GSM5301: ACCOUNTING FOR DECISION MAKING

LECTURER: PROF. MADYA HASHANAH ISMAIL

CASE STUDY 2: THE PIRATES OF THE SILVERLAND (PALM OIL PIRACY)

GROUP 4 MEMBERS:
NAME NOOR ASRUL NORSHAHIRA KAMARUZZAMAN NOR ZAKIAH MD SARWAN MATRIC ID GM05304 PBS1211186 PBS 1311155

VIVEKSARATI SANDRASIGARAN LAU KAR WOH

A/L

PBS1311014 PBS1312188

The Pirates of the Silverland (Palm Oil Piracy)

1.0

EXECUTIVE SUMMARY Palm Haul Sdn Bhd (PHSB) was a small and medium sized enterprise

in the crude palm oil (CPO) transportation business located in Taiping, Perak and was established in 2002. PHSB was managed by En. Rossly, the Chief Executive Officer which is also the son-in-law of PHSBs founder, Datuk S. Najeed. Transporting crude palm oil is a niche market in the industry and pays a high gross profit margin between 35% - 45% generally. Like the other transport companies involved in the business, PHSB also faced problems with its drivers embroiling in oil piracy. Transport companies are naturally will held the responsibility for such thefts as they usually take place under their watch and these companies are bound to compensate the refineries for such losses. The culprits involved frequently tanker drivers, depot operators and transporters. It has results in increasing of compensation over CPO shortfall and low operating margins, high oil pilferage activities, high driver record of absenteeism and high cost of maintenance. One of their major customer, Oilene Refineries (Oilene) had made a complaint about the quality of the CPO been delivered by PHSB to them and its later impact on Oilenes failure to fulfil their customer orders on timely manner.

Our primary suggestions revolve around two main issues which is critical to Palm Haul Sdn Bhd as below:

A. Customer complaint over bad CPO quality been delivered It is vital for an organization to avoid customer complaints. This is a major issue as it will tarnish the organization's image at first instance. In this scenario, the major client of PHSB, that is, Oilene Refineries Sdn Bhd made a direct complaint to Palm Haul Sdn Bhd owner, that is, Datuk S. Najeed. The complaint was regarding the quality of crude palm oil (CPO) delivered by Palm Haul Sdn Bhd. Deterioration in quality subsequently have a negative impact on Oilene Refineries Sdn Bhd sales as customers orders cannot be fulfilled. The significance of this situation to Palm Haul Sdn Bhd is losing a major customer. If these problems are not being cured, Oilene Refineries Sdn Bhd may not renew its contract with Palm Haul Sdn Bhd. This will lead to a significant sales drop in coming years.

B. Low quarterly profit reported Palm Haul Sdn Bhd first quarter of 2009s financial report showed a significant decline in profit by 300% although remaining year end period with 3 months. Datuk S. Najeed shocked and need drastic solution to overcome high cost issues. Compensation cot should not arise as it is

avoidable cost. Other areas to be looked in are spare parts, tyres and tube, petrol as well as upkeep and maintenance. This five parts contribute nearly 60% more compared to last year end results.

2.0

SWOT ANALYSIS

2.1

INTERNAL ENVIRONMENT

2.1.1 STRENGTHS A. Sustainable player in the industry Having 80 fleet tankers out of 1,500 fleet tankers in this country were equal to 5% of this market segment. It has been 7 years since operation and has overcome 2007 global financial crisis where during that time, many companies were forced to withdraw from their business. B. Strong connection Founder of Palm Haul Sdn Bhd (PHSB), Datuk S. Najeed was a retired chief engineer from the Ministry of Transport. Therefore, during his office, he had make connections with big people enabling him to set up a company with sales already in hand. Furthermore, the contracts are renewable in 5 years time.

2.1.1 WEAKNESSES

A. Lack of internal control There are no proper guidelines on doing things the right manner. Each employee should know their job function, responsibilities and line of reporting. Failure to do so will lead to organization crushed-down. It is include CEO of PHSB where hes lack of working experience has resulting in these cases to happen. Financial performance for the year act as proof that profit has gradually decreasing over the years but he dont even realised it until its been notified by the owner of the company, Datuk Najeed. B. Financial Vulnerability As at end of 31 March 2009, PHSB Sdn Bhd has extremely low cash situation. The negative amount of RM 578, 443 represents an overdraft which is a liability to the company. In the point view of financial, this is a worst scenario and should be handled with proper due care. To add more, with current pilferage issue may lead financial instability and contribute to further cash bail outs.

