Freezing Complete

Executive Summary The purpose of this report is to evaluate and analyse the current position of Cold Cuts Ltd after the occurrence of the problems in the case study and recommend few suggestion to resolve these issues.

First, this report provides an analysis and evaluation of the current and prospective profitability, liquidity and financial stability of Cold Cuts Ltd. Methods of analysis include SWOT analysis, target costing analysis, cost volume profit analysis, financial analysis, technology analysis and  pay back analysis. Results of data analyses show that Cold Cuts Ltd’s comparative performance is below industry averages.

Other than that, an ethical analysis to the ethical issue faced by Cold Cut Ltd which CC need to decide whether CC need to pay an anti dumping tax issued by United States International Trade or bribe them to drop the case.

This report finds that the prospects of the company in its current position are not positive. The major areas of weakness require further investigation and remedial action by management.

Recommendations discussed include: 

Cut down manufacturing cost by implement production strategy



Take actions toward the person who proposed bribe



Ignore the bribe

1.0 Introduction Mr Dali, the Managing Director of Cold Cuts Ltd (CC) had a meeting with Mr Nelly, the Supply Manager from their biggest customer, Secconz. Mr Nelly asked CC to lower the price because Secconz has been facing a lot of competition from China who have been able to produce at much cheaper prices. Secconz hopes that CC can reduce the price since they believes that CC has already recouped the original investment. Cold Cuts Ltd really need to think about this in order to keep its relationship with its biggest customer. Furthermore, their supply contract is almost over. Losing Secconz may bring a huge loss to CC.

There is also an ethical issue faced by Cold Cuts Ltd. CC need to decide whether CC need to pay an anti dumping tax issued by United States International Trade or bribe them to drop the case. This issue arises because United States International Trade Commission has begun investigation on CC exports from China to United States. They are saying that CC is pricing its products much lower than the fair value even CC believes that they acted according to the law. The situation is complicated because there is a chance that CC will be shut down for a long time even if they did not do anything wrong.

This report is prepared to analyze the issues in Cold Cuts Ltd that put it in this kind of situation. It provides information obtained through financial analysis to help CC to decide on whether it wants to continue or stop the supply contract with Secconz. It also helps CC to evaluate the financial matters that will be affected by CC decision. This report pay particular attention to the anti dumping tax law and will highlight major strengths and weaknesses while offering some explanation for observed changes. The report will comment on the prospects of the company and make recommendations that would improve company’s current performance. These observations

do have limitations which will be noted.

2.0 Main issue The first issue in this case is Secconz, the biggest customer of Cold Cuts Ltd (CC) asked for lower price since that they have a lot of competition from China who have been able to produce a  product like CC at much cheaper prices. CC and Secconz are coming towards the end of the second year of the supply contract. If CC wants to continue the supply contract, Secconz hope that CC finds a way to reduce the price. In addition, Secconz insists that they should think about the viability of their partnership in long term.

The second issue is United States International Trade Commission has begun investigation on CC exports from China to United States. They are saying that CC is pricing its products much lower than the fair value. However, Mr Rithisak, a plant manager in China said they acted according to the law. If CC is found guilty, CC need to either close down or pay a huge antidumping tax. This situation leads to an ethical issue that CC need to face. Mr Rithisak believes that they want some bribes to smoothen things out. The situation becomes more complicated  because Mr Rithisak worried that even if they are not doing anything wrong, the authorities might still shut them down.

3.0 Analysis and Discussion The first issue in “Freezing Out Profits” case is Mr. Nelly, the Supply Manager from the biggest

customer, Secconz, expected Cold Cuts Ltd (CC) to reduce the price since that they have a lot of competition from China who have been able to produce a product like them at much cheaper  prices. Furthermore, Mr. Nelly also thinking to produce the technology themselves instead of  buying from CC if the price cannot be lowers down.

3.1 SWOT Analysis SWOT analysis is stands for strengths, weaknesses, opportunities and th reats which can be use to analyse the organisation and environment. Howev er, below is CC’s SWOT analysis.

