Development of optimizing application for warehousing management. The case of agro holding vyborgec

Description of the project for optimizing the implementation of warehousing applications, which was launched during its internship at Vyborgets Agricultural Holding. Changes in business processes and assessment of the impact of project implementation.

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Federal state educational institution of higher education

National Research University

Higher school of economics

Saint Petersburg School of Economics and Management

Department of Management

Development of optimizing application for warehousing management. The case of agro holding vyborgec

Bachelor's thesis

In the field 38.03.02 `Management'

Educational programme `Management'

Kulesh Viktoria Vadimovna

Saint Petersburg 2019

Abstract

Russian companies, operating in agriculture sector under sanctions and in circumstances of strong internal competition find themselves in need to obtain competitive advantage with achieving investment effectiveness. Such situations are hardened with the state of limited funds and out-of-date assets state. One of the solutions is to digitalize company's operations in one way or another to create additional value down the stream.

Thesis author describes project of optimizing application implementation for warehousing, which was launched during her internship in Agroholding Vyborgec. Research goal is to expose changes in business processes and estimate effects of project execution on the company with help of qualitative and quantitative studies, which included using such research methods as: surveys, financial modelling and business-process modelling. business implementation optimizing

Main result is the comprehensive effectiveness estimation of mobile application introduction into logistics and warehousing operations of one of the biggest players in Saint-Petersburg agricultural market in niche of vegetables supply. Reasoned recommendations for application and processes improvement are also provided by author

Keywords: Effectiveness evaluation, internet-of-things, investment decisions, agriculture, warehousing, financial modelling

Table of Contents

Introduction

1. Literature Review

1.1 Usage of mobile applications in warehousing and logistics

1.2 Efficiency criteria for warehousing optimization application in agriculture

2. Company and Project Description. Research Design

2.1 Project description

2.2 Process state before project implementation. AS-IS state

3. Results

3.1 Research design and methodology

3.2 Process state after improvements and recommendations

Conclusion

References

Appendices

Introduction

Current state of Russian Economy has several defining features as external pressure in form of sanctions and movement to substitute imported products in times of restricted access to international markets. While Russian agriculture market flourishes in given circumstances (RT, 2017), there is a need to establish competitive advantage for agricultural companies in context of internal competition - various companies are contesting growing market even in Saint-Petersburg - Vyborgec, Eco-Culture, Belaya Dacha, etc. In this case, implementation of warehousing application may help to provide operational solutions, covering several drawback as insufficient investment effectiveness (ISSEK HSE, 2017).

The research problem can be formulated as: "Is the usage of particular mobile solution in warehousing and logistics efficient in current state of particular company in Russian agriculture market (Vyborgec Agroholding)?"

Basically, this problem splits into several questions, that should be answered by author:

1. What are the efficiency criteria for the implementation of new technology solution in logistics and warehousing for Agroholding Vyborgec?

2. Is project realization make a positive take on operations and overall financial state of a company?

3. What steps are required to be done by management to enhance positive impact from mobile technology introduction decision?

Answering these questions require competition of certain amount of research objectives:

1. Provide insights on contemporary development of warehousing optimization topic;

2. Analyze actual state of the company business;

3. Visualize business process of Vyborgec warehousing;

4. Collect primary and secondary data;

5. Execute application implementation effectiveness evaluation;

6. Compare business processes before and after project competition;

7. Provide recommendation for further enhancing of the application and overall warehousing/logistics.

Thesis will focus on two aspects:

Transformation (optimization) of Agroholding Vyborgec's warehousing during and after implementation of business application;

Effectiveness of decision made, estimated through stated methods by author in practical part of the paper

Overall scope of Thesis can be considered as a single company function study with inclusion of external environment analysis, which will reveal logic of made decision to introduce internet-of-things practices into non-digital company key operations.

Overall project professional significance is concentrated in two major pillars:

1. The lack of academic papers on a topic of warehousing digital solutions implementation in Russian Federation;

2. Combination of qualitative and quantitative study to measure effectiveness will give additional insights to the practitioners and business communities. While giving straight answer on whether application implementation is effective, paper will give multilevel analysis for the reader, which will help to extrapolate some practices on other cases better, then just with only NPV calculation or obvious statements only.

Thesis results can be relevant for researchers in field of logistics effectiveness measurement and enhancement on the setting of Russian agriculture industry. First group may be appealed by using two-side estimation approach, combined with basic business processes analysis; second - due to the provided insights and practical experience of operating agroholding change implementation.

Thesis structure consists of three chapters, divided into total of ten paragraphs. First chapter is devoted to the overview of logistics optimization topic through digitalization and effectiveness measurement. Second chapter gives more particular insights on the business specifics of Agroholding Vyborgec operations from the point of external and industrial environment assessment with elements of business process analysis. Third chapter makes step to actual effectiveness assessment of optimizing application introduction into Vyborgec warehousing system, and revealing its effects on processes and costs.

