1.

0 INTRODUCTION

Penda Cable Industry Sdn Bhd, which in further of this report will be known as PCI was
founded in 1957. Their core business is manufacturing and distribution of a wide range of
power cables. Its vision was to be a global leader in cabling solutions and energy related
business by 2020 and be committed to excellence in their products and services by adopting
continuous improvement, quality work culture, expertise and technology. The cable and wire
industry was basically domestic market-oriented and mainly for power distribution. As shown
in figure 1 below, PCI had a two-tier organization structure consisting of its General Managers
and Chief Officers. The profit of the company for the year 2006 was 9.2 million ringgit while
in the year 2007, it was 32.6 million ringgit which shows that the profit of the organization has
increased by 41 million ringgit.

This case discusses issues on purchasing system in a manufacturing company, Penda Cable
Industries Berhad (PCI). The issue started on February 2008 when the Managing Director of
PCI Sdn Bhd, En Ghani reviewed 2007 Financial Report and found out there were recent
increases in costs of goods sold and inventories. The rate of increase in costs of goods sold had
been disproportionate with growth of sales. En Ghani was informed that one of the reasons for
the increase in cost was because of the current purchasing system that contributes to redundant
purchasing and high inventory holding costs.

Siti Aminah, the Chief of Financial Officer was asked to review the current purchasing
system and suggested the need to implement a new computerized purchasing system that would
help relieve some of its manual operations and at the same time would ensure it has the proper
controls in place. En Ghani requested a formal report on current purchasing system and
suggestion for a new system before the next management meeting which would be in two
weeks’ time. En Ghani assigned Siti Aminah on the special task instead of the senior Chief
Production Officer and she did not have any experience in system and technology. The new
system must be able to reduce costs, enhance control and provide easy management of users
and services in qualitative and quantitative ways.

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 The main characters involved in this case is firstly En Ghani as the new appointed
Managing Director of Penda Cable Industry Berhad, who reviewed past year Financial
Report and asked for formal report from Siti Aminah. Next is Siti Aminah the newly
appointed Chief of Financial Officer that is being asked to make formal report instead of
the Senior Chief of Financial Officer.

Figure 1: PCI Organization Structure

Encik Ghani
Managing Director

Encik Yusof Encik Azman Cik Siti Aminah

Chief Human Chief Production Officer Chief Financial Officer
Resources & Admin

Cik Lim
General Manager Material
Resource Planning
Encik Sam Cik Aliah
General Manager Finance Manager
Purchasing

Encik Min
Raw Material Storekeeper

Encik Razi Encik Fauzan

Assistant Purchasing Assistant Finance
Manager Manager

Encik Faris
Cik Anne Finance Clerk
Purchasing Clerk

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2.0 OBJECTIVE OF THE CASE

1. To demonstrate how cultural norms and values can impact the development and evolution
of a nation’s or geographic region’s financial reporting system, accounting profession,
and independent audit function.
2. To provide students with a better understanding of the global accounting profession.
3. To introduce students to unique challenges faced by independent auditors around the
globe.

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3.0 FLOW CHART OF THE PURCHASING SYSTEM

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4.0 S.W.O.T. ANALYSIS

4.1 Definition and Explanation

The SWOT analysis helps organizations assess issues within and outside the
organization. The SWOT analysis, made up of an assessment of strengths, weaknesses,
external opportunities and threats from competition, provides an outline for strategic
decision-making. Small businesses, large corporations and individuals can utilize the
SWOT analysis process for evaluation. By adding a SWOT analysis in their business
plans, small businesses can better clarify their short- and long-range strategies. The
SWOT analysis, often found in marketing plans, becomes a useful tool for planning
and competitive analysis. Organizations often provide a SWOT analysis in a chart
format with each segment represented in a different quadrant. Although so, in this case,
I am just going to list each segment.

4.2 Strength

1. Continuous improvement
2. Quality work culture, expertise and technology
3. Revenue and profit growth (121m, 41m) - saving in administrative expenses (6m)
4. Accumulated losses reduced by 33m
5. Material for sheath will be selected for resistance to water, oil, sunlit, underground
conditions, chemical vapors, impact or high temperature
6. Cables have special requirements for ionizing radiation resistance for nuclear
industry application
7. Manufactures various types of pilot cables according to Tenaga National Berhad
(TNB) standard specification
8. Capable to manufacture Supplier Self Service (SUS) type and Slotted type of
Optical Ground Wire (OPGW)
9. Memorandum of understanding with Preformed Line Products (PLP) Australia,
supply all types of accessories of OPGW
10. Large capacities: 3600km of Power Cables and overhead aluminium conductors,
10000 metric ton of Aluminium Rods and 1400 km of OPGW conductors.

