Oilene - Pirates of the Silverland

1.0 Introduction (Case Synopsis) 1.1 Corporate background Palm Haul Sdn. Bhd. (PHSB) was a family-owned small and medium sized enterprise in the crude palm oil (CPO) transportation business located in Taiping, Perak. Established in 2002, it had about 200 employees, out of which, 80% were in operations, primarily, drivers of the company’s customized tankers. PHSB owned a fleet of 80 tankers. They started with an initial capital outlay of RM2 million, and maintain an average annual turnover of RM25 million. PHSB’s annual gross profit margin hovered around only 10% over the last few years, which was below the industry average of 30%. On the average PHSB transported 3000 tons of CPO daily from palm oil mills to the respective refineries that purchased the oil from oil palm plantation companies and cooperative mills. Recently, PHSB encountered alarming problem pertaining to the quality of consignments to the refineries where the CPO delivered was either short in quantity or contaminated with water or sludge.

1.2 Protagonist Background Oilene was one of the refineries operating in Malaysia where it is refined for local consumption or export. PHSB provides transportation services to carry the CPO from the mills to their station bay. Other than PHSB, Tiger Oils Transporters was also providing Oilene with similar services. The contract with PHSB is about to due on June, 30 th. Nevertheless, due to the problems they are facing with PHSBs’ services, thorough considerations need to be taken into account before they come into conclusions either to continue or terminate the contract. 2.0: Issues and Root Causes of Problems 2.1 Flawed CPO Handling & Delivery 1

In accordance to the case, pilferage was one of the major issues associated to the palm oil industry. The drivers of palm oil tankers were unscrupulously involved in siphoning the CPO and selling them to syndicates. The amount siphoned off is replaced with liquid such as water, used oil or sludge to camouflage the theft. These additives resulted in contamination of the CPO which was to go through the process at refineries. Consequently, it might affect the quality of the end product. On top of that, there had been many occasions where the consignment delivered did not tally with amounts listed in the delivery orders. Indeed, these occasions are considerably an ultimate threat towards Oilene performance.

2.1.1 Root causes 1. Misconduct of drivers On the basis of the case, it is evident and succinct that the contaminated consignments and shortage of delivery is due to misconduct of drivers. It was unveiled that PHSB discovered that reason for the pattern of pilferage is because of “money”. The remuneration package must be review and the other fringe benefits must be taken into consideration in order to motivate the drivers as well as to avoid unethical behaviors among them. Besides, motivation factor is of utmost importance as to retain the drivers and to overcome the challenge of driver shortage.

2. Negligence CPO has high tendency to solidify and once it’s solidifies in the tankers, it cannot be liquefied again, even by force heating. Thus, there must be a required pumping 2

temperature. Loading, travel and pumping temperatures have to be precisely complied with, since any change in consistency, which may be occur during transportation, can compromise the quality of CPO. Other than that, many of the tankers do not reach the refineries, instead found abandoned by the roadside, and empty, with the drivers also missing. Undoubtedly, when the drivers acted negligently it might affects the quality as well as quantity of CPO delivered to Oilene.

2.1.2 Solutions 1. Long Term - Fleet Management System According to The Sidhu Brothers Group, which has been in the business of transporting CPO for more than 30 years, seems to have come up with a formula to deal with the siphoning of CPO – which takes place between the time the commodity is transported from the mill to the refinery. The company, which has been using the Fleet Management System (FMS) since February last year to track the route of its drivers, has managed to resolve the CPO theft problem. The FMS is a modified system from British company Minorplanet plc and is supplied locally by CSE Multimedia Technologies Sdn Bhd.The system marks the date and time the tankers enter a hot spot and how long they stop at rest areas and eating shops.There is a “panic button” installed near the driver’s seat in every oil tanker which enables the driver to alert headquarters if the tankers are hijacked or experiencing any difficulty. When our oil tankers go off the original route and head to one of the hot spots, the FMS system will detect it, so the drivers know the risks they are taking if they work with syndicates to steal CPO. Oilene might suggest to PHSB to adopt the system and allowing them to have an access on the system.

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2. Short Term & Long Term - Supplier Performance Evaluation PHSB performance considerably impacts on the efficiency and effectiveness of Oilene operation. Therefore, Oilene should ensure that delivered CPO conforms to the specific purchased requirements. In this case, the evaluations on PHSB’s ability to supply CPO in accordance with the requirements must be performed. Records of the result must be kept and analysed accordingly before considering for the next contract renewal. Besides, specific terms and conditions must be stated clearly in the contract. The significance of having supplier Performance Evaluation is as follows:

i.

