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Executive Summary ........................................................................................................................ 1 1.0 Introduction ............................................................................................................................... 2 2.0 Main issue ................................................................................................................................. 3 3.0 Analysis and Discussion ........................................................................................................... 4 3.1 SWOT Analysis..................................................................................................................... 4 Selling price from Cold Cuts ................................................................................................... 5 Cold Cut Singapore Annual Sales and Margin ........................................................................ 5 3.2 Target Costing ....................................................................................................................... 6 3.3 Cost Volume Profit Analysis (CVP) ..................................................................................... 7 3.4 Financial Analysis ................................................................................................................. 8 3.5 Technology Analysis ............................................................................................................. 8 3.6 Payback analysis- machine.................................................................................................... 9 3.7 Ethical analysis ...................................................................................................................... 9 3.8 Analysis on Anti-dumping Tax ........................................................................................... 10 4.0 Recommendation .................................................................................................................... 13 4.1 Just In Time Manufacturing ................................................................................................ 13 4.2 Lean Manufacturing ............................................................................................................ 15 4.3 Convince the client .............................................................................................................. 15 4.4 Take actions towards the person who proposed the bribe ................................................... 16 4.5 Ignore the bribe ................................................................................................................... 16 4.6 Seek for legal advices .......................................................................................................... 17 5.0 Reference ................................................................................................................................ 20
Table 1 SWOT Analysis on Cold Cuts Ltd .................................................................................... 4 Table 2 Cold Cuts Ltds Selling Price ............................................................................................ 5 Table 3 Annual Sales and Margin ................................................................................................... 5
Figure 1 Just In Time Manufacturing ........................................................................................... 13 Figure 2 Lean Manufacturing Tools ............................................................................................. 15
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 Ltds 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 Convince the client Take actions toward the person who proposed bribe Ignore the bribe Seek for legal advices
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 companys current performance. These observations do have limitations which will be noted.
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.
Weaknesses refrigeration Selling price higher than competitors Do not have proper price strategy The cost of manufacturing is higher No proper knowledge on
Develops own products Fuzzy Frost Alpha system Exported product worldwide Only Singaporean supplier for FFA technology Enable perishable items to be stored far longer than conventional fridges
antidumping
similar products with cheaper price Bribery Will lose the biggest customer
Selling price from Cold Cuts Secconz European customers Per Unit ($) Per Unit ($)
Direct materials Direct labour Direct costs Factory overheads Manufacturing cost Margin before machinery depreciation
40 10 50 8 58 and 82
40 10 50 8 58 42
administration costs Selling price from Cold Cuts 140 100 Table 2 Cold Cuts Ltds Selling Price
Cold Cut Singapore Annual Sales and Margin Annual Sales Units Selling Price ($) Secconz European customers 8,500,000 Table 3 Annual Sales and Margin 4,150,000 25,000 50,000 140 100 Total ($) 3,500,000 5,000,000 25,000 50,000 Margin Units Unit price Total ($) 82 42 ($) 2,050,000 2,100,000
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.
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.
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.
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.
Dumping is defined in the Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trades (GATT) 1994 as the introduction of a product into the commerce of another country at less than its normal value. Under Article VI of GATT 1994, WTO Members can impose anti-dumping measures, if, after investigation in accordance with the Agreement, a determination is made (a) that dumping is occurring, (b) that the domestic industry producing the like product in the importing country is suffering material injury, and (c) that there is a causal link between the two. In addition to substantive rules governing the determination of dumping, injury, and causal link, the Agreement sets forth detailed procedural rules for the initiation and conduct of investigations, the imposition of measures, and the duration and review of measures.
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An anti-dumping measure shall be applied only under the circumstances provided for in Article VI of GATT 1994 and pursuant to investigations initiated and conducted in accordance with the provisions of this Agreement. Below are the criteria that determine whether Cold Cuts Ltd break the law or not. a) A fair comparison shall be made between the export price and the normal value. This comparison shall be made at the same level of trade, normally at the ex-factory level, and in respect of sales made at as nearly as possible the same time. Due allowance shall be made in each case, on its merits, for differences which affect price comparability, including differences in conditions and terms of sale, taxation, levels of trade, quantities, physical characteristics, and any other differences which are also demonstrated to affect price comparability. The authorities shall indicate to the parties in question what information is necessary to ensure a fair comparison and shall not impose an unreasonable burden of proof on those parties.
b) Determining injury The Agreement defines the term injury to mean either (i) material injury to a domestic industry, (ii) threat of material injury to a domestic industry, or (iii) material retardation of the establishment of a domestic industry, but is silent on the evaluation of material retardation of the establishment of a domestic industry.