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 11. Two-tier structure create proper checks and balances to simplify governance

4.3 Weakness

1. Increases in costs of goods sold (85m) and inventories (18m) disproportionate with
growth of sales
2. Current purchasing system contributed to redundant purchasing and high inventory
holding costs
3. Siti Aminah (CFO) has no experience in system and technology
4. Internal control weaknesses:
a) The purchasing clerk, Cik Anne should not have received the invoice and DO.
b) There is no copy of PO being sent to vendor, Receiving Department and AP.
c) The Materials Resource Planning, Cik Lim should not update AP. The liability
should be recorded by another clerk from Finance Department.
d) The Finance Clerk, Encik Faris should not prepare cheque. Payments to
suppliers can only be authorized by AP. Voucher should be prepared by the one
who updated account payable. This is to ensure the payment of bills is
authorized by account payables not the finance clerk, who writes the checks.

4.4 Opportunity

1. E-procurement system: present e-procurement technology would help purchasing

departments order, track and manage supply purchases over the Internet
2. Strategic sourcing: reduced the total cost of purchases through a structured approach
that leveraged the combined purchasing power and practices of all business units in the
company.
3. Comprehensive review of supply chain process: forming cross-functional teams to
determine business needs and creating supply wish list that can be pursued in unison
with the suppliers

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 4.5 Threats

1. More than 135 competitors in Malaysia, major local cable manufacturers: Leader
Cable, Tenaga Cable, Power Cable and Supercomal.
2. Elektrisola: most advanced fine enamelled copper wire manufacturing plant in the
world; foreign-owned and export-oriented.
3. Have to establish and maintain profitable supplier relationship while pressuring
supplier keep their price low
4. Price of raw materials increase > suppliers pass on any increased cost in the form of
higher prices to the purchaser (PCI)
5. Have to ensure supply quality

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5.0 ISSUES AND RECOMMENDATIONS

5.1 Purchasing System Issue

Current purchasing system contributed to redundant purchasing and high inventory holding
costs and caused increases in costs of goods sold and inventories disproportionate with
growth of sales. A few issues in the company’s internal control contributed to this, firstly,
the purchasing clerk, Cik Anne should not have received the invoice and DO. Next, there
is no copy of PO being sent to vendor, Receiving Department and AP. Thirdly, the
Materials Resource Planning, Cik Lim should not update AP. The liability should be
recorded by another clerk from Finance Department. And finally, the Finance Clerk, Encik
Faris should not prepare cheque. Payments to suppliers can only be authorized by AP.
Voucher should be prepared by the one who updated account payable. This is to ensure the
payment of bills is authorized by account payables not the finance clerk, who writes the
checks. An additional issue is that the Purchasing System is done Manually which could
cause human error, high cost, load of paper work, takes a longer process time and the
employee being reluctant to change due to becoming too dependent towards the manual
system.

Due to this issue firstly, there will be a manipulation of accounts and misuse of
cash. Next, without a copy of PO, vendor, Receiving Department and AP cannot review
and make comparison. And finally, there will be unauthorized payment could be made to
vendor. If the issue is not rectified, if Cik Anne prepare the PO, she can order raw material
without authorization. This is because she is the one who ordering raw materials and check
the invoice. Besides that, the quantities received may not be the same as the quantities
ordered because there is no document for them to make verification. Additionally, if Cik
Lim updates the AP, she can manipulate the materials resources figure because she is the
one who approve the MRMS. Finally, if Encik Faris prepares the voucher and cheque,
unauthorized cheque could be made to vendor. Additionally, by using the manual
purchasing system, the possibility of error is high, it could consume more time, there will
be an increase in cost from time to time depending on number of work task, low profit due
to high cost, tracing and verification will become difficult to be carried out and finally there

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 will be lots of paper work that should be filed and stored.