1. Methods: single company case study, business process modelling, financial modelling, questionnaire.

1. Literature Review

While this thesis is done in tone, which is close to the company practical perspective of internet-of-things usage in warehousing, further innards will consist of general IOT description in application to logistics with remarkable examples of optimizing applications, which may be implemented in particular case of Agroholding Vyborgec. Last part of review is devoted to efficiency criteria and possible effects on agricultural company operations.

Digitalization in logistics

As it was stated in the introduction, topic is concentrated on an analysis of actual application implementation in logistics part of business processes in Agroholding Vyborgec. Warehousing logistics for the means of current paper exposition can be stated as a combination of processes, covering efficient and safe handling of goods within the particular place (Keller and Keller, 2014). Overall digitalization of logistics and warehousing process through usage of mobile devices and pre-installed software is an example of internet (or intranet in case of corporate only usage data) of thing. IOT (internet-of-things) is the network, which connects various subjects within intranet to do various activities:

· Store and process data;

· Search data by predetermined parameters;

· Track, monitor, locate position actual items (things) within system (Yuqiang, Jianlan and Xuanzi, 2010).

In overall, internet-of-things can support management decision-making process by providing not only relevant data within short time period. Such data is updated frequently within IOT, which gives an opportunity to subtract activities, which duplicate such functions with greater time, money and other resource costs.

As the scope of research is concentrated on warehousing optimization processes, variety of collected information can be called big data. Big data is established by Gartner as "high-volume, high-velocity and/or high-variety information assets that demand cost-effective, innovative forms of information processing that enable enhanced insight, decision making, and process automation" (Gartner IT Glossary, 2012). As an example, the position of a cargo or single particular pallet can be collected as a data set with appropriate use of instruments, creating IOT system. This step of company digitalization can drive company further to decreasing costs and creating new competitive advantage to surpass competitors.

In detail, there are several drivers, which lead companies to seek opportunities on logistics application market:

· Business integration (Kurt et al., 2016);

Communications between business units and various warehouses of single company will enhance company agility to sustain demand fluctuations, avoid functions and activities duplication.

· Standardization and Globalization (Kurt et al., 2016);

Due to the process of acquiring various assets or companies, question of unified methodology and processes stands straight. Software can help to assimilate new warehouses or enterprises faster. In case of Russian experience nowadays, such movement is substituted with import substitution and local producers' efforts stimulation (Vartanova & Drobot, 2018) or sharing and mitigating occurred risks like currency devaluation (Trukhachev, Sklyarov & Sklyarova, 2018)

· Data update frequency increasing (Hanebeck and Tracey, 2003);

To optimize losses and fluctuations in demand or stock level, it is crucial to transform systems to the gathering data on the daily or hourly basis. In combination with notification messages, there may be an improvement on quality control processes and elimination of human factor.

· Data variety enhancement;

New valuable information can be viewed as the new "fuel" for decision making process - new insights can give leads for operational and tactical improvements over current processes and activities.

· Overall warehousing costs reduction.

All the listed benefits and drivers of mobile application usage can be transformed into actual cost-savings procedure. In accumulation, main cost reduction comes from decreased wages from staff reduction and creating additional operational possibilities. Warehousing costs reduction can lead to decrease of unit costs, which subsequently lead to the increased returns on sales.

· Networking and coordinating value chains with partners.

As Globalization proceeds to pour into many operation in companies around the globe, less mobile and agile companies are tend to cooperate to overcome industry and environment difficulties. In India, some communities are already functioning over several years: e-marketplace, manuals for farmers and angler. Other decreasing entry barriers solutions are implemented to enhance economic growth (Mudda, S., Giddi, C., & PVGK, M., 2017). Integration movement among Russian agricultural firms is just in the study of scientific research and general suggestions - no real cooperation mechanisms introduced (Ereshko, Kulba & Medennikov, 2018).

While global topic development is moving towards efforts collectivization and sharing risks and possibilities, in Russian agriculture sector there is to actual shared value creation - such initiatives are only on a paper, not in motion.

To proceed with topic, it is crucial to provide actual examples of application usage in logistics: how it actually affects decision-making, and where the value of such application come from.

1.1 Usage of mobile applications in warehousing and logistics

Despite the fact that since 2015, Russian legislation restricts foreign IT companies to operate on Russian clients (242 Federal Law "Processing and storage of personal data in Russian Federation") due to the requirement of local data storage. Thus, it is important to reveal major functionality of modern application and how these apps will provide value for company.Further examples will be distributed into four categories:

· C2C or P2P logistics operations;

As an example of software, which creates connection or even networking between companies or even employees from different companies, can be shown GasBuddy. This app provides information about cheapest prices on gasoline from its users. This function is crucial for small transport companies who has not sufficient discounts on fuel to stick to one particular brand. So, drivers together can help each other by updating information to the common net (GasBuddy.com, 2019).

