The impact of globalisation and higher education on the tourism industry: does the distribution of higher tourism education distribution impact on wealth creation?

Abstract

This research proposal contains literature review and proposed methodology for anticipated research. The research will seek to establish two dimensions of higher tourism education: how location of related institutions is connected to tourism’s importance in the economy; and how higher tourism education contributes to wealth creation. The rationale for the study is based on the fact that little has been done in literature to link the areas of study as clearly as proposed in this research. The research shall make use of primary research using interviews which will be done on higher education practitioners. The sample size shall be 50 (from which 20 will be analysed) and the sampling approach shall be judgemental. Emphasis shall be on interviewing providers of higher tourism education with emphasis on policy makers. This is because they are likely to be aware of the reasons why the specific field of study should be considered as important to the economy. They would also be aware of concentration of similar institutions in other markets.

1.0 Introduction

It is difficult to determine which between globalisation and education helps more in wealth creation. Globalisation promotes movement around the world and in case of tourism; it makes tourism destinations very accessible. Higher education on the other hand promotes wealth creation in the tourism sector by promoting creativity and entrepreneurship in the sector. The aim of this research is to try and establish if higher tourism education (HTE) can help create wealth. It also evaluates the business concept of supply and demand in relation to whether the concentration of HTE institutions is dependent on how important tourism is considered in an economy. This is in addition to its ability to make its students better entrepreneurs in the field of tourism by enabling them understand the concept of tourism (Galal, 2011). Higher tourism education is training programs aimed at equipping students to master the concept of tourism and service delivery. It ranges from vocational training to regular education programs that are taken in the university programs. Higher education is an important tool for multiplying wealth.

Those who are equipped with knowledge in tourism are able to ensure that tourists are served well. They are able to understand the tourists and know how to offer satisfaction to them. They are also able to know how to manage their tourism products to get the greatest yield. The trained tourism professionals also tend to be good at marketing and attracting tourists to their destinations (Jamrozy, 2007). The growth of tourism can be attributed to several factors including globalisation and its influence on the movement of people across countries. Globalisation also facilitates cross cultural communication as there is increased understanding between people. In my opinion, even though wealth creation in tourism is not only because of higher education, HTE does contribute significantly to wealth creation.

1.1 Value of research

The bulk of studies on higher tourism education do not make an attempt to establish the connection between the concentration of higher tourism education institutions and the importance of tourism in the economy. The assumption that the institutions are more in countries that value tourism more is questionable and in need have research. The same applies to the relationship between HTE and wealth creation. Studies are many on the performance of tourism in different economies and it is therefore easy to tell that tourism does have an impact on the wealth of the countries. However, there is little connection made between higher tourism education and wealth creation.

2.0 Review of past studies

2.1 Location of higher education programs

In general, the location of any organisation or enterprise depends on demand. An organisation is more likely to set up operations in places where the demand is high. In relation to tourism, higher tourism education programs are likely to be located in regions where the industry is considered as very important (Cubillo, Sanchez and Cervino, 2006). The demand for the educational programs is influenced by the thoughts of the market on the related field. This means that tourism education enjoys high demand only in countries or regions where tourism is considered to be very important. The level of importance on the other hand is determined by the ability of people to see opportunities and be determined to exploit them.

In my view the relationship between higher education and wealth creation is not in dispute. Tourism is an industry that mainly depends on human resources and making them more skilled can help the industry grow. The endogenous growth theory is used to explain the relationship between economic performance and education. The theory considers knowledge as a form of human capital. This capital can be exploited to fuel discoveries, create new industries or sectors within an industry, and promote growth (Bhat and Gaur, 2012). From the presentation above, the performance of tourism in Europe may not be directly linked to how important the industry is to the economy. However, there are general observations that link the level of education in an economy and their ability to excel in offering services. Tourism is a service which needs to be offered with tact and strategy for the tourists to be satisfied. Understanding tourism and understanding the tourists is very important as a component of this.

In addition to understanding the tourists, the practitioners need to understand their resources. Resources can be used to create different effects. This is a function of education where people are trained to be very creative in how they perceive the resources around them (Cepar and Bojnec, 2010). Apart from having natural sceneries that tourists would like to see, the rest of the tourism destinations are a product of creativity. Superior architecture promotes tourism. Provision of excellent accommodation and holiday experiences also promote tourism. Culture can also be showcased in a manner that promotes understanding hence also promoting tourism. In the end, the tourists can be attracted through diverse means to visit a country and the knowledge of doing that.

2.2 Impact of higher tourism education on wealth creation

The influence of higher tourism education on wealth creation is dependent on the manner in which it is applied and the manner in which the students put their knowledge into action. It is important to appreciate that knowledge is human capital (Gouna, 2009). This is just one of the forms of capital that are needed for wealth creation. Other forms must be present for the higher tourism education to produce the desired effect of wealth creation. For instance, having a pool of trained tourism industry practitioners does not yield much fruit unless investors are willing to fund their initiatives. Governments should also be proactive in promoting tourism. One of the ways in which government promote tourism is by advertising the country over international media. Such advertisements benefit the industry as a whole.