Due to this issue, I would recommend, that the DO should be sent to Receiving
Department, then Receiving Department will issue SRN and send it to Purchasing
Department and AP Department; invoice should be sent to Account Payable Department
where the clerk in Account Payable Department is responsible to reconcile the information.
Three copies of PO should send to vendor, Receiving Department and AP. This is to make
sure there is independent verification. Next, a clerk from Finance Department should be
responsible to update AP. This is to make sure there won’t be any misappropriation of cash
or manipulation of accounts. The cheque and voucher should be prepared by two different
clerks from AP. This is because the payment to supplier should be authorized by AP.
Lastly, PCI Sdn Bhd is recommended to implement a new computerized purchasing
system. When inventories are reduced by sales to customers or usage in production, the
system determines if the affected items have fallen to their reorder points. The computer
program will then identifies inventory requirements and prepares traditional PR. This is
able to reduce unnecessary orders that lead to high inventory holding costs. Before the
implementation of a new system, the company should train their employee to use new
system and assign task to employees based on experience and their capabilities as well.

5.2 Purchasing Procedure Issue

The difference between processes and procedures can be summed up as breadth and depth.
A process defines the big picture and highlights the main elements of your business–
breadth. A procedure captures those elements and adds more information for functional
responsibilities, objectives, and methods–depth.

Firstly, the issuance of Monthly Material Requirement (MMR) is not authorized by

the general manager. Instead, it was being sent directly to Encik Razi, the Assistant
Purchasing manager for the Monthly Raw Material Summary preparation. For this, I would
recommend that the authorization by General Manager must be obtained for Monthly
Material Requirement (MMR) and endorsed by the planning section. This is to avoid any
fraud to happen from the planning section or En Razi itself.

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 Next issue is that the procedures for calling the vendor to submit the quotation is
not precise instead, the vendors are called by Encik Razi through facsimile, e-mail, or by
telephone without proper authorization by the general manager on the submitted quotation.
This will lead to the fraud or pravitism made by En Razi. To this issue, I would recommend,
the procedures on calling the available vendors should be made available and have a proper
authorization to avoid pravitism done by the assistant manager.

5.3 Asset and Record Safety Issue

The issue found here is that the Store Received Note (SRN), Monthly Material
Requirement (MMR) and Voucher Certificate Action Request (VCAR) are not pre-
numbered as for safety and archive purpose. Instead, it just been submitted to the person
or department that need the document and if it necessary. For this, I would recommend
that, documents such as SRN, Raw Material Received Report (RMRR), and VCAR should
be pre-numbered correctly for the safety of the documents and avoid from any error in the
future.

5.4 Segregation of Duties Issue

Segregation of Duties (SOD) is a basic building block of sustainable risk management and
internal controls for a business. The principle of SOD is based on shared responsibilities
of a key process that disperses the critical functions of that process to more than one person
or department. Without this separation in key processes, fraud and error risks are far less
manageable. Imagine what would happen if the keys, lock and code for a nuclear weapons
system were all in the hands of one person! Emotions, coercion, blackmail, fraud, human
error and disinformation could cause grave and expensive one-sided actions that can’t be
corrected.

In this case, the first problem would be when the calling for quotation, evaluating
the quotation and purchase order generation are solely done by the assistant purchase
manager, Encik Razi. There is too much task that given to En Razi which can cause
depression and fraud since there is no one else who are doing the job. Thus in my opinion,
the task should be done by different people at the different level of staff. For an example,

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 calling for quotation should be done by other qualified staff and being authorized by En
Razi, the evaluating for the quotation can be done by En Razi and purchase order generation
can be done by other staffs under general manager supervision just like Encik Sam.

Another issue is the received on material required and raw material store are solely
done by the storekeeper, En Min under the same department. To solve this issue, the
receiving department should be established and be separated from the raw material store
and also appoint another staff in the new receiving department. This is to avoid from
confusion and error on the material received since the En Min take the responsibility on
the material required as well as the store.

Besides that, the material stored at the store does not have any proper inventory
reconciliation that should be made by material department. Thus, the reconciliation should
be made at the end of each month before issuing the MMR by the planning department in
order to avoid material theft and also to make sure only necessary purchase be made by the
department.

Additionally, the cheque and voucher preparation done by the same account clerk,
Encik Faris. This problem can brings to fraud on the company’s money especially when it
did not been supervised by the manager. To resolve this, cheque and voucher should be
done or prepared by the different account clerk and be check first by the supervisor before
it being sent to the general manager and assistant finance will approved on the amount in
the cheque and voucher.