· Stock levels optimization;

One of the most popular applications connected with inventory stocks is an EazyStock. This agile solution can be integrated into any ERP system and provide user with support in forecasting stock and supply to meet estimated demand, calculated based on historical data. Also, user can demand customized infographics and reports concerning current changes in procurement and purchasing. Other important feature - instant notifications of crucial changes in inventory level or warehousing costs. In addition, forecasting models can be adjusted by users (EazyStock.com, 2019).

Figure. 1. EazyStock application run on the tablet Source: EazyStock. EazyStock - Inventory Optimization Software. Retrieved from: https://www.eazystock.com/..

· Automatized data collection;

GPS tracking of the goods or cargo fleet units is important to be known on demand to sustain inventory and assets safety and estimate progress of shipping. Hawk Eye offers not only actual tracking of current location of truck, but also gives cloud base storage and sharing the data with required frequency, real-time alerts (for example, going off-course or exceeding speed limit) and routing with immediate calculation of saved costs (HawkEyeLogs.com, 2019)

· Combined solutions.

ServiceMax offers full functionality of EazyStocks in addition to the big data collection and manual data input which will give employees abilities to assess quality of services provided and connect customers to establish self-service capabilities, which gives an edge over other software solutions in the community of educated employees (ServiceMax.com, 2019)

Figure. 2. ServiceMax application run on the PC Source: Servicemax.com. Work Order Software, Tracking & Management Systems Retrieved from: https://www.servicemax.com/products/work-order-management

While there are various solutions, available to the European and American companies, current Russian laws, restricting information outflow from country, also narrowing choice of private companies. Requirement to store Russian data inside the country drives changes from inside the corporate field. Same motivation drives Agroholding Vyborgec to create own software, which will be tailored for the company and collect most features of previously stated categories:

· Goods data and position collection;

· Stock and purchase optimization;

· Information and alert share between employees and managers;

Reports on-the-go compilation, based on the custom needs of particular user or users' group.

1.2 Efficiency criteria for warehousing optimization application in agriculture

While two topics of optimization directions itself and metrics of its measurement after project implementation are obviously connected, there are some specifics applied for particular industry of agriculture. In overall, there can be stated three major groups of optimization directions, paired with particular metrics:

1. Direct unit costs decreasing (direct financial performance). Metric: average unit costs per time measurement and operation, resulting in general positive financial influence of application implementation (NPV)

As any managerial decision, introducing change to any operations causes particular costs to be included. Usually in means transferring variable costs into fixed costs (capital expenditures), which gives positive economical effect if change does effect on huge output (Dцrnhцfer, Schrцder & Gьnthner, 2016). Bigger the output, more costs company will cut from variables decrease. On the other side, positive output is countered by maintenance costs and investments done to establish improvement efforts in first place. Other options of metrics could be market share change, which, according to the research of Stank T. et. al. in 2003 proven significance of such interconnection.

2. Spoilage elimination. Metric: spoiled inventory share per time measurement.

For agricultural companies, as well as retailers, working with FMCG industry, spoilage becomes huge issue due to food properties, which include short lifespan (VAN DER VORST, 2006). For example, vegetables shelf life varies from 5 days to several months, where most popular ones - cucumbers and tomatoes have lifespan of only 10-20 days (Comodity.ru, 2012). Thus, proper logistics system is crucial for any company, operating in such circumstances. Otherwise, some share of inventories will be spoiled with only some of it may be salvaged to acquire small share of potential revenue lost (i.e. cheap fertilizers). Other aspect of this problem lies in potential food recycling or redistribution with proper supply chain management system and establishing sustainable and social-responsible business (Hammond et al., 2015).

3. Decrease of time, required to complete operation (Wen, 2005). Metric: average time spent on operation.

This aspect is widely explored by researcher over the span of last two centuries, starting with Frederic Winslow Taylor, who introduced Principles of Scientific Management in 1911. Nowadays, technologies won't make researcher to stay near the employee with stopwatch. Other side of that aspect is the introduction of meta-standards not only inside the holdings like Vyborgec, but also among partners and key clients to boost up turnover and mutual profits (Garcнa-Arca, Gonzбlez-Portela Garrido & Prado-Prado, 2016).

4. Overall acceptance of change implementation. Metric: Change in employees' perception.

While stated previously metrics are quantitative, they cannot estimate holistic effect of the changes on processes. People, as the main resource of any present company, are versatile and have more complex feedback that sometimes cannot be measured by one production-driven indicator: process comfortability, ease of task competition, etc. - all of these helps to indirectly cut costs. In some instances, suppliers during 360-feedback procedure can provide valuable insights to take managerial decisions (Graeml & Peinado, 2011).