The other way in which governments promote wealth creation through tourism is by maintaining political stability and national security. Tourists only prefer to visit locations where they are sure of their personal safety as well as the safety of their belongings (Diplari and Dimou, 2010). Besides, tourists also value infrastructure. Most tourists would like to visit locations that have the necessary infrastructure so that they can enjoy their vacations. Facilities such as modern hotels and roads are crucial for tourism. It is government and not the practitioners that play a major role in facilitating development of such infrastructure. The only exception are the few tourists that seem to prefer nature based tourism and would therefore not mind rugged and traditional settings during their vacations (Kaynak and Ali, 2012). A review of these factors points to the fact that education, as human capital, is only a component of wealth creation in the tourism industry. It is however an important component.

Higher tourism education contributes to wealth creation in a number of ways. As has been mentioned before, education promotes understanding across cultures. It enables the tour practitioners to behave in a manner that is acceptable or even preferred by the international tourists (Chang and Hsu, 2010). This understanding enables them provide good service and enhance customer satisfaction. It is these satisfaction levels that play the most important role in promoting sustainable tourism as tourists recommend the destinations to others who may be interested in doing so in the future.

Higher education tourism also covers areas such as sustainability which are very important in ensuring that performance in tourism is sustainable. Sustainability can be discussed on two levels. Firstly, environmental sustainability is crucial in ensuring that tourism is sustained into the future (Busby and Gibson, 2010). With good education, ways of ensuring that natural resources are not exhausted can be created. The second factor is societal sustainability for the host communities. This is especially applicable in the rural poor and delicate environments such as the Polar Regions (Dipari and Dimou, 2010). Tourism provides the best source of employment in such areas since other forms of development are not allowed. Most governments disallow economic activities in regions that they consider delicate and only tourism can be used to generate funds without negatively affecting such areas. In addition to sustainability, education promotes creativity.

These presentations indicate that there is indeed a link between higher tourism education and wealth creation. But it is difficult to determine which of the two factors is dependent on the other. The confusion can be explained by the following two arguments. Firstly, it can be said that tourism education has led to creativity, tourist attraction and increased spending per tourist (Bhat and Gaur, 2012). This has led to wealth creation. The second argument could be: being that the country is wealthy, it is able to invest more in higher tourism education and establishing numerous institutions to do that (Bhat and Gaur, 2012). The merits of each of the statements are worth considering. Even where it may be true that higher tourism education helps in improving wealth, it may be difficult to prove it. This is because national wealth is dependent on many more factors including government policies and the state of the world economy.

The objections to the theory can however be overruled using observations and facts. For instance, in countries where higher tourism education is advanced, there seems to be greater creativity in the manner in which tourists are handled. In developed countries such as Britain and France, it is easy for one to find a complete consumer guide online and make bookings to all sites and accommodations they intend to use in the course of their visit. They are also able to transact from across the border. The level of service also tends to be comparatively high. In some of the cases, money is made by the industry in less obvious ways. For instance, a visit to some sites can be free. This encourages tourists to visit more sites and the economy gains when they spend on additional items such as food, clothes, gift items and hotel accommodation.

In addition to creativity, education helps the tourism practitioners overcome language barriers. Languages such as English and French are common languages of instruction in institutions around the world (Kaynak and Ali, 2012). Overcoming language barriers is crucial in attracting tourists. Most tourists would avoid destinations where they would not be in a position to communicate effectively. Understanding language and other cultural dimensions is important for wealth creation in the tourism industry.

In conclusion, even though it is difficult to distinguish between globalisation and education as factors promoting tourism, the link to the distribution of HTE institutions has received less attention. This research will attempt to seal literature gaps in establishing whether distribution of HTE institutions influences the level of wealth. 

3.0 Research methodology

This research shall use an inductive approach as the basis for making its findings. General observations and responses gathered in the course of the research shall be the basis for drawing conclusions.

3.1 Research philosophy and approach

The philosophy to be used shall be realism. In realism, the researcher acknowledges both subjective and objective angles to research (Bryman and Bell, 2007). The subjective views are those that are formed from the personal experiences of the sources of information. In this case, it is expected for the target interviewees to be in favour of HTE hence may tend to emphasise more on its importance on wealth creation in tourism. However, the core of the study will be on the impact on distribution hence the biases are not likely to have a great impact. Besides, the research shall be conducted in a manner that helps in eliminating the biases.

3.2 Research design

The research shall use both secondary and primary sources. Secondary sources shall be used to create a theoretical basis for the same. However, as has been observed in the literature review above, there is a literature gap. Studies that link the distribution of HTE institutions to wealth creation in tourism are quite rare. This means that secondary research will only serve the purpose of providing a basis for how education and globalisation can influence wealth creation. The specific link between distribution of HTE institutions and wealth creation shall be sought using secondary research.

