The Florida Retail Company is a collection of small consumer electronic retail stores. The company is known for its personal and efficient service. Susan Bender, the Vice President of Operations, prides herself on running one of the most efficient operations in the electronics retail industry. One of the main tools for this efficiency is a computer system that allows FRC to closely monitor sales progress and inventory turnover rates.
The computer system was bought and is currently maintained by ACME Retail Computer Services. ACME and Florida Retail have had an excellent and mutually profitable relationship for the past 10 years. FRC maintains a small staff of three people to run the ACME retail system.
New Strategy
The Florida Retail Company is planning a bold strategic move into the consumer electronic retail industry. The company plans to phase out all of its current smaller retail stores and mold its business around large super-stores. The first store will be the showcase and model for future stores. Jack Murphy, the owner of FRC, has envisioned a futuristic computer system to support his new store concept. The new computer system will provide all the functionality of the current system (accounts payable, accounts receivable, general ledger, purchasing, inventory control, sales analysis) and have a fully integrated point-of-sale function. Jack envisions a "paperless" sales floor where all transactions and merchandise reservations are handled by the computer system. Additionally, the new computer system will have an optical bar code reading capability to facilitate customer transactions.
The first super-store will open at this time next year. FRC plans to open at least two other super-stores in the year following.
Need for New System
Susan Bender, the vice president of operations, realized that the current computer system supplied by ACME would not support the larger operations of the future super-store. After some inquiries, Susan believed that ACME was the only supplier capable of offering the software needed. ACME was currently in the process of developing a software package that would provide all the functions of the current systems for larger operations.
Susan contacted David Lansing, the CEO of ACME, to discuss a possible deal. The two quickly agreed that ACME would supply the needed computer software system for FRC. Susan would be involved initially to help develop the customized point-of-sale system for FRC. Beyond that, ACME agreed to deliver a new software system capable of all functions the old system provided plus integrating the customized point-of-sale system. FRC was to be the first ACME customer to use the new computer system. It was agreed that the software was to be in place two weeks before opening day of the new super-store and the hardware needed for the software was to be in place one month prior to opening day.
A fixed price of $350,000 for the software was proposed by ACME based on a $3 million estimate for total development costs. The price of the software was derived by prorating the development costs (including the point-of-sale system) over the expected number of customers and adding 15 percent for profit. ACME required that 50 percent of the purchase price was to be paid up front and the remainder was to be paid upon delivery of the software system.
Susan thought that the price was fair and the terms and deadlines of the agreement were satisfactory. Close monitoring of ACME's progress would not be necessary since Susan has always relied on ACME to successfully solve FRC's computer system problems; besides, nobody at FRC knew much about developing computer software systems.
Opening Day (Six Months Later)
Susan was a bit nervous this morning. Everything about the store was ready, but there had been some problems with the computer system during these past two weeks. Her system manager, Helen Cooley, as well as two ACME representatives had been spending many sleepless nights fixing and tuning the system. Susan hoped all the major problems were resolved.
A long line of people were waiting to get into the store when the doors finally opened. Right away there were problems with the computer software system supplied by ACME. The first customer to be serviced at the cashier's station took 20 minutes to finally get out of the store due to the slowness of the computer software system. Salespeople were complaining about slow computer response time when they tried to reserve merchandise through the system. Soon, there was a long line of people at every cashier station and with every salesperson. Customers were leaving the store due to long lines at the cashier stations and slow salespeople. The computer system finally "crashed" in mid-afternoon and became inoperable. The employees of FRC had no idea what to do next.
That evening, Jack Murphy had a meeting with Susan, Helen, and two ACME representatives. Jack told them that the computer system was going to put him out of business and they had better do something about it.
As a consultant for Florida Retail Company, you are required to assess the aspects of Purchasing & Procurement Management and use your own assumptions to answer the following questions:
QUESTION 1
(a) Identify FOUR (4) advantages of the inclusion of supply managers and pre-qualified suppliers.
(b) Identify FOUR (4) disadvantages of excluding supply management and suppliers from the new product development process.
QUESTION 2
(a) Do you feel that the fixed price contract agreed to by FRC was the best way to procure ACME's computer system? (25 marks)
(b) Where did FRC go wrong in purchasing the software system?