5. Integral metrics - combined empirical indicator.

While an idea of combining all possible findings and effects into one function seems appealing and used by other researchers in the field of logistics (i.e. Hector & Ruthven, 2012 or Vorotnikov et. al., 2017), it is quite a utopia to do so. Several problems are occurred with such an approach like: weights determination for each aspect of logistics system efficiency; indicator formula design; inability to effectively combine quantitative and qualitative metrics under a body of one formula. Thus, creating the field for making result more theoretical than practically applicable. Also, various assessments in decomposed state can become "bricks" for recommendations compilation.

2. Further choice of metrics, methods is described in third chapter, concerning occurred limitations and project dynamic.

2. Company and Project Description. Research Design

Agroholding Vyborgec was chosen as a base for current study due to the fact that author had passed internship in logistics department and became close to the situation, which led to the implementation of optimization application introduction into warehousing operations of company. Further development of current chapter shows state of art before project implementation at Agroholding Vyborgec and describes research design and methods used by the author to complete research objectives, stated in the introduction of current paper.

Company description

The agricultural holding Vyborgec is one of the leading suppliers of fresh vegetables and greens in St. Petersburg and the North-West region as a whole. The history of the company begins with the birth of the Soviet Union. In the 20s-30s of the 20th century, the state firm "Krasny Vyborgec" was part of the agricultural trust at Lensovet. During next 50-60 years, there was no recorded improvement for entity.

In 1983, during the period of development of agriculture and the growth of production on the entrusted lands, the greenhouse complex "Vyborgec" was created. To this day, the company continues to develop, which is based on the greenhouse complex. Production is year-round, which allows you to maintain profitability during even the winter period.

The firm receives most of its operational earnings from the sale of lots of greens and vegetables to wholesale buyers and retailers, including the well-known retailers like Auchan, O'key, Lenta, X5, METRO, Perekryestok etc. Also, the agricultural holding owns a company store, planted near production cite at Vsevolozhsk (small city near St. Petersburg). It is worth noting that in addition to the medium-low segment, Vyborgec delivers products to retailers of the premium segment (Azbuka Vkusa). That helps Vyborgec to diversify products pool and its contractors pool.

Production is quite integrated: all main facilities (storage, packaging, shipping, operations) are located within one distribution center. New greenhouse complexes are periodically put into operation, which reflects the growing demand for the company's products. Since 2010, the equipment is being upgraded according to the Scandinavian example "Interplanting".

Products undergo control according to "GOST" - international quality standards adopted by countries of CIS, and also carried out on quality control by the Agroholding itself. The company claims that it does not apply the technology of gene modification, and also minimizes the use of pesticides and other relatively harmful substances in the production of vegetables and greens.

The range of products sold under the brand "Vyborgec" includes:

· Cucumbers;

· Tomatoes;

· Salad;

· Eggplant;

· Bell pepper;

· Spinach;

· Arugula;

· Greens (basil, parsley, cilantro, dill, celery, green onions, etc.)

The brand "Vyborgec" also includes special and exclusive products - for example, cook leaf lettuce, which is not widely spread on the market. This salad is grown specifically for the Lenta hypermarket chain. Also, the company is preparing for additional expansion of the product line. More than 3 billion rubles will be invested by the company for the establishment of champignon production, which indirectly indicates the success of the company's business and the desire to diversify within the product group. The launch of the project was scheduled for the beginning of 2018 (Business Peterburg, 2017).

In general, a wide range of vegetables (with the possible exception of the most popular items, like potatoes and onions) is sold under a single brand - the Agroholding trademark without additional differentiation depending on consumers, product characteristics, distribution channels. Due to the absence of a significant share of sales outside the North-West region (has a small presence in the Central Region (Moscow, Novgorod, etc.)), they do not have export operations and do not distribute the brand abroad.

More insights are coming from external environment analysis and financial analysis of company performance, which further will be conducted by author:

External environment analysis. The "Five Forces of Porter" method was chosen as a tool for analyzing the organization. From the point of view of external factors, the company's position within the competitive environment of the industry and the part of the external environment that is closest to the business processes of the company itself are evaluated.

· Market power of suppliers;

In the context of this force, the agricultural holding Vyborgec depends directly on the supply of fertilizers to their production facilities. Despite the high level of influence on the industry and the company (8/10 according to the author), Vyborgec has many existing multi-year contracts with multi-year contracts, which reduces the likelihood of a negative application of suppliers' market power.

· The threat of new players;

Given the relatively high investment threshold of entry into the industry, as well as the need to comply with strict regulations of regulators in terms of the production process and product characteristics - the degree of power of this aspect can be assessed as 3/10. At the same time, taking into account the fact that only in the last year, the Vyborgec Agroholding began to modernize equipment and implement solutions to optimize the production process, the emergence of more technologically savvy players can increase the strength of this aspect to 4 - 5 points.