Primary research shall be done using interviews. With interviews, the research and the interviewee have an open discussion on the subject matter (Collis and Hussey, 2003). The responses are either recorded or transcribed for further analysis. The reason for choosing the interview approach was because it facilitates open discussions. It also provides an opportunity for instant clarifications whenever there is a misunderstanding (Collis and Hussey, 2003). This advantage is important to this research since it attempts to investigate a matter that has rarely been investigated before. The interviewees may therefore need elaborations and explanations before they can comment on the matter. The main disadvantage of interviews is that they tend to lean towards the areas of bias of the interviewees. They tend to dwell more on areas they understand well at the expense of the areas where their understanding is low. In this research, this weakness shall be dealt with by allocating timelines for each question to ensure they are all given attention.

3.3 Population and sample

The population shall be higher education providers in the field of tourism. These will mostly the professors and senior administrators in institutions that provide higher tourism education. The choice of this population is informed by the fact that this is their field of study. They are therefore likely to be very aware of the impact that their services create both in the industry and the economy. The assumption made in this case is that these professors must have sought to interrogate the question of value of their programs and they are likely to have done preliminary research on the area. It is expected that their participation will be influenced by their need to find out whether their views are shared or contradicted across the industry. This means that they are likely to request for copies of the research report; which I will provide to them.

Sampling shall be judgemental and shall be based on considerations of availability and perceived knowledge in the matter. Information on the professors targeted shall be obtained online and through phone calls after which interviews shall be scheduled in consultation with the professors. A sample size of 50 shall be settled on.

3.4 Data collection 

Given that the sample size is large for an interview, and due to the fact that they are widely distributed, it will be difficult to meet them on one-on-one interviews. Where it will be possible to meet about 5 interviewees at the same time, the interviews will be converted into discussion sessions where the interviewees benefit from each other’s’ thoughts before giving theirs. This approach will be useful in eliminating individual biases. 3 discussion groups shall be formed for this purpose. This differs from the approach of focus groups as selection will be random with the only consideration being availability and not specific professional or experience backgrounds. The rest of the interviewees shall be interviewed via the internet using video chat applications. This approach shall be useful in reducing the cost of the research and also in promoting convenience as the interviewees can participate even from home. The disadvantage of this approach is that it does not promote quality of communication. Communication is more effective when there is physical presence. However, it is the best choice available that can produce acceptable results.

3.5 Data analysis

This is qualitative research. It means that it repeat information may not add much value. The interview results shall therefore be sifted to try and find where additional knowledge or unique approach to the knowledge is provided. The group discussion results shall be prioritised due to their ability to eliminate biases. The rest of the interviews shall be sifted for any additional information. It is anticipated that by the time the 20^th interview is considered, the findings will have already been exhausted. The analysis shall therefore factor in 20 out of the 50 interviews. An indication of proposed questions for the research are shown in Appendix 1.

3.6 Anticipated limitations

Challenges are expected in being able to convince interviewees to create time for research. The target interviewees are quite busy and getting them into an interview may be very difficult. This challenge shall be overcome by making appointments in advance and facilitating discussions that do not involve much distraction. For instance, conducting an online interview is easier to schedule as the interviewee does not have to allocate time within their busy working hours. Secondly, it is expected that the professors will be curious about the subject matter and would be willing to participate as a way to guarantee that they will receive a copy of the report.

These areas of study have received very little attention in the past. Little effort has been made to directly link education to wealth creation and even fewer links exist to link concentration of higher tourism education institutes and importance of tourism in the economy. This will be a new study that will be expected to raise important questions. Where information that is relevant to research is not available, it shall be adopted as part of recommendations for future research.

4.0 Conclusion

This research proposes to create an understanding of how education is related to wealth creation. Specific focus shall be on higher tourism education and how it leads to wealth creation in relation to tourism. In this study, it will be acknowledged that other factors such as globalisation and government policy are very crucial in tourism. It recognises that the bulk of studies have been on globalisation and how the same leads to success in the tourism industry. The little attention provided on linking education to success in tourism has concentrated on the core of skills creation. However, there has been little connection between the distribution of HTE institutions and tourism. It is expected that studies on tourism will be most common in areas where tourism is excelling. However, it is also expected that the influence of globalisation in the movement of students will bring in a new angle where having institutions in a certain location does not necessarily mean that only locals are able to access their services. The emergence of new learning techniques such as online and distance learning is expected to feature in this study. Lack of relevant information shall be included in recommendations for future research. 