The final issue is, there is no committee being setup for the approval on the purchase
of materials in the purchasing department. Thus, a committee of quotation approval should
be set up by the company so that, the approval not only solely made by the manager of his
interest

-
5.5 Supply Chain Issue

A supply chain is a network between a company and its suppliers to produce and distribute
a specific product, and the supply chain represents the steps it takes to get the product or

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 service to the customer. Supply chain management is a crucial process because an
optimized supply chain results in lower costs and a faster production cycle.

PCI Sdn Bhd have been having some issues as stated below:-

i. Have to establish and maintain profitable supplier relationship while pressuring

supplier keep their price low
ii. Price of raw materials increase whereby suppliers pass on any increased cost of raw
material in the form of higher prices to the purchaser (PCI)
iii. Have to ensure supply quality as it is hard to monitor it
iv. Company's dilemma in establishing & maintaining profitable supplier relationship
v. No centralized supplier selection

Due to the above listed issues, it has caused incurring high costs in maintaining good
relationship with supplier and also maintaining high raw material quality, the need to pass
on the increased costs to customers, they are unprotected against price fluctuation which
affects company's products price and quality, low customer satisfaction, bad image that
lowers company reputation and finally losses of stakeholders' confidence.

But if nothing is done to resolve the issue, then the company will be unable to obtain raw
materials at the best price and quality. May be end up paying more than the going market
rate if the supplier is not working with them and not operating in a competitive
environment. Inventories can gradually creep up, particularly the slow moving and
obsolescent items are not regularly reviewed. If supplier does not regularly communicate
with the people at the coalface, in situations where goods are ordered from a number of
locations by a large number of people it can be very difficult to ensure that they are in
compliance with procedures. Besides that, customer need to pay higher price, might switch
to competitor’s product and the quality issue may reduce customer satisfaction and affect
customer loyalty.

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 To solve the issue, I would recommend the company to have a long term agreement with
the suppliers which can help save costs in production process or administration, attain
quality control procedures whereby they would do comprehensive review of supply chain
process, create a supply wish list and also do strategic sourcing. Additionally, the company
can also practice separate purchasing contracts for service parts. Besides that, they could
also form cross-functional teams and commodity teams to determine business needs.

5.6 Documentation Issue

In computer hardware and software product development, documentation is the
information that describes the product to its users. It consists of the product technical
manuals and online information including online versions of the technical manuals and
help facility descriptions. The term is also sometimes used to mean the source information
about the product contained in design documents, detailed code comments, white papers,
and blackboard session notes.

The first issue found is that the purchasing clerk, Cik Anne did not attach the
purchase order together with the set of invoice, SRN, delivery order sent to the financing
department meant for payment preparation to the vendor. Thus, I would recommend, the
purchase order should be attached and sent to the finance department with the set of invoice
before arrangement for payment being made to the vendor or supplier. This is done to make
sure on the actual total of the delivery material and the actual payment that should be made
so that, there is no fraud happened if it been checked with the invoices.

Another issue is that the carbon copy for cheque sent to vendor was not being filed
by the finance clerk, En Faris. This could cause the problem to the company if the vendors
claimed for any unpaid materials and the finance department could not find any evidence
such as the copy of cheque to show they have already paid the materials ordered. Due to
this, I would recommend, the carbon copy should be kept and filed by serial number or
pre-numbered by the finance department as for reference for the company if needed.

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 5.7 Highly Competitive Industry Issue
This is an issue which is commonly faced by most companies in the world. In this case,
there are more than 135 companies were competing with PCI Sdn Bhd in producing
electrical components in Malaysia. Major local cable manufactures in Malaysia are
including Leader Cable, Tenaga Cable, Power Cable and Supercomal. Besides that,
Elektrisola owns an enamelled copper manufacturing plant in Bentong, which is the most
advanced in the world. By this, PCI Sdn Bhd lies in such high competitive environment to
compete with its competitors.

This can cause for there to be the present of many competitors which will eventually
cause them to lower down their price. In other words there would be a price war which is
a market situation in which, usually two, powerful competitors try to usurp each other's
market share by progressively reducing prices until one of them retreats, at least
temporarily where would eventually allow the companies to produce low quality of
products. Due to the high competition in the industry, PCI Sdn Bhd might have to lower
their price in order to compete with others and eventually lead to a price war in the industry.
This may lead to low quality of products being produced as company started to look for
cheaper raw materials with the hope of cutting down their production cost and products
can be selling at a cheaper price. Thus, the quality of product is being compromised.