· Market power of buyers;

Several different factors increase the strength of this parameter - limited coherent diversification options for agricultural market players; end users are highly heterogeneous - in fact, all residents of the region of the company's presence; In recent years, the margin of Vyborgec's business has not been high, so it's important for the company to consistently sell products with a good turnover without loss in revenue - 9/10.

· The threat of substitutes;

It is extremely low because in the near future, the emergence of fresh vegetables substitutes in the diet of the Russian consumer is not expected. Quite the contrary, the tendency to healthy lifestyles in Russia will not allow quenching the demand for fresh vegetables. Thus, this power can be estimated as 2/10.

· Competition inside the industry.

Perhaps the most critical force for assessing the position of the Agroholding Vyborgec - over the past 5 years, the competition in the North-West Federal District has increased significantly - in addition to Vyborgec, the following companies are considered to be key players in the market: Eco-culture, private trademark of retail chains, Belaya Dacha, Fruitland, Rosfruit. The situation of increasing competition leads to the need to optimize the processes within the company and to find key competitive advantages, because for some of the players (for example, Ecoculture) there are production capacities of the Federal level, which gives this aspect of the external environment a strength of 10 points out of 10.

Company SWOT-Analysis. SWOT-analysis as an additional analytical instrument may help to visualize not only potential strategic options for the company, but also establish actual features of external environment and company's distinctive features.

Table 1.

SWOT-analysis elements for Agroholding Vyborgec

Strengths

1. High level of perceived product quality;

2. Availability of products on the shelves of major retailers;

3. Eco-friendly production in compliance with GOST;

4. Presence of long-term contracts with suppliers of fertilizers.

5. The use of digital technology and BI in the preparation of management reporting;

Weaknesses

1. Company is represented only in the North-West Federal District;

2. Product range does not differ in breadth, there are no popular positions (mushrooms, potatoes, carrots, etc.);

3. Company does not have full vertical integration (there are no own sales units and outlets);

4. The lack of digital technology in production.

5. Significant debt burden on the enterprise (more than 85% - borrowed funds)

Opportunities

1. The trend for healthy nutrition in Russia is strengthening;

2. Request of the population for farmers products and goods, supplied directly from the manufacturer;

3. Entry into new markets and product niches in a growing market.

Threats

1. The emergence of new competitors of the Russian level and the strengthening of the positions of the old ones (for example, "Ecoculture");

2. Lack of workforce motivation for advanced training;

3. Overall competitiveness loss.

Furthermore, based on these positions of the primary matrix, the main strategies were drafted that will allow the company to compete successfully and achieve significant results, taking into account the opportunities and threats, which Vyborgec Agroholding may be facing during next several years of operations.

Table 2.

Cross-matrix strategies table SWOT-Analysis for Agroholding Vyborgec

SO

1. Development of marketing policy in the context of working with young people (S1S3O1)

2. Conducting an aggressive policy on the presence on the shelves of key retailers and ousting competitors from them. Creating additional entrance barriers (S2S4T1)

ST

1. Creation and implementation of an application to optimize the work of the warehouse (S5T3)

2. Conducting an aggressive policy on the presence on the shelves of key retailers and ousting competitors from them. Creating additional entrance barriers (S2S4T1)

WO

1. Opening of the sales division in Finland (S3S4O3)

2. The cultivation of vegetables "open ground" - mushrooms, cabbage, potatoes, etc. (W1W2O3)

3. Opening of own stores of branded products in key sleeping areas of St. Petersburg (W3O2)

WT

1. Creation and implementation of an application for optimizing the work of warehousing (W4T3)

2. The cultivation of vegetables "open ground" - mushrooms, cabbage, potatoes, etc. (W1W2T1T3)

Out of seven stated strategies, four were chosen as most impactful and crucial for Agroholding Vyborgec current state-of-art. Choice was further supported by management response on analysis results.

Key strategies:

1. Opening of the sales division in Finland;

2. Opening of own branded stores outside of production site (in St. Petersburg);

3. Creation and implementation of an application to optimize the work of the warehouse;

4. The cultivation of vegetables, raised on "open ground" - mushrooms, cabbage, potatoes, etc.

Strategic options 3 and 4 are currently implemented by ZAO Agrofirma Vyborgec. Option 4 is at the initial stage of the investment project, option 3 is the point of current author's bachelor thesis.

Option 1. Considering the "green" status of Finland in the context of the use of GMOs and food additives (despite the absence of a complete ban, the population is trying to choose exclusively "green" products), the elector can be in demand on the Finnish market due to his "traditional" production. Coupled with the availability of transport facilities and proximity, this option can be successful. Option 2. The positive experience of the "Velikoluksky Combinat" shows that the shop "from the manufacturer" can bring considerable profit and increase sales (Moskalev, 2015). Given access to financial markets and positive net income, the Agroholding can invest in the continuation of vertical integration with the end customer. In addition, company already has one such shop near the production, thus, has employees to proceed with this option.