Bibliography  

Alderman, D.H., Benjamin, S.K and Schneider, P.P (2012), Transforming Mount Airy into Mayberry: Film-Induced Tourism as Place-Making, Southeastern Geographer, 52(2), pp. 212-239

Bhat, S and Gaur, S.S (2012), Managing diverse stakeholders in the context of destination marketing, Worldwide Hospitality and Tourism Themes, 4(2), pp. 185-202

Black, G.S (2010), A Social Marketing Approach for De-Marketing Sex Tourism, The Business Review, Cambridge, 15(2), pp. 33-41

Bryman, A. & Bell, E. (2007). Business Research Methods. 2nd edition. Oxford: Oxford University Press

Busby, G.D and Gibson, P (2010), Tourism and hospitality internship experiences overseas: A British perspective, Journal of Hospitality, Leisure, Sports and Tourism Education, 9(1), pp. 4-12

Cepar, Z. and Bojnec, S (2010), Higher Education Demand Factors and the Demand for Tourism Education in Slovenia, Organizacija, 43(6), p. 257

Chang, T. & Hsu, J (2010), Man Development framework for tourism and hospitality in higher vocational education in Taiwan, Journal of Hospitality, Leisure, Sports and Tourism Education, 9(1), pp. 101-109

Collis, J. & Hussey, R. (2003). Business Research. 2nd Ed. Basingstoke: Palgrave Macmillan

Collison, F.M and Spears, D.L (2010), Preview Marketing cultural and heritage tourism: the Marshall Islands, International Journal of Culture, Tourism and Hospitality Research, 4(2), pp. 130-142

Cubillo, J.M., Sanchez, J. and Cervino, J. (2006), ‘‘International students’ decision-making process’’, International Journal of Educational Management, Vol. 20 No. 2, pp. 101-15.

Diplari, A. and Dimou, I (2010), Public Tourism Education and Training in Greece: A Study of the Necessity for Educational Restructuring, Industry and Higher Education, 24(2), pp. 115-120

Galal M.H.A (2011), E-learning as an alternative strategy for tourism higher education in Egypt, Quality Assurance in Education, 19(4), pp. 357-374

Gouna, E (2009), Tourism Education in Europe and Overseas Employability in the View of Tourism Education Employability in the View of Tourism Education, (Online) Available at: http://www.etourismus.net/blogoscope/Tourism%20Education%20Christian%20Maurer.pdf (Accessed 22 July 2013)

Jamrozy, U (2007), Marketing of tourism: a paradigm shift toward sustainability, International Journal of Culture, Tourism and Hospitality Research, 1(2), pp. 117-130

Kaynak, E. and Ali, K (2012), Assessing tourism market potential in a dynamic emerging economy, Asia Pacific Journal of Marketing and Logisticsm, 24(2), pp. 199-221

Maggi, R. and Croce, V. (2005), ‘‘The Lugano Tourism Indicator – a competitiveness indicator for city tourism destinations in Europe’’, The Future of City Tourism in Europe, WTO, Paris.

UNWTO, (2013), World Tourism Barometer, (Online) Available at: http://dtxtq4w60xqpw.cloudfront.net/sites/all/files/pdf/unwto_barom13_01_jan_excerpt_0.pdf (Accessed 22 July 2013)

VisitBritain, (2013), About VisitBritain, (Online) Available at: http://www.visitbritain.org/ (Accessed 22 July 2013)

Appendix 1: Proposed questions (to be refined before actual study)

1.       To what extent does higher education in tourism contribute to wealth creation?

2.       How would you compare this contribution to the impact of globalisation?

3.       What factors influence the distribution of HTE institutions?

4.       Is there a difference in the performance of the tourism sector where there is a higher concentration of HTE institutions?

5.       In regards to the distribution question, is there a causative relationship between concentration of HTE institutions and wealth creation in tourism?

6.       How does HTE impact creativity in the tourism industry?

7.       In relation to the question 6 above, is there a causative relationship between concentration of HTE institutions and creativity in tourism?

8.       Does the globalisation of education introduce change in relation to the impact of concentration of HTE institutions? 

Case study analysis PowerDome

Executive summary and introduction

The case study analysis is about PowerDome, a technology company that was founded by five partners but is on the brink of losing the last two of the initial founders. The company has in the past take pride in its informality where creativity was encouraged by empowering employees to create projects and a friendly atmosphere created where employees would interact freely with the founding directors.

In this analysis, some of the problems identified are: lack of adequate responsibility and accountability lines; poor change management approaches; and incompatibility between the organisational cultures of merging business partners. A detailed description of the problems identified, their impact on the organisation, and recommendations for remedy are discussed in the subsequent sections.

Case analysis

Failure to adapt to organisational pressures in designing company structure was one of the main problems at PowerDome. Having been started as a small entrepreneurship whose membership was only comprised of the first five partners, the organisation was run informally with no clear lines of responsibility. This was a management orientation that was aimed at encouraging innovation and was extended to the rest of the employees as the company grew. This resulted in a situation where accountability systems were not in place when they were needed. The strategic importance of change in a growing organisation can be described under the framework of the organisational life cycle whose main steps are start-up (birth), growth, maturity, decline and death (Doherty, Champion and Leitao, 2010). At the start-up level, the entrepreneurs are directly involved in all aspects of operation and their visions are unified. There is little need for intensive management as the founders are all committed to the attainment of the organisational goal. However, as the organisation enters a phase of growth and begins to recruit new employees, there is need for the organisational structure to be modified.