Although so, if the issue is not resolved, there is no customer satisfaction and the
company will lose their target market. Living in such highly competitive industry, PCI Sdn
Bhd is mandatory to come out a better and useful strategy to tackle all the competitors in
order to survive and earns better profits. If PCI Sdn Bhd failed to come out a better strategy
to overcome the issue, PCI Sdn Bhd will lose its target market to the competitors. As price
war continues and low quality of products being produced, customers’ satisfaction might
reduce and all the manufacturers may earn a lower profit. Thus, they may fall into a lose
situation. And it will eventually lead to the company being unable to invest in the foreign
market. Even PCI Sdn Bhd able to expand to the foreign market, there might be high risk
occur. Thus, there might be a huge losses incur in PCI Sdn Bhd.

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 To solve the issue, I would firstly recommend a differentiation strategy whereby
PCI Sdn Bhd should have a well-planned strategy in order compete with their competitors,
such as differentiation strategy. By using the differentiation strategy, PCI Sdn Bhd will be
able to produce products which are different from its competitors in terms of feature, design
and quality. Competitive advantage over others manufacturer might be achieved by
implementing the differentiation strategy. It will help to attract and retain customers,
increase revenue and profitability. Besides that, PCI Sdn Bhd should invest in research and
development. Understand the competitors are important in order to expand their market,
especially those world class manufacturers, such as Elektrisola. The company have to know
what and how should they compete with others. Risk of investment into the foreign market
might be reduced if there is appropriate research and development being done by the
company.

5.8 Siti Aminah (CFO) – lack of experience in system & technology

As stated in the case, Siti Aminah is the newly assigned Chief Financial Officer but
unfortunately she is lacking of experience in system and technology. Due to this, she may
have difficulty in identifying the weaknesses in the current system. She doesn’t have the
ability to develop a new system to deal with the weaknesses in the current system and she
would be unable to solve the current issues and the increasing costs of goods sold and
inventories will result in continuing losses.

To resolve this, Siti could recruit consultants who are the expert in the field of
system and technology. Together with the consultants, Siti and explain the current issues
to them and develop a new purchasing system to solve the problem.

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6.0 FINANCIAL RATIO ANALYSIS

6.1 Liquidity Ratio

Liquidity ratios are measurements used to examine the ability of an organization to
pay off its short-term obligations. Liquidity ratios are commonly used by prospective
creditors and lenders to decide whether to extend credit or debt, respectively, to
companies. These ratios compare various combinations of relatively liquid assets to
the amount of current liabilities stated on an organization's most recent balance sheet.
The higher the ratio, the better the ability of a firm of pay off its obligations in a timely
manner.

6.1.1 Current ratio

This ratio compares current assets to current liabilities. Its main flaw is
that it includes inventory as a current asset. Inventory may not be that
easy to convert into cash, and so may not be a good indicator of liquidity.

Current Asset
Current Ratio =
Current Liability

In this case, there is an increase in the current ratio from 0.73 times in 2006 to 1.15
times in 2007 which indicates that, there is more current asset to cover current
liabilities in 2007 compared to in 2006. Therefore, PCI should taking more
discounts so that they are able to reduce their current liabilities and pay their
current liabilities on time.

6.1.2 Quick ratio

This is the same as the current ratio, but excludes inventory.
Consequently, most remaining assets should be readily convertible into
cash within a short period of time.

Current Asset - Inventory

Quick Ratio =
Current Liability

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 From this case, the quick ratio has a less than 1 that indicates the company
will not be able to pay its immediate obligations and therefore should be
looked at with caution. Besides, as compared to the current ratio, quick ratio
of PCI Sdn Bhd is much lower that means that their current asset is highly
dependent on the inventory that will lead to the overstocking problem. Even
though quick ratio in 2007 is 0.5 which is higher than 0.27 in 2006, it still
indicates that PCI Sdn Bhd has problems in settling their obligations
because it still possesses high asset. Thus, they should reduce their
inventory by conducting more promotion or advertisement on their sales.

6.2 Profitability Ratio

Profitability