2.2

EXTERNAL ENVIRONMENT

2.2.1 OPPORTUNITIES A. Emerging Biofuel Market In 2008, world biofuel production will be 1.35 barrels per day (bpd and by 2013, it will rise to 1.95 million bpd (MPOB, 2008). World oilseeds output is expanding due to advances in technology and acreage. Expansion in world demand for vegetable oils is about six millions MT demand for edible oils and two million MT is biofuel demand. Palm oil production alone can expand by more than five million MT, and even higher than expansion in demand for food in certain years. Thus, there is a need for an additional demand outlet, a vacuum which biofuel can fill.

Thus, the biofuel industry plays a crucial role to ensure farmers are not marginalized due to price collapse. B. Lucrative niche of market The demand for crude palm oil is on daily basis. It serves as the basic ingredients for food preparation in each home. When demand is high, the price of crude palm oil is increasing. Through the statistics, approximately 17.73 million metric tonnes of crude palm oil (CPO) are moved across the nation from mills to refineries annually. When this happens, transportation companies may reap approximately RM 50 million each year. Having a market portion of 5%, would result PHSB Sdn Bhd to earn a minimum of RM 2.5 millions annually.

2.2.2 THREATS A. Dampening Economic Outlook The prolonged US-led global economic slowdown will continue to dampen Malaysias exports. The dampening economic outlook has negative impacts for the oil palm industry as demand in some regions plunges. This threat to the oil palm industry, sooner or later, is bound to have a negative impact on all chain of crude palm oil. The Star (22 Nov, 2008) quoted a source in the oil palm industry which states that defaults on Malaysian and Indonesian palm oil contracts are estimated to involve 1.5 million tonnes of crude palm oil (CPO). This situation could lead to a deferment of palm oil shipments and renegotiation of import deals especially with India and China. B. Stiff Competition There are approximately 1500 tankers transporting CPO from mills to refineries in the county. Since demand is high, so do the competition

amongst

all

transportation

companies.

This

includes

their

closest

competitor of CPO, Siddhu Brothers Group.

3.0

FINANCIAL ANALYSIS PHSB started off with their capital initial outlay of RM100,000. Then

they expand their operation in 2004 with additional of RM1,900,000 and borrowing term loan of RM2,032,011 to finance their newly acquisition of vehicles. By year 2006 problem starts to occurred when their company working capital had taking an overdraft to finance their operation instead of withdrawn from their fixed deposit every year. That is the reason of decreasing in gross profit on the following year. Gross profit margins are usually around 35% - 45% and a reasonable profit if the company can mange effectively the administrative overheads.

4.0

RECOMMENDATION

A. New technology to curb palm oil theft - Fleet Management System Fleet Management System (FMS) has been introduced by MPOB as a preventive measure to cases like this palm oil theft. The issue arose when a fair percentage of CPO that is loaded into the tankers never arrived at the destinations but thousands of metric tonnes were missing, tankers were not arrived at the refineries which were found abandoned plus with the missing drivers. FMS is basically function as a vehicle tracker so they will be informed wherever those driver is taking ay unusual route to destination. FMS device will be installed in the cab of a Crude Palm Oil (CPO) tanker which will allow PHSB to track scoundrel drivers as the

system will mark the date and time the tankers enter a hot spot and how long they stop at rest areas and eating shops. This means that, if the oil tankers go off the original route and head to one of the hot spots, then the system will detect them. Therefore, by using FMS, the drivers will be aware of the risks they will be taking if they work with the syndicates to steal the CPO which automatically will reduce the oil thefts as well as the compensation cost faced by the company. B. Good compensation package given to employees This will resolve their loyalty to PHSB thus will lower driver shortage and the issue of high absenteeism. A good compensation package can includes year-end bonuses as the bonuses will be much lower than the compensation cost that PHSB is currently bearing. Besides, PHSB can also increase in drivers salary based on Malaysian Industrial Development Authoritys (MIDA) salary rate for lorry and truck drivers to minimize the pilferage. Moreover, PHSB could as well include medical, social security, accident protection, pension scheme, Employer Contribution Fund and annual leave of 10 to 14 days which is normally provided together with an annual salary increment that is calculated based on a certain percentage of the basic salary and performance. C. Training conduct for employees Employee of PHSB can learn how to perform tankers maintenance; a preventive maintenance could also be one of the possible solutions as prevention is better than cure. Maintenance each vehicle on regular basis plays an important role in an effort to reduce yearly rising maintenance costs.

5.0

CONCLUSION

Based on above analysis, what we can conclude here is that PHSB still can be saved by implementing those solutions given. The issue on low operating margins will automatically be solve together with the matters regarding their other client as well as the major customers complaint on the quality of CPO delivered by PHSB thus will increase their profit over the years. Thank you.