An increase in the number of responsibilities in any organisation necessitates the setting up of an organisational structure that facilitates accountability and efficiency (Doherty, Champion and Leitao, 2010). Creation of clear responsibility lines is also necessary in any organisation. It provides the basis for accountability and identification any lapses that need to be corrected at a future date. Strategic management of the organisation, it is imperative that the organisational structure fits with the organisational culture (Carlström and Ekman, 2012). It is based on the need to maintain flexibility and informality that PowerDome resisted attempts to formalise procedures. In general, highly formalised organisational cultures are complemented with bureaucratic or hierarchical structures while informality and flexibility are complemented with flatter organisational structures (Hazman and Ahmad, 2009). The organisational culture is a way of doing things within the organisation and it dictates how employees relate to each other, their work and their superiors (Carlström and Ekman, 2012). It would appear that the founders highly valued being directly involved in operations and interacting with employees. However, this did not justify failure to establish clear responsibility lines.

At PowerDome, Managers were employed to manage the financial crisis but were unable to formalise the organisational processes due to change resistance of lack of support from senior management. The resistance was mainly coming from the fact that the new accountability procedures had the effect of high levels of formalisation in an atmosphere of an informal and flexible culture. This exposes a weakness in the manner in which they sought to introduce change. In strategic change management, three major steps to be followed are the de-crystallisation, implementation of change, and re-crystallization (Chaiporn and Amonrat, 2011). This means that uncertainty must be created at the initial stage, urgency and appreciation of need for change made, and support for the change process secured. In the second stage, the changes proposed are implemented before recrystallization is done to make the new systems the new organisational culture.

The third fault identified for PowerDome is poor management in the formation of strategic partnerships. In the deal that saw PowerDome merge with MegaFirm as a subsidiary, it was expected that their organisational culture differences would not have a major impact on the subsidiary. However, PowerDome was forced to conform to MegaFirm’s culture in exercise of one of the clauses in the merger agreement. In strategic alliances, it is imperative that there is a fit between the organisational cultures of the strategic partners. Failure to have this fit is a recipe for future disagreements as it is in this case. MegaFirm failed to appreciate the culture of PowerDome and the impact it has on its innovativeness and instead concentrated on monetary ways of motivating employees. This was a pure case of incompatibility of organisational cultures and failure to accommodate it. In the end, both MegaFirm and PowerDome were likely to suffer loses as the former would not be able to attain the innovative capabilities that they invested to acquire while the latter would be forced to either close down or do without the financial capability acquired.

Recommendation and conclusion

The main problem identified is the lack of clear responsibility lines and mechanisms for accountability. These were avoided due to the need to maintain an organisational culture characterised by flexibility and informality. The result was operational problems that adversely affected the company. There are three options that the organisation could use to overcome this problem: introducing a formalised organisational structure with clear responsibility lines, entrenching a culture of accountability for utilisation of resources, and creating criteria for evaluating strategic partners before entering into mergers or strategic alliances.

Formalisation of the organisational structure could have the impact of introducing a bureaucratic system that could discourage innovativeness. This could erode the company of its competitiveness. However, it could be advantageous to the organisation as it would enable ease of management and promotion of operational efficiency. This is based on the reasoning that organisational structures need to be refined as the organisation grows to facilitate efficiency and profitability of the organisation (Parnell, 2005).

The organisational culture was that of accountability. This reasoning is based on the assertions that it is only when the organisational culture is in line with the organisational goals set. Organisational culture has indeed become an important platform for enhancing the competitiveness of organisations. Entrenching this culture would have the impact of ensuring that all in the organisation are conscious of the need to make their innovations profitable and sustainable. It would inject the culture of responsibility in innovation. On the other hand, such a focus could inhibit innovation as employees may be more preoccupied with establishing sustainability instead of concentrating on innovation. Nevertheless, it is possible to introduce a culture of accountability in a manner that does not inhibit freedom, flexibility and the prevailing culture of innovation.

Proper procedures for forming strategic partnerships would have the advantage of ensuring that there is a fit between cultures of the strategic partners and prevents disagreements later on. In compatibility of cultures has indeed been cited as one of the main reasons for failure of strategic alliances and partnerships (Chaiporn and Amonrat, 2011). On the other hand, putting in place a strict procedure could lead to rigidity and frustrate quick decision making where quick decisions are needed. Nevertheless, it would help in overcoming challenges such as those experienced by PowerDome.

In conclusion, the problems at PowerDome can be summarised as lack of accountability structures, lack of measures for division of labour to facilitate efficiency, insistence on a culture not compatible with principles of sustainability, and poor management of strategic alliance formation processes. If the recommendations in this analysis had been adopted, PowerDome would have been more sustainable and would never have needed to get into the strategic merger.