Financial analysis. Current financial state of a company can be too overall piece of information to make particular outcomes, or highlight precise drawback in economical "health" of a venture. To establish analysis, financial statement position should be extracted and presented first. Only source of 2017 financial report is Rosstat (GKS, 2018).

Table 3.

Balance Sheet of Agroholding Vyborgec for 2015-2017 in mln RUB

Balance Sheet Item

2015

2016

2017

Fixed assets

3 381

3 207

4 960

Inventory

171

300

446

Accounts receivable

386

506

706

Cash and equivalents

67

17

429

Total Assets

4 005

4 030

6 541

Equity

694

708

747

Long term liabilities

2 778

2 466

4 490

Short term liabilities

164

401

378

Accounts payable

369

455

926

Total Equity & Liabilities

4 005

4 030

6 541

First look at the dynamics shows vast increase of taken long term loans up to 50% in comparison with 2016, which were used as investments for previously mentioned projects to increase amount and variety of vegetables supply in North-West region of Russia. Another support lies in much the same increase of company inventory. From the negative side, company has increased its cash leftovers up to 0,5 billion RUB. While it can be explained by total increase in accounts in favor of Vyborgec (increase in accounts payable in 450 is compensated partially by increase of accounts receivable in 200 million RUB), company still does not earn much from potential investments of that sum in operations or financial assets purchase.

Other pieces of viable data are hiding behind Profit & Loss statement. These figures are shown in the table below.

Table 4.

Profit & Loss Statement Item

2015

2016

2017

Revenue

1 786

1 835

2 307

COGS

- 877

- 901

- 1 439

Administrative & Marketing expenses

- 581

-748

- 462

EBIT

328

186

406

Other earnings

271

295

324

Other expenses

- 436

- 440

- 666

EBT

164

41

62

Taxes

- 11

- 27

- 23

Net income

153

14

39

P&L Statement for 2015 - 2017.

While 2017 can be marked positively due to the gain in revenue from extensive increase in operations, which will continue in next several years due to previously started investment program. As it is stated in Appendix 1, interest expenses increased approximately by 30% during each year over the period of 2015-2017. While still staying over break-even point, company performs under 2% of net return on sales, which is significantly lower than results achieved three years ago. Calculation of other relative indicators is presented in Table 5.

Table 5.

Indicators (returns) calculation for Agroholding Vyborgec

Indicator

2015

2016

2017

NROA

3,82%

0.35%

0,6%

ROE

21,9%

1,97%

5,22%

ROS

18,37%

10,14%

17,6%

NROS

8,57%

0,76%

1,7%

Other relative indicators show ambiguous picture. From one side, there is a definite growth, performed in 2017. But it is not enough to bring back similar success of 2015, when net margin of sales was close to 10% mark. Production costs increased over the years. In 2015-2016 share of COGS was around 49-50%, while in 2017 it became 62,4%. From positive side, company decreased other operating expenses on almost 300 million RUB, which improved return on sales in 7,5%.

Concluding company analysis from all the tools used (internal, external, financial analysis), some distinct features can be identified:

· Agroholding Vyborgec is currently in a state of extensive growth, fueled by enormous investments. That movement decreases total margin of business along with cashflows under company's control;

· Even if currently there are majority of strategic options, which may be chosen to further bolster sales or geographical expansion, current struggles may restrain company from further development if it will stop generating net income in future years;

· Amount of sheer inventory is growing at an alarming rate which is slightly exceeds sales increase, resulting in possible logistics problems on the side of Agroholding Vyborgec.

2.1 Project description

Project of optimization application implementation for warehousing processes in Agroholding Vyborgec is a planned enhancement of competitive advantages over competitors. Current Vyborgec strategy shows extensive approach to bolstering market positions more times than extensive one. One of the most prominent examples is the investment worth 50% of book value into production of mushrooms and other all-season vegetables (Business Peterburg, 2017).

Optimizing application is the second step on the way of digitalizing business. First one was done in 2016, when Vyborgec bought license and implemented Microsoft Power BI system for report preparation, data accumulation and decision-making.

Project implementation started in the beginning of February with competition between basic provider of software. Month afterwards was taken to finalize contract with company. Due to the fast delivery, in the middle of march Vyborgec was able to start tweaking process in parallel installing physical equipment.

Project itself has several layers of realization. Three main layers are:

· Choosing vendor for license purchase;

· Customization of licensed product

· Purchase of needed equipment to set system in places on different location

Main question of vendor choice lied in several dimensions: customization abilities of application software; domestic supplier status; cost-to-quality ratio; simple to support or to study support employees within the company.