Increase performance visibility. When companies do not know the facts about how their suppliers are performing, supplier management tends to be based on guesses. Moreover, the simple act of measuring performance can help improve performance. This improvement can be even more dramatic when companies award additional business on the basis of suppliers meeting performance goals.

ii.

Uncover and remove hidden waste and cost drivers in the supply chain. The supply chain is full of inefficiencies. Some of these inefficiencies can be improved by better communications between customers and suppliers. Others are a result of poor business practices at the supplier that can result in increased inventory, quality problems, higher costs, and slow deliveries. Companies can reduce wasteful costs and activities, typically caused by supplier glitches, such as: additional inspections, extra freight charges, overtime (to catch up), safety stocks, obsolete inventory, buying from multiple sources (which reduce price leveraging), etc.Time is money, and by measuring and improving supplier performance and by reducing supplier 4

quality problems, for example, a company eliminates wasteful steps in its own processes. By better understanding supplier performance and supplier business practices and processes, customers can help suppliers drive waste and inefficiency out of the business, resulting in higher-quality suppliers and lower costs.

iii.

Leverage the supply base. By measuring supplier performance, an enterprise can set a threshold for its suppliers that can lead to higher-quality results. Companies can better plan new products and services based on a good understanding of its suppliers’ capabilities and performance levels. Understanding local suppliers can help determine if they are capable of reducing total costs enough to outperform offshore suppliers. Also, suppliers can provide technologies to their customers that help them develop new products and services that can add revenue to the customer’s bottom line and enhance their competitive position, thus helping customers add value to the top line in addition to removing cost from the bottom line.

iv.

Align customer and supplier business practices. Ideally, suppliers should run their business in alignment with their customers: share the same business ethics, expect similar standards of excellence, show commitment to continuous improvement, etc. Consider how the lean enterprise or any high performance system that drives shorter delivery times, higher quality, and lower prices could actually have an adverse impact on a supplier who is not aligned with these practices. A supplier who is unaccustomed to pursuing continuous improvement may be unable to keep up with its customers’ increasing requirements for better, cheaper, faster goods and services.

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v.

Mitigate risk. Insight into supplier performance and business practices helps reduce business risk, particularly given companies’ increasing dependence on its key suppliers. Risks can be financial and operational and increase with geographic distance. Or, a risk area of increasing concern is the performance of sub-tier suppliers whom the prime supplier has no contact with or knowledge of.

vi.

Improve supplier performance. The goal of supplier evaluation should be supplier performance improvement. While simply measuring performance has a positive effect, supplier evaluation can be most effective when it leads to continuous improvement activities and actual supplier performance improvement. Supplier evaluation systems need to address both the traditional quantitative indicators such as quality, delivery, and cost management as well as the underlying qualitative factors. The root causes of performance difficulties can be hard to uncover and require understanding business practices, cultural factors and the leadership at the supplier. Follow-up activities, such as supplier training and development, and corrective actions to address supplier evaluation findings are the best ways to obtain measurable and positive results.

3. Long Term - Attractive Remuneration Package On a side note, the remuneration package of PHSB drivers should be mulled and delved into. In accordance to the case, it was determined that the drivers pay package was below competitive market level. This has a direct, negative impact towards the motivational level of the drivers. As a result, misconducts such as palm oil theft and negligence in handling the crude palm oil occurred. Such undesired situations could be eluded or prevented should PHSB relook into the remuneration package of the 6

drivers. Oilene may advise PHSB on this matter to contend with the issues of contamination or shortage of delivery as such solution could be effective in the long run.

4. Short Term - Modification of Terms of Contract Prevention of avoiding unnecessary obligations due to above mentioned problems need to be considered. Modification of terms of contract must be executed in accordance with the regulations stated in Contract Act 1950. In this case, there must be a clause stated regarding the quality standard of CPO & lead time expectations as well as the right to return CPO which does not meet the requirements. Nevertheless, mutual agreement between Oilene and PHSB must be achieved before the modification take place.