Bibliography

Carlström, E.D., Ekman, I., 2012. Organisational culture and change: implementing person-centred care. Journal of Health Organization and Management, 26(2), pp. 175-191

Chaiporn, V., Amonrat, T., 2011. Strategic change and firm performance: the moderating effect of organisational learning. Journal of Asia Business Studies, 5(2), pp. 194-210

Doherty, N.F., Champion, D., Leitao W.A., 2010. Holistic approach to understanding the changing nature of organisational structure. Information Technology & People, 23(2), pp. 116-135

Gundolf, K., Meier, O., Missonier, A., 2012. Mergers between size-unequal partners: strategic risks and hurdles. Journal of Small Business and Enterprise Development, 19(2), 281-299

Hazman, S.A., Ahmad, J., 2009. The fit between organisational structure, management orientation, knowledge orientation, and the values of ISO 9000 standard: A conceptual analysis. The International Journal of Quality & Reliability Management, 26(8), pp. 744-760

Parnell, J.A., 2005. Strategic philosophy and management level. Management Decision, 43(2), pp. 157-170

Making capital investment decisions

The nature of investment decisions

      Large amounts of resources are often involved

      It is often difficult and/or expensive to bail out of an investment once undertaken

 

Discounted payback period

      The discounted payback period essentially calculates the break-even point at which the discounted returns from a project are equal to the capital cost of the project.

      Shows how long it will take to recover the initial cost of the project after taking into account the cost of capital.

      Superior to the conventional payback period approach.

      Due to discounting of the cash flows from a project, the discounted payback period will always show a longer payback period than the standard payback period, and hence may be regarded as more conservative. 

Internal rate of return (IRR) ; IRR decision rule

 The relationship between the NPV and IRR methods

 The IRR method providing more than one solution

 Two main problems with the IRR method

      The possibility of arriving at multiple rates

      Concerns over the reinvestment rate

      Both problems can be overcome by modifying the IRR to arrive at a modified internal rate of return (MIRR)

Modified internal rate of return (MIRR)

      The conventional IRR is the discount rate at which the present value of a project’s future cash flows is equal to the initial investment.

      The most common form of MIRR compounds the net cash inflows to a single figure at the end of a project’s economic life, and then using the cost of the project as a base figure, calculates the modified return for a project using the following formula:

                [(Compounded cash inflows / Cost of project)^1/n - 1] × 100

      The cash inflow in the final period is arrived at by assuming a reinvestment rate equal to the cost of capital (not at the project’s internal rate of return), so the MIRR is generally lower than the IRR.

       

Practical points related to investment appraisal

 Investment appraisal in practice

 Managing the investment decision

 Capital rationing

      In determining investment funds available, the amount of funds available for a business’ investment may be limited by

                - external market for funds or

                - internal management.

      Situation where there are insufficient funds to finance all the potentially profitable investment opportunities available is referred to as capital rationing.

      Competing investment opportunities need to be prioritised and some modification to the NPV decision rule is necessary.

Case study: Planning for growth at Viverra Motors

1.0 Introduction to procurement and background

Procurement can be described as the processes through which materials needed for production and sale are acquired from suppliers and made available to both internal and external customers in a given company (Croom and Brandon-Jones, 2007). This function plays an integral role in the creation of value to customers with its efficiency expected to significantly contribute to customer satisfaction. The procurement systems and practices also play a major role controlling the operation costs of the organization. The tradeoffs that must be considered in any procurement system involve the choice between incurring transportation overheads and the stocking of a large amount of inventory thereby incurring heavy storage and related costs (Emberson and Storey, 2006). The JIT (Just in Time) concept is commonly used in ensuring the efficiency of the supply chains and mainly focuses on procurement systems and how the same can contribute to efficiency and cost effectiveness in the organisation (Sunil and Meindl, 2001). This concept is in most cases embraced in conjunction with relevant procurement systems together with the provisions of the MRP concept. Organisations with a number of operation centres, the manager should also weigh between centralization and decentralization of procurement operations. Each of these options has its merits and demerits.  

This paper considers the situation of Viverra Motors and seeks to provide informed solutions to the challenges faced in relation to procurement processes. It focuses on the challenges identified before discussing theoretical and practical approaches that could be useful to the organisation.

2.0 Challenges arising from dealing in a variety of brands  

Viverra motors, having just acquired a new dealership is marketing 3 different brands of cars. This has far reaching implications as far as procurement is concerned with the company expected to require more materials. To begin with, different materials are likely to be used more often than others. Other materials are likely to be need more space while others can be stored for longer periods than others. This implies the need to establish a complex procurement system controlling schedules and quantities of products being procured. It also implies the need to engage a variety of suppliers from whom the materials are sourced.

Materials can either be generic or genuine. Genuine materials are sourced from the manufacturers of the cars and this implies that the company is restricted in its choice of suppliers (Sanchez-Rodriguez, Hemsworth and Martinez-Lorente, 2004). Generic materials on the other hand are sourced from a variety of suppliers. Such suppliers are often many and in competition with each other. This competition puts a downward pressure on the prices of such products hence allowing for crucial savings to be made (Sanchez-Rodriguez, Hemsworth and Martinez-Lorente, 2004). The increase in the number of brands being marketed does not necessarily imply a commensurate increase in the number of parts being procured. This is due to the fact that certain parts are usable across brands and the dealers are therefore forced to make adjustments only on parts that are considered genuine parts and a small proportion of the generic products.

