would be introduced, and then remain approximately at that level over the next few years. The system must be able to handle the increase.
6. Each office staff member must have a computer with the ability to carry out all the business functions except for scheduling and management statistics.
7. The scheduling software needs to be available only on two computers – one at the Auckland Head Office and the other at the Christchurch Branch.
8. The management statistics software needs to be available only on the managers’ computers in Auckland.
9. The system should have a life expectancy of four years.
10. A discount rate of 5% needs to be applied.

AITS has already made progress on identifying some potential solutions for some parts of the system, and the expected costs of some of the available products and services are listed below.

1. Cost of networking. Consultants considered various solutions including frame relay, modems, etc. and recommended ADSL connections as being the most flexible, with the advantage of standardisation throughout.  Auckland already has ADSL, and Christchurch can be connected for $300. Each ADSL connection costs $60 per month, and this is not expected to increase over the next few years.
2. LAN costs. Several quotes for installing a LAN at each of the distribution centres and upgrading the Auckland Head Office LAN have all come in at around $25,000 for each site.  These quotes are relying on using most of the existing equipment including cabling.
3. Hardware upgrades and replacements are estimated to cost around $11,000 at the start.
4. Software licenses and upgrades are likely to cost about $5,500 a year for the standard office products.
5. Software programmers are charging $80 per hour, analysts and project managers $135 per hour.

There is a new application development system, with its own database, called SAGE.  It costs $120,000 initially, and $5000 per year in support costs.  It would require extra server hardware costing $9,500.  This SAGE application development system is said to cut development time in half, but the programmers are charging $95 per hour to work in this environment.

6. A distribution scheduling system, DisSched, has come onto the market. It has two versions.  Version A costs $35,000 and would need extra applications written (about 250 hours of programming) to make it meet all the requirements.  These applications could be written in any development language/environment including SAGE.
7. Version B costs $45,000 and would need about 10 hours of analyst’s time to customize it, but no new applications need to be written. Both have a one-off license fee of $1250 per user.  Andrew says that DisSched is far better than he could design, and he wouldn’t even attempt to write his own system again as it would take years to develop anything as good as DisSched.
8. A new HR package, HREzy, costs $11,000. This can be integrated with other systems with negligible cost, but has limited functionality.  It is estimated that a programmer using a standard development system, would take about 200 hours to develop an application which would have more of the required functionality.  Using SAGE, the development time would be halved.
9. The current sales, inventory, accounts and marketing (including customer relationship management) systems can be replaced with a package, SIAM, for $150,000. This would meet all of the requirements of these sections. SIAM would need extra server hardware costing around $11,000.  This hardware would not be needed if the hardware for SAGE was bought.
10. A smaller application than SIAM has also been considered. This package, called HAMIS costs $42,000 and covers the sales, inventory, accounts, marketing and human resources (HR), but is pretty basic and would need about 2,000 hours of standard programming to make it meet the requirements. The upgrading of its HR portion would require approximately 150 hours of standard programming (as part of the 2,000 hours).
11. For each 20 hours of programming, an analyst is required for approximately one hour, and a project manager is required for half an hour.
12. Several consultants have estimated that the complete system, excluding the scheduling, would require approximately 3500 hours of standard programming and would require an extra $11,000 of server hardware to run, plus database software of $4,000. They point out that this programming time can be halved if SAGE is used, and the extra server hardware used for SAGE would be able to accommodate the new developments. SAGE comes with its own database.
13. A trainer costs $100 an hour and it will require on average three hours of staff training on any new application.
14. The office staffs are familiar with Microsoft based systems.
15. The new government is considering lowering company tax from 28% to 25%.