5. Long Term - Termination of Contract Should the circumstance where the quality of the palm oil is still highly compromised despite efforts for instance: (1) modification of terms of contract, (2) implementation of fleet management system on PHSB side, (3) increase remuneration package for drivers on PHSB side and (4) establishment of supplier evaluation system, still deemed unable to remedy the situation, it would be advisable for Oilene to terminate the contract with PHSB. The first consideration prior to termination of contract between Oilene and PHSB boils down to the question that whether Oilene have an immediate replacement of transporter with sound proximity on the access to the plantation. A transporter located too far away from the oil palm plantation would only imply additional cost of transportation incurred, which increase the cost of goods sold and ultimately undermining gross revenue and profitability after taxation. 7

The second consideration would be that whether the newly contracted transporter has the established tools or mechanisms in minimizing or curbing the issues of palm oil piracy, be it due to the misconduct of the driver’s end or the negligence of handling the crude palm oil. As conferred in the case, transporter in palm oil industry is highly competitive and is readily available. Thus, should PHSB remain ignorant of the issues emerged despite Oilene’s effort to remedy the situation, termination the contract should be meticulously evaluated and looked into.

Financial & Non-Financial Impact Fleet Management System will help not only PHSB but also Oilene to foresee uncertainty occasions and at the same to prepare for contingency plan. It does not involve fund outlay; however an access to the system must be consented by PHSB. There are different types of approaches to evaluate suppliers. The evaluations can be done manually (i.e. questioners, scorecards and ISO 9001:2001) or automatically by system (i.e. site visit or evaluation software). Oilene must look at into their financial position, shall the automation be chosen, Oilene have to bear one off expenditure. However, in the long run Oilene will be benefit and see the outcome from return on investment. 2.2 Increase in Operational Complexity Figure 2.2: Palm Oil Processing Flow Chart

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2.2.1. Increase of Operation Cost & Lead Time Stemming from the contamination of palm oil, unnecessary operational activities or measures in contending the contamination issues are required. To further worsen the situation, Oilene had to shut down the plant to clean out the sludge almost on a weekly basis. The figure below depicts the loss on the profitability of Oilene incurred due to the shutting down of the plant. Dr. Expenses

Amount

Cr. Cash

Amount 9

Such undesired occurrence also greatly hampered the operational activities and schedules of Oilene. The impacts include (1) an increased in operational costs due to the additional measures required for the removal of the contamination and (2) prolonging or increasing the cycle time along the processing line required to refine the palm oil and to ultimately, deliver the palm oil to its respective customers. Failure to meet the lead time may result in low customer satisfaction and may tarnish its business reputation.

2.2.2 Operational Impairment Due to Inventory Issue Albeit PHSB assumed full responsibility of the upheavals by compensating the damage or losses inflicted due to their negligence of handling the crude palm oil, the impact of insufficient raw materials should not be overlooked. Insufficient raw materials would result in operational turbulences or impairments should such situation prolong. Whilst the issue could be partially or fully mitigated in the short run through the maintenance of certain inventory threshold periodically via forecasting, it may not be sustainable in the long run. Over the time horizon, these impeding crisis or uncertainties linger considering these scenarios: (1) should there be a sudden surge in demand, Oilene would have insufficient stocks or inventory to meet the demand. Or (2) should there be a constant or trended decline in demand, Oilene would have excessive stocks or inventory. To pelt Oilene worse, failure to meet customer increased demand would lead customer dissatisfaction or customer attrition whilst holding excessive stocks would lead to increased incurrence of expenses (i.e: storage cost). Oilene should warrant attention that the market demand for a commodity is dynamic and may fluctuate over time. Such issue has to be addressed upon hinging on the detriments it may wreck on Oilene. 10

2.2.1 Root Causes 1. Pilferage & Contamination In this case, it is inferable that pilferage triggers contamination. In addressing the contamination issues, it leads to unnecessary operational complexity. The CPO received from PHSB does not meet the quality standard of requirements. Therefore, an extra operational measures need to be taken in order to rectify the issues. As a result, Oilene need to incur extra cost (human capital & time) and at the same time resulting to increased in the lead time.

2.2.2 Solutions 1. Short Term - Adoption of Project Crashing to Reduce Cost On the study postulated by Nazrul et al. (2012), project crashing is a method intended to shorten the overall project duration by the reduction of the time required for one or more critical activities. In essence, it serves the objective of reducing the initial required duration whilst minimizing the cost of crashing. To reduce project duration while minimizing the cost of crashing, the project team should estimate require time, require the cost, crash time, crash cost for each activities. And then the team can estimate total crash time, total crash cost, the crash cost per week to reduce project duration at minimum cost.