            In the procurement of these parts, certain considerations must be put in place including considerations on the lead time required by suppliers and decisions on the size of inventory to be held at the organisation. This decision may greatly be influenced by the amount of space available, the cost of storing and maintaining the stocks as well as the transportation costs. The main role of procurement functions in organisations is to ensure that materials needed for production and for sale are availed in time for delivery of goods and services to the customers (Mentzer, et al., 2001). Lead time refers to the time that lapses between the point at which an order is placed with a supplier and the time that the materials ordered are actually delivered to the company (Yang, Hong and Modi, 2011). The procurement systems must take cognisance of different lead times and ensure the reorder quantities are accurately determined.

            The provision of several brands can therefore be said to impact the company’s procurement systems on the following fronts: need to procure more materials, increased complexity from engagement with a large number of suppliers, varying lead times and reorder quantities due to different rates of consumption of parts, and the need to establish complex but reliable systems to coordinate the varied dimensions.

3.0 Weaknesses of Viverra Motor’s procurement management systems

The company’s main weakness is the inadequacy of space to store inventory. The nature of the dealership’s operations is such that the company requires that a large number of parts are kept within the firm for sale and timely delivery of services to the customers. The lack of space is bound to be more prominent with the acquisition of the new dealership. The other weakness relates to the company’s strained finances. Having made an acquisition at a significant cost, the company’s finances are strained and that reduces its ability to develop the infrastructure needed to store more inventories. This calls for a creative approach in the design of the structure of their supply chains and procurement systems in particular.

            Another potential weakness would lay in the fact that their procurement systems are decentralised where each of the four dealerships conducts its own procurements. This could be a disadvantage in the sense that it denies the company the economies of scale that could be realised had such practices been centralised. However, considerations on transportation and related costs may work to justify the procurement model and its merits can therefore only be justified upon consideration of the relevant tradeoffs (Matsuura, Kurosu and Lehtimaki, 1995). The acquisition of the new dealership is unlikely to add value to the procurement systems if they are to remain disjointed. However, in the case where a centralised procurement system is embraced, then the company would have a higher bargaining power and be able to keep its operation costs at the bare minimum.

4.0 Application of supply chain and inventory management concepts

As has been noted above, Viverra motors is faced with a prospect of increasing number of materials and suppliers as well as limited space for keeping the inventory required. This calls for a solution that allows for stocking of inventory that is just enough while also ensuring that customer service runs uninterrupted. The aim of any supply chain management system is to secure value for customers in a manner that generates maximum levels of customer satisfaction. Success in business lays in the organisation’s ability to maintain a satisfied and loyal clientele. In addition to focus on customer service, Viverra runs on a policy of low-price low cost strategy and this requires that they keep a keen eye on their operation costs. The lean manufacturing and the Just in Time concepts are very useful in enabling organisations to keep their operation costs at the bare minimum.

            The Just in Time concept is a system that traces its origins in the Japanese companies and gained popularity around the world in the 1990s (Gupta and Snyder, 2009). This system advocates a collaborative approach between organisations and their suppliers. Under this arrangement, the suppliers would be aware of the consumption patterns in the organisations and make deliveries ‘Just in Time’. The system was designed to help in minimising inventory costs while assuring continued operations by ensuring that at no point can operations be held at a stand still due to lack of supplies (Huq and Huq, 1994). This therefore implies the need for closer integration of information systems between the suppliers and the organisations. The Just in Time system presumes the existence of a relationship with suppliers. These relationships are often thoroughly negotiated with systems such as payment systems being put into perspective. For an organisation which is cash-strapped such as Viverra Motors, the establishment of such an arrangement could help in alleviating pressure on their working capital. For instance, such relationships would often require some degree of assurance that the organisation in question would continue trading with the supplier in question for a given minimum period of time. The assurance would in most cases be accompanied with a concession in payment terms where payments could be done within a reasonable time after delivery (Brookshaw and Terziovski, 1997). The company could therefore sell off all or part of the supplies before their credit period expires and that would easily solve their cash problems.

            The tradeoffs that must be weighed when making the decision on whether or not to establish an integrated system with given suppliers include the benefits of such an arrangement versus loss of opportunities to make savings from temporary price drops (Stuart and Hongyi, 2010). Market prices are bound to fluctuate and companies in constant relationships where the price ranges are strictly provided could miss out of the opportunity to make substantial savings. On the other hand, failure to engage suppliers meaningfully could lead to inefficiencies that would not only be more costly, but also a threat to the levels of customer satisfaction in organisations (Emberson and Storey, 2006). It should also be appreciated that the fluctuations can also go in the opposite direction where the organisations are forced to spend more due to price hikes. This is especially the case with organisations dealing with seasonal demand. For instance, in the auto industries around the world, it is a well acknowledged fact that sales go up during festive seasons (Stuart and Hongyi, 2010). This is especially so with small non-luxury cars. The procurement system should therefore be designed to either take advantage of low prices during low seasons, or embrace the option of forming relationships with suppliers where they get to be shielded against price hikes to a certain degree.