Under the Anti-dumping Agreement, imposition of an anti-dumping duty requires that the investigating authority have evidence not only to substantiate dumping, but also to prove that the dumping has resulted in injury to a competing domestic industry in the importing country. Moreover, dumping may result in benefits to consumers in the form of lowerpriced goods and is thus not an entirely deleterious practice. Under the terms of the GATT, a country can take action against dumping only when there is a factual finding of injury to an industry in an importing country. Anti-dumping Agreement contains more detailed rules on determinations of injury. It is difficult to develop a general quantitative standard to measure the extent of injury that has occurred. Specifically, CC must ensure that sufficient evidence is considered when determining injury, that there is sufficient
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proof of causality between dumping and injury and that there is no potential for injury from other factors unrelated to dumping imports to be counted in with dumping injury. The result of the analysis: Basis Explanation Break or comply
A fair comparison shall be We do not have enough It is hard to decide whether made between the export financial price and the normal value. information to CC comply or break the
determine whether CC sells anti-dumping law because its product at higher prices we cannot calculate the fair in China. Furthermore, price comparison. If the
factory in China produces domestic price is lower than old technology product. We export price, CC is
do not have information on complying with the law. that. Determining injury Based on the analysis, CC CC complies with the law did not cause any injury to because it is not cause any the domestic industry, injury.
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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.
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.
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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.
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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.
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4.4 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.
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.
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2. Consideration of price effects of dumped imports In addition, the Agreement requires investigating authorities to consider whether there has been significant price undercutting by the dumped imports as compared with the price of a like product of the importing Member. Investigating authorities are also required to consider whether the effect of dumped imports is otherwise to depress prices to a significant degree, or to prevent price increases, which otherwise would have occurred to a significant degree.
3. Evaluation of volume and price effects of dumped imports The Agreement provides that no one or several of these factors can necessarily give decisive guidance. It does not specify how the investigating authorities are to evaluate the volume and price effects of dumped imports: merely that consideration of these effects is required. Thus, investigating authorities have to develop analytical methods for undertaking the consideration of these factors. Moreover, since no single factor or combination of factors will necessarily result in either an affirmative or negative determination, in each case investigating authorities have to evaluate which factors are relevant, and which are important, in light of the circumstances of the particular case at issue.
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4. Examination of impact of dumped imports on the domestic industry The Agreement provides that, in examining the impact of dumped imports on the domestic industry, the authorities are to evaluate all relevant economic factors bearing upon the state of the domestic industry. The Agreement lists a number of factors which must be considered, including actual or potential declines in sales, profits, output, market share, productivity, return on investments, utilization of capacity, actual or potential effects on cash flow, inventories, employment, wages, growth, ability to raise capital or investments, and the magnitude of the margin of dumping. However, the list is not exhaustive, and other factors may be deemed relevant. In addition, the Agreement again specifies that no single factor or combination of factors will necessarily lead to either an affirmative or negative determination.
5. Demonstration of causal link The Agreement requires a demonstration that there is a causal relationship between the dumped imports and the injury to the domestic industry. This demonstration must be based on an examination of all relevant evidence. The Agreement does not specify particular factors or give guidance in how relevant evidence is to be evaluated. Article 3.5 does require, however, that known factors other than dumped imports which may be causing injury must be examined, gives examples of factors (such as changes in the pattern of demand, and developments in technology) which may be relevant, and specifies that injury caused by such other factors must not be attributed to dumped imports. Thus, the investigating authorities must develop analytical methods for determining what evidence is or may be relevant in a particular case, and for evaluating that evidence, taking account of other factors which may be causing injury.
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6. Cumulative analysis Cumulative analysis refers to the consideration of dumped imports from more than one country on a combined basis in assessing whether dumped imports cause injury to the domestic industry. Obviously, since such analysis will increase the volume of imports whose impact is being considered, there is a greater possibility of an affirmative determination in a case involving cumulative analysis. The practice of cumulative analysis was the subject of much controversy under the Tokyo Round Code, and in the negotiations for the Agreement. Article 3.3 of the Agreement establishes the conditions in which a cumulative evaluation of the effects of dumped imports from more than one country may be undertaken. The authorities must determine that the margin of dumping from each country is not de minimis, that the volume of imports from each country is not negligible, and that a cumulative assessment is appropriate in light of the conditions of competition among the imports and between the imports and the domestic like product. De minimis dumping margins and negligible import volumes are defined in the Agreement..
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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]
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