Strengths 



Specializing

Weaknesses

in

refrigeration



Selling price higher than competitors

components



Do not have proper price strategy

Develops own products Fuzzy Frost



The cost of manufacturing is higher

Alpha system





Exported product worldwide



Only Singaporean supplier for FFA

 No

proper

knowledge

on

antidumping

technology 

Enable perishable items to be stored far longer than conventional fridges

Opportunities 

Expansion to China



Invest in new market

Threats 

The

China

competitor

produce

similar products with cheaper price 

Bribery



Will lose the biggest customer 

Table 1 SWOT Analysis on Cold Cuts Ltd

Selling price from Cold Cuts Secconz

European customers

Per Unit ($)

Per Unit ($)

Direct materials

40

40

Direct labour

10

10

Direct costs

50

50

Factory overheads

8

8

Manufacturing cost

58

58

and 82

42

Margin

before

machinery

depreciation

administration costs Selling price from Cold Cuts

140

100

Table 2 Cold Cuts Ltd’s Selling Price

Cold Cut Singapore Annual Sales and Margin Annual Sales

Units

Margin

Selling

Total

Price ($)

($)

Units

Unit price Total ($)

($)

Secconz

25,000

140

3,500,000

25,000

82

2,050,000

European

50,000

100

5,000,000

50,000

42

2,100,000

customers 8,500,000 Table 3 Annual Sales and Margin

4,150,000

Alternative 1

One of the alternatives which are Cold Cut (CC) want to decides whether to keep Secconz to continue the contract with this major customer.

3.2 Target Costing Target Cost = Anticipated selling price  –   Desired profit

Target Cost = $140 - $40 = $100

We will analyze using target costing method, which use the anticipated selling price to deduct the desired profit that CC wants to get. As we calculated, the anticipated selling price which is $140 selling to Secconz and the desired profit that can get is $40. Therefore CC will get a target cost of $100. Target costing method which is that most of the cost of a product is determined in the design stage. Once the product has been designed and has gone into production, not much can be done to significantly reduce its cost. There is the only way to reduce the cost come from designing the product so that it is simple to make, uses inexpensive parts and is robust and reliable. CC wants to reduce the cost of the product, they have little control over the cost once the product has gone into production, then it can follows that the suitable way to affect the profit come in the design stage where valuable features that Secconz are willing to pay for can be added and where most of the costs are really determined for Secconz. Target costing is the  proactive methods that will help CC with cost management on the production, minimize non value-added activities, and encourages selection of lowest cost value added activities.

3.3 Cost Volume Profit Analysis (CVP) Cost-volume-profit analysis estimates how much changes in a company's costs, both fixed and variable, sales volume, and price affect a company's profit. In cost volume profit analysis, we are looking at the effect of three variables on one variable profit. In CVP analysis, we have to calculate the breakeven point in units. Breakeven point in units is the number of units the firm has to produce and sell in order to make a profit of zero. In other words, it is the number of units where total revenue is equal to total expenses.

If operating income equals zero, then the breakeven point in units has been reached. If the operating income is positive, the business firm makes a profit. If the operating income is negative, the firm takes a loss. CVP shows how revenues, expenses, and profits change as sales volume changes.

Operating income equation:

[[(selling price-variable cost)] x (Quantity sold)] - (Fixed cost) = [[($140-$50)] x (25,000)] –  ($8 x 25,000) = $2,250,000 - $200,000 = $2,050,000

Alternative 2

The other alternative is not keeping Secconz  and do not renew the supply contract with CC.

3.4 Financial Analysis Secconz is the major customer of CC in Singapore, losing the customer will give a huge impact to the financial of the company especially in their revenue. The revenue of CC will drop about one third of all Fruzzy Frost Alpha (FFA) sales of CC. If this happens it will affect the company  profit as well. As mentioned above, the selling price of FFA models to Secconz is much higher than European customers. Furthermore, the annual requirement of Secconz was 25,000 units of FFA which is one third of the sales of CC. Meanwhile, CC might lose $ 3,500,000 yearly which is almost 41% of total sales.

3.5 Technology Analysis CC was a manufacturing in Singapore specializing in refrigeration components and developed its own brand of refrigeration process technology known as Fuzzy Frost. However, the refrigeration technology had not altered much since its invention. The technology became easy copy or imitation. Besides that, CC was a subcontractor of components for customers who were original equipment manufacturers (OEMs). It was a company from which refrigeration manufactures outsourced their special components. CC was facing the competition from similar supplier of the  products and it was also vulnerable for those customers to manufacture in-house on their own. CC should have a proper adoption of the right technology products for the business in order to save the cost in the long run. However, it is important for CC and manager to stay informed on the latest technology products in their industry. Furthermore, CC sold the FFA component locally only to Secconz. By not keeping Secconz, CC only left export models of FFA to those European customers at much lower cheaper prices against competing European technologies. In this situation, CC should able to penetrate the European market and competing with their technologies.

3.6 Payback analysis- machine CC might not be able to achieve payback on its investment in the new machinery within two years despite the rapid obsolescence of the FFA technology. In this case, the new machinery cost $ 8.3 million. The estimated annual net cash flow would be $ 4.15 million.