            The lean manufacturing concept focuses on the structure of the supply chains and aims at eliminating duplication of roles, integration of systems and an overall focus on ensuring that the operation costs are as low as they can be (Yang, Hong and Modi, 2011). One of the common trends that have been taken by organisations embracing the lean manufacturing concepts has been the integration of their manufacturing plants (Yang, Hong and Modi, 2011). In a typical manufacturing setting, the managers could choose to either have several factories scattered all over a region or have one big factory which would then distribute products to regions where customers are located. While integration has been known to help in making significant savings for most companies, it must be appreciated that the outcome could be very different. For instance, establishment of a common production site implies the need to transport products over longer distances. Where there are no cost effective means of transportation, the costs may even exceed the cost of running decentralised manufacturing sites (Sunil and Meindl, 2001). In the case of Viverra Motors, the lean manufacturing concept can effectively be applied to the organisation of its procurement activities where each dealership runs its procurement systems independently.

            Centralised procurement systems can have a number of advantages. To begin with, the centralised departments are able to procure large quantities of products (Yang, Hong and Modi, 2011). This improves their chances of bargaining for better prices and more lenient terms of payment. Suppliers are easier to influence when the buyers are doing so in bulk. Secondly, centralised systems help in avoiding duplication of roles (Stuart and Hongyi, 2010). By centralising the procurement systems, it is likely that certain positions would be rendered untenable and this is likely to help in reducing the cost of labour in the organisation. Thirdly, where procurement is centralised and materials procured in bulk, suppliers are likely to take the buyers very seriously in fear of losing a lucrative business (Croom and Brandon-Jones, 2007). Deliveries are therefore more likely to be timely and this can help in ensuring that operations are as smooth as required. On the other hand, a centralised system comes with various additional costs. For instance, the organisation is likely to need a sophisticated system of communication where the head office is made aware of inventory needs in time. There is also likely to be an increase in transport costs from the head office to the dealerships. The much needed space for keeping inventory would also need to be made available as procurement would be done in bulk. Demand planning can get complicated where different dealerships are concerned. The patterns could differ from one point to another. However, such differences can easily be dealt with through effective communication systems (Croom and Brandon-Jones, 2007).

As has been seen from the arguments above, every model of the supply chain has its merits and demerits. The manager should therefore be able to accurately evaluate the cost implication of the options available before making a decision on the way forward.

5.0 Conclusion and recommendations for Viverra Motors

Procurement management is a very crucial function in any organisation. Its main aim is not only to ensure that materials needed are availed, but also that they are acquired at the lowest possible cost.

In light of the challenges faced by Viverra Motors, this report recommends as follows:

Firstly, the organisation should consider centralising all their procurement operations. It is unlikely that the additional costs in terms of transportation and internal communication could offset the benefits that come with a boosted bargaining power that comes with bulk.

Secondly, the Just in Time approach should be embraced where there is more collaboration with suppliers who avail their supplies just before the inventory runs out. This approach would minimise the pressure on the available storage facilities.

Thirdly, the company should use its consolidated procurement systems and the Just in Time approach to cement lasting relationships with main suppliers who may then be able to provide materials on credit. This would help the company to operate without hitches despite its difficult cash position.

References

Brookshaw, T., Terziovski, M., 1997. The relationship between strategic purchasing and customer satisfaction within a total quality management environment, Benchmarking: An International Journal, 4(4), 244-258

Croom, S., Brandon-Jones, A., 2007. Impact of e-procurement: experiences from implementation in the UK public sector. Journal of Purchasing and Supply Management, 13(4), pp. 294-303

Emberson, C.A., Storey, J., 2006. Buyer-supplier collaborative relationships: beyond the normative accounts. Journal of Purchasing and Supply Management, 125(5), pp. 236-245

Gupta, M., Snyder, D., 2009. Comparing TOC with MRP and JIT: a literature review. International Journal of Production Research. 47(13), pp. 3705-3739

Huq, Z., Huq, F., 1994. Embedding JIT in MRP: The case of shops. Journal of Manufacturing Systems. 13(3), pp. 153-164

Matsuura, H., Kurosu, S., Lehtimaki, A., 1995. Concepts, practices and expectations of MRP, JIT, and OPT in Finland and Japan. International Journal of Production Economics. 41(1-3), pp. 267-272

Mentzer, J.T., et al., 2001. Defining supply chain management. Journal of Business Logistics. 22(2), p. 18

Sanchez-Rodriguez, C., Hemsworth, D., Martinez-Lorente, R., 2004. Quality management practices in purchasing and its effect on purchasing’s operational performance and internal customer satisfaction. International Journal of Logistics, Research and Applications, 7(4), pp. 325-344

Stuart, S., Hongyi, S., 2010. Supplier integration strategy for lean manufacturing adoption in electronic enabled supply chains. Supply Chain Management: An International Journal, 15(6), pp. 474-487

Sunil, C., Meindl, P., 2001. Supply Chain Management: Strategy, Planning and Operations. Upper Saddle River: Prentice-Hall

Yang, M.G., Hong, P., Modi, S.B., 2011. Impact of lean manufacturing and environmental management on business performance: an empirical study on manufacturing firms. International Journal of Production Economics, 129(2), pp. 251-261