First point about customization is crucial in terms of expending business. Each tweak, change in algorithms require proper testing, rewriting application code and other procedures related with required additional investments. Better to have base software as user-friendly as possible not to struggle during further changes in production processes. Second point is solely determined by external environment - sanctions and Russian legislation in particular: since 2015 it is mandatory to store all the data, acquired in Russian Federation inside datacenters, located in Russian Federation (Interfax, 2015). Such law automatically decreases variety of potential vendors to only two groups - ones who are working with large number of Russian customers, or ones who are "born" in Russia. Third aspect lies on an expert assessment of particular offer quality in comparison with actual price and ability to pay back given investments. Fourth aspect is quite close to the first one - flexibility of software may be established only then, when specialists are not in a state of struggle with simple task like minor troubleshooting or creating downloading data template for future logistics information processing.

After the competition of tender procedure, it became clear that Agroholding will stay with Russian vendor "1C". Since Vyborgec has major distribution center and several warehouses, it is more reliable to concentrate usage of application on the distribution center first. First iteration of optimizing application for warehousing included several modules, such as listed below:

· ERP, monitoring system of current inventories and tracking shipments all over the company, not only in distribution center;

· Tracking system, which holds notes in Kanban-like scores and helps to sort out products by storage time and preventing spoilage

· Shipment planning operation system, which assists user in completing actual order, considering different and most times more effective ways to gather much needed units in optimized way

· Automatic planning module for each type of good and every client, which is helping to forecast starting amount of inventory needed for future shipments.

Testing phase was finished until 2nd of April, which showed great quality of subcontractor's duty competition. Since 2nd of April, optimization application became implemented on the full scale of Vyborgec logistics operations.

Current operative state of application is visible on the following figure, which show screenshot on a hardware, installed in different venues of distribution center. At the same time, application works in different modes. Operative mode shows information about current state of stored goods in particular warehouse and about current delivery, which status was read with bar-code scanner device (see Figure 4). Management mode is accessible from the PC inside offices to withdraw needed information about current operations state or to respond to notifications which are automatically send to the all relevant stakeholders in several seconds after incident or milestone passed (see Figure 5).

Figure 3. Optimization application installed on the tablet inside Vyborgec storage facility Source: photo taken by the author during internship in Agroholding Vyborgec.

Other terminals like this are integrated in machinery and equipment which was already installed in the distribution center (like conveyor or loader).

Figure 3. Reading process of information, concerning particular product package at Agroholding Vyborgec3.

Simple process of reading bar-codes with scanner is a huge leap forward in comparison with hand writings and myriad of non-systemized excel spreadsheets.

Figure 5. Application Management mode in operation3

While such a venture is almost all-around improving current state of Agroholding Vyborgec warehousing processes, it has only one drawback - actual economical effect of such system usage is unknown and even closely undetermined, which lead to the choice of particular methods to verify project positive influence on logistics operation inside warehouses of Agroholding Vyborgec.

2.2 Process state before project implementation. AS-IS state

Process of transferring, storing and shipping already prepared product before project implementation looked like a common process in agricultural firm. Finished product is collected from the greenhouses or fields (production capacities of Agroholding Vyborgec), packed into personal packages or bulks (personal packages are also gathered into small bulks on the pallet) and set for a transfer to the distribution center. After arriving to the distribution center, product package is put on the conveyor belt, which has its sensors to evaluate time of passing each milestone inside the distribution center.

While it is not possible to set particular bulk to make all the way from the beginning of center to correct warehouse, there are several checkpoints, where personnel take goods from one conveyor and put into another. Information about bulk is stored with MS Excel and saved on the common spreadsheet.

After reaching the warehouse, there are two distinct operations - storing and shipping. Employee determines what bulks will be shipped to which client with help of several documents like packing list and shipment register. While it is a document-driven process, there are several drawbacks, happening inside warehouse:

· Employee must come to each bulk by himself to check its status (does he need to mark it to the particular shipping or not?)

· Order of choosing and shipping bulks with similar goods are difficult to determine. Frequently, some bulks are spoiling, while only fresh and new ones can be marked for particular shipping;

· While shipment register may automatically be filled and sent to the bookkeeping, other documents need to be manually transferred into database.

Such state-of-art shows cases of losing crucial analytical data, spoiled supplies and over reliance on employees' professionalism and attention to detail during filling database with shipment information. Following figure shows the state of process with highlight of possibly improvable stages.

Figure 6. State of Agroholding Vyborges process before project implementation3

3. This description depicts actual need in digitalization for Agroholding Vyborgec to continue its competitive advantage, considering all previously mentioned points in second chapter - high tension in external environment, rising level of competition inside the industry, unresolved weaknesses and actual flaws in process management in logistics and warehousing processes.

3. Results

Following chapter consists of results recollection, leading to the practical implementation of optimization application in warehousing of Agroholding Vyborgec. To start with, all the collected data for the further methods application, can be divided into two major types: financial and non-financial.