Payback period = Amount to be invested / Estimated annual net cash flow 2 years = $ 8.3 million / Estimated annual net cash flow Estimated annual net cash flow = $ 4.15 million

However, the shorter payback periods are preferable to longer payback periods. CC also has decided to ship the machines to China although the machines that made the old Fuzzy Frost. However, there is several benefits which allowed expansion into a new market at much lower cost. China had much lower labour costs amd although producing the older types of components.

3.7 Ethical analysis A contingent from China trade officials paid a surprise visit to Cold Cuts Ltd plant in China. They informed Mr Rithisak, the plant manager in China that the United States International Trade Commission has begun to investigate their exports from China to US. They also mentioned that CC had put their price much lower than the fair value on their products. Therefore, if CC were found guilty, the United States International Trade will either close down their business or at the very least, CC need to pay a huge anti-dumping tax. Thus, the ethical issue came when the staff of United States International Trade Commission wants some bribes in order to smoothen things out. One of the officers even met with one of CC’s staff privately to

make some personal arrangements so that the case can go away.

4.0 Recommendation To resolve the 1st  issue, it is recommended that Cold Cuts Ltd cut down the cost in manufacturing by implement any production strategy such as just in time manufacturing or lean manufacturing.

Figure 1 Just In Time Manufacturing

4.1 Just In Time Manufacturing Just in time manufacturing is a strategy used in the manufacturing industry to reduce costs by reducing the in-process inventory level. It is driven by a series of signals that tell the  production line to make the next piece for the product and when it is needed. The signals used are usually simple visual signals, such as the absence or presence of a piece that is needed in the manufacturing process.

In just-in-time manufacturing, reorder levels for certain inventory items are set and new stock is ordered only when those levels are reached. There is no overstocking of parts or items, which saves on space in the warehouse.  This manufacturing strategy can lead to improvements in quality and efficiency. It also can lead to higher profits and a larger return on the company's investment.

Action and Implementation Evaluation process should be done on certain areas before the implementation of JIT manufacturing. First, Mr Dali should do an evaluation on area such as: 

People involvement –  To obtain support from related parties such as stakeholders, employees and management.



Plant  –   To determine exactly where the organization stands in term of production and workforce capability before the implementation of the strategy.



Organization flexibility  –  To determine the flexibility level of organization to respond to any new changes.

After the evaluation process, Mr Dali can continue with the planning process to design suitable flows and systems to improve the performance.

Figure 2 Lean Manufacturing Tools

4.2 Lean Manufacturing Lean manufacturing is being utilized by businesses of all sizes today. Although it took a few years to become mainstream, the success stories from mid-size to large corporations have pushed lean manufacturing down to very small organizations.

Most of the large corporations employ a few lean experts. Many mid-size and most small  businesses do not have lean manufacturing expertise in the company. It is common that a few individuals have attended a lean manufacturing seminar or read a few books, but lack the expertise to develop a road map.

Action and Implementation Mr Dali should start an analysis of the organization to identify areas of opportunity in every area of the business, including sales, service, engineering, maintenance, production, quality, shipping and administrative functions. Then, Mr Dali should form a team and train them to understand the methods to utilize the lean tools to solve the problem or maximize the improvement.

4.3 Take actions towards the person who proposed the bribe In order to resolve the second issue, it is recommended to bring the matter internally to their top management of United States International Trade Commission or else report to local authorities so that action can be taken towards the person who proposed the bribes. For example, Mr Rithisak can report to Suruhanjaya Pencegahan Rasuah Malaysia (SPRM) if its happened in Malaysia. However, for international stage, Mr Rithisak can refer to INTERPOL, FBI or IAACA which is known as International Associate of Anti-Corruption Authorities.

4.4 Ignore the bribe Other than that, Mr Rithisak can totally ignore the bribes from the United States International Trade Commission’s staff and seek for any legal advices regarding the matter. This will prevent CC’s staff too from any ethical issue. As for the company itself, CC should implement a strategy

for combating possible practices of bribery that might happen in the future.

In the end, even as a first time offender, bribery can lead to a felony charges being brought against a company or a person, in which large fines and imprisonment. The consequences of a conviction for bribery can be very severe. Thus, the government will pursue cases involving  bribery with the sole purpose of proving guilty, regardless of their true intent.

5.0 Reference 1. Carl, W., 2013. Reliableplant. [Online]. Available: http://www.reliableplant.com/Read/11691/lean-manufacturing-implementation. [15th January 2013] 2. Just In Time Manufacturing., 2013. Tutorialspoint. [Online]. Available: http://www.tutorialspoint.com/management_concepts/just_in_time_manufacturing.htm. [15th January 2013] 3. Technical information on dumping., 2013. World Trade Organization. [Online]. Available: http://www.wto.org/english/tratop_e/adp_e/adp_info_e.htm. [15th January 2013]