The Pirates of the Silver Land

TABLE OF CONTENT

1.0         INTRODUCTION        

2.0        PROBLEM STATEMENT        

3.0        THE PROBLEM        

4.0        RECOMMENDATION        

5.0        CONCLUSION        12

1. INTRODUCTION

The case study is about a company Oilene Refineries Sdn Bhd complaining about the quality and quantity of the Crude Palm Oil (CPO) delivered by a transporter Palm Haul Sdn Bhd.

Process of producing refined palm oil starting from Palm kernel are harvested and transported at the mill for CPO extraction and then refined by the refinery for local consumption/export. Refineries largely outsource the transport of CPO using customized tanker to carry. Competition of transport companies is robust, if one company loses a contract chance are there for others to have the contract.

Gross profit margin for the industry is between 35% to 45%, administrative overhead are usually low and transportation company can generate a reasonable net profit if operate efficiently.

A major problem faced by transport company is “oil piracy” while CPO being transported from mills to refineries. The culprits involved:

1. Tanker drivers
2. Depot operators
3. Transporters

CPO replaced with liquid e.g water, used oil/sludge, it result in contamination of CPO which will go through the process at refineries and will affect the quality of the end product for local consumption/ export.                                                                                                                                                                                  

1. PROBLEM STATEMENT

Oilene Refineries Sdn Bhd is facing a high cost of goods sold in their income statement due to low quality and less quantity of CPO delivered by Palm Haul Sdn Bhd (PHSB) to their refinery. Higher COGS will diminish sales generated.

1. THE PROBLEM

PROBLEM 1:

Due to shortage of CPO delivered to Oilene refinery because of oil piracy, this will decrease the inventory of Oilene and cost of goods sold will increase. So gross profit will be decrease and after deducting all the operating expenses, net profit will also decrease. Maybe this happened due to lack of monitoring of business activities by Oilene.

Solution:

To overcome this problem, it is important for Oilene to adopt new procedure by controlling their inventory. Inventory is significant asset and for many companies the largest asset. Inventory is central to main activity of merchandising and manufacturing companies. Mistake in determining inventory cost can cause critical errors in financial statement. Inventory must be protected from external risks(especially theft) and internal fraud by employees. A perpetual inventory system is especially useful when inventory consists of items with high unit values such as palm oil or when it is important to have adequate but not excessive inventory levels.

Perpetual inventory systems require detailed accounting records and therefore tend to be more costly to implement and maintain than periodic systems. Computer technology has made perpetual inventory systems more popular today than ever before.

Theft and pilferage, breakage and other physical damage, mis-orders and miss-fills, and inadequate inventory supervision practices must be dealt with regardless of the type of inventory accounting system.

There are several method related for inventory control can be implemented by oilene:

1) First-In, First-Out

The first-in, first-out (FIFO) method treats the first goods purchased or manufactured as the first units cost out on sale or issuance. Goods sold (or issued) are valued at the oldest unit costs, and goods remaining in inventory are valued at the most recent unit cost amounts.

2) Last-In, First-Out

The last-in, first-out (LIFO) method of inventory costing matches inventory valued at the most recent unit acquisition cost with current sales revenue.

3) Average cost methods

Provide inventory and cost of goods sold amounts between the LIFO and FIFO extremes, and is the next best thing to LIFO for income and tax minimization when inventory costs are rising.

4) Just In Time Method

Just in time (JIT) is a production strategy that strives to improve a business' return on investment by reducing in-process inventory and associated carrying costs. Just in time is a type of operations management approach which originated in Japan in the 1950s. It was adopted by Toyota and other Japanese manufacturing firms, with excellent results: Toyota and other companies that adopted the approach ended up raising productivity (through the elimination of waste) significantly.

The philosophy of JIT is simple: the storage of unused inventory is a waste of resources. The key to this success is by continuous monitoring of demand and supply in real time. The orientation is demand driven by the market instead of supply driven by vendors. The planning in done by the order placed instead of forecast and the production size is smaller as its demand driven instead of large batch production. Quality control is done by line workers and eliminates the needs of additional cost of hiring a quality control staff. And finally it has very low inventory which means less cash in the form of goods instead of a conventional model with heavy stocks.

Main benefits of JIT to Oilene:

• Reduce cost operation delivery (transportation) and overcome oil piracy issue
• Quality CFO is increased and guaranteed.
• The cost of providing or leasing warehouse can be reduced.
• reduce storage losses as a result of the long stock market prices fluctuated
• Employees with multiple skills are used more efficiently. Having employees trained to work on different parts of the process allows companies to move workers where they are needed.
• Production scheduling and work hour consistency synchronized with demand. If there is no demand for a product at the time, it is not made. This saves the company money, either by not having to pay workers overtime or by having them focus on other work or participate in training.
• Increased emphasis on supplier relationships. A company without inventory does not want a supply system problem that creates a part shortage. This makes supplier relationships extremely important.
• Supplies come in at regular intervals throughout the production day. Supply is synchronized with production demand and the optimal amount of inventory is on hand at any time.

Other Possible Solutions:

1. To insert several requirements for the CPO consignment contract from the millers and as follows:-

1. Certified Transportation Company with a good track record (tankers are clean to avoid cross contamination).
2. Tankers from the transportation company are well equipped (tanks are insulated to be in isothermal condition and blanketing with inert gas to reduce oxidation).
3. Tankers must be equipped and registered with current tracking fleet management systems and specified route.

1. Increase CPO consignment quantity.

- To avoid shortage of CPO, the quantity required should be increase.

- Refineries have several CPO storage tanks with a standard volume of 200 MT to 1000 MT.

- The capacity of refineries processing plant is in the range of 300 MT/day to 2000 MT/day.

- The refineries processing plant is continuous therefore excess of CPO is a requirement.

1. Outsource CPO supply from the other palm oil millers.

- Perak has 46 palm oil millers which 14 of those are operated in the north.

- Pulau Pinang has 2 palm oil mills and Kedah has 6 palm oil mills.