First group consists from two categories - financial statement of company and internal operational data of warehousing and logistics processes. Financial statement was gathered from Rosstat open source by author. Latest reports are considering 2017. Internal logistics and warehousing data was gathered by author during her internship at Agroholding Vyborgec. Internship was taking place in logistics division in logistics and warehousing efficiency department, which main responsibility was function reporting to the executives. production and inventory forecasts were acquired from manufactory division - main operational body of the company.

As it was said earlier, project scope was set as overall company warehousing, which included transportation conveyor, main distribution center and local warehouses. Thus, overall internal data is presented in average numbers for the location type.

Non-financial data consists only of questionnaire results, which tries to answer two questions regarding project implementation: do employees consider project a success from the terms of perceived effectiveness or process-wise.

3.1 Research design and methodology

Project of implementation technological solutions, as it is mentioned before in literature review, require broad justification of spending company's resources and decisive post-investment monitoring procedures. Therefore, methods chosen by author were picked to achieve objectives in the list below:

· Assess problems, connected with processes of logistics and warehousing in Agroholding Vyborgec;

· Achieve qualitative estimation of warehousing processes efficiency before and after optimization application implementation;

· Estimate application implementation efficiency.

While, first objective was done during the internship and stated in previous paragraph, two other objectives are definitive to support or disapprove point of actual project efficiency. Qualitative estimation was assessed similarly as in author's previous paper - by doing Likert-scale set of questions by four, connected with single entity describing particular operation state. Survey, based on questionnaire with Likert-scale implementation will create ability to perform parametric tests with assumptions of normally distributed samples (Probation Journal, 1997). Examples of similar approach also can be found in papers, concerning other branches of management than logistics (Mimouni-Chaabane & Volle, 2010). To determine actual significance of actual event, parametrical tests are conducted to test hypotheses of parameters equal means.

Third objective may be accomplished with two different classes of methods: regression analysis and financial modelling. While regression analysis requires massive sample sizes, gathered before and after project implementation, there was a shortage of time after the ending of testing period. Therefore, proper regression analysis became unavailable for researcher. Financial modelling, on the other hand, could utilize actual forecast, done by sales department of Vyborgec, which will definitely improve assessment quality. As NPV was shown as potential important metric in investment efficiency determination, are calculated with some auxiliary ones: payback period and internal rate of return.

Financial data on costs, cost savings investment expenditures etc. was gathered from financial department of Agroholding Vyborgec, as the company is interested in assessment of digital transformation project in own needs. As quantitative data falls under NDA clauses, prices and costs are multiplied by unknown factor to disclose actual company cash flows, but data still will be useful to provide conclusions based on relative indicators calculation and interpretation. Secondary data will be taken from internet open sources.

For example, financial statements will be acquired through Vyborgec's website, warehousing applications benchmark data will be received through request to other applications providers, etc. Main source of the definitive data for the project will be the primary data, gathered by author during the internship in Agroholding Vyborgec.

Questionnaire conduction

Questionnaire was conducted two times - before and after the project implementation. First iteration took place from 23rd to 30th of March 2019. Second iteration - from 6th to 15th of May 2019. Warehousing and logistics employees were asked to answer 8 questions. Employees for both iterations were completely different to avoid biases, which may occur otherwise:

1. Current process is done the best way possible.

2. Your working time distributed efficiently.

3. Sunk costs can't be further mitigated easily.

4. Other process stakeholders are satisfied with the process outcomes

5. You have nothing significant to suggest for current process to enhance it.

6. Amount of activities in process is currently optimal

7. Your activities create enough value for the company.

8. You are currently satisfied with routine, you are involved in.

Set of questions was agreed with management of Agroholding Vyborgec. Respondents were asked to set for each question their own assessment from 1 to 7 points, where 1 point is equal to response "Not agree at all" and 7 points are equal to "Absolutely agree". As described in the methodology section, such questionnaire design may help researcher to acquire qualitative assessment of certain statements, which may prove or disapprove point of perceived project effectiveness among main users of project product - employees.

All the questions above can be split into two Likert-scale categories - Process efficiency (1 to 4) and Process enhancement (5 to 8). Difference is in the character - first defines measurable process performance dynamics, second - in overall process changes concerning business-activities of stakeholders.

Samples happened to be homogeneous: average age is 37, salary is 35,000 roubles in average, working experience at Vyborgec is higher than 2 years in average (Participation restriction was not to have respondents in the sample, who worked under one year in Vyborgec. Reason - insuring respondents' ability to analyze situation and reasonably answer given questions.

After all the answers were processed, tables below were completed

Table 6.

Respondents' answers before project implementation (1)

Category

Question

Respondents

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

Process Efficiency

Q1. Current process is done the best way possible.

1

1

2

2

3

3

1

2

3

3

3

3

1

4

7

Q2. Your working time distributed efficiently.

2

2

2

2

2

1

1

3

2

3

2

2

2

2

3

Q3. Sunk costs can't be further mitigated easily.

...

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