2. Long Term - Adoption to Palm Oil Monitoring System Basically it is about filtering system. Upon uploading the tanker at the refinery station bay, the custody transfer process take place. The system was able to monitor the volume and water content of the delivery to ensure that it meets the specifications. This can be done 11

manually or automatically using online quality monitors attached to the pipes of the truck during delivery. The result might have an impact on the price per load since higher quality CPO is more useful to buyers, however it is still cheaper compared to the risk of production shutdown that lead to the delay in orders delivery.

3. Long Term - Inventory Management Inventory management system is momentous to meet organizational objectives, particularly on optimal level of stock for raw materials and production outputs. The amount of inventory held has a direct impact on the responsiveness and efficiency of operations of a company. In general, it is also reflective of the performance in a given industry. In the Malaysian palm oil industry, most of the processing activities are wellplanned or are geared towards fulfilling as demanded – referred as “back-to-back’ approach. Under the governance of this approach, the movements or flows of palm oil products along the supply chain are relatively responsive and timely in terms of delivery or reaching to prospective buyers. Hinging on this, the inventory levels of palm products should be held or maintained low whilst suffice to meet the demand of processing activities.

There are a variety of inventory management strategies all answering same questions, i.e. When to order? How much to order? To answer them, different approaches can be applied, namely inventory models, simulation, and optimisation. (Soshko, 2010) Traditional inventory strategies expressed by means of analytic formulas are the most popular. However, a complexity of analytic inventory models increases if stochastic data appears. If 12

demand and lead time are stochastic (as they use to be in practice), computation of the optimal order quantity will be more complex. Application of analytical formulas is only then useful, if there is no necessity for complex adoption inventory models for any certain case which requires from a manager good mathematical skills and creativity. In order to check and evaluate results of system operation under defined inventory models settings (found either by using inventory models or empirically) before implementing them to the company a simulation model can be used. However, to create a good simulation model, input data should be defined accurately and a model should capture logic of the modelled system. For example, if Min-Max strategy is modelled, then a model should operate based on Min-Max conditions. Once created, a simulation model can be multiply used then for performing so called “what-if” analysis. Illustratively, a manager can use the simulation model to evaluate how the system will operate in case of increasing/decreasing demand. Besides analytical models for inventory management, optimization model allow finding parameters of inventory models as well. Application of scenario approach of stochastic programming in inventory management is then rational if there is some lack of data required for traditional analytic algorithms, as for example mean and dispersion of demand or lead time cannot be precisely expressed. However, better benefit optimisation models give in case of planning inventory in multi echelon supply chain, because they allow describing interconnections of echelon in managing inventory toward the end customer.

Therefore, to remain competitive in the current market, the inventory management system must be in place. It is recommended that Oilene could implement or improve their existing inventory management as it may helps Oilene :

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i.

to maintain an optimum size of inventory for efficient and smooth production and sales operations.

ii.

to maintain a minimum investment in inventories to maximize the profitability.

iii.

Effort should be made to place an order at the right time with the right source to acquire the right quantity at the right price and right quality.

Financial & Non-Financial Impact Generally the ascribed solutions given could help Oilene in dealing with extra operational measures that lead to unnecessary costs. At the same time, better inventory management might help Oilene to enhance their operational activities and forecasting. It should however warrant our attention that certain tools for instance palm oil monitoring system may incur the investment of an initial outlay. In spite of that, in a long run perspective, the investment may be recouped in a manner that it down-throttle the potential contamination issues with the crude palm oil. By the virtue of this, it significantly reduces operational cost and reduces the need to introduce additional measures to contend with the contamination. Hence, the best feasible boils down to the question of sustainability in the long run versus fixing current issues. 3.0: Proposed Best Solution Due to time constraint, it is recommended that Oilene would continue the contract with PHSB for a short term period. Thus, in order to overcome losses caused by consignment delivered we proposed that certain possible solutions mentioned in the earlier section could be taken into consideration provided that Oilene had enough financial and human resource capital to support. The best measures in dealing with the contamination for the short run include supplier performance evaluation whilst in the long run, adoption of fleet 14

management system. In the spectrum of operational activities, Oilene should look into project crashing for the short run whilst palm oil management system in the long run. Perhaps, by implementing the afore-proposed solutions, Oilene could strengthen new strategies particularly related to operational activities and as well budgetary matters in order to optimize profit and to minimize costs. Throughout the period of new contract, Oilene must evaluate PHSB performance in order to make a decision for future business undertaking. Should PHSB failed to live up to the mutually consented standards, termination of contract should be considered to prevent the incurrence of unnecessary operational cost across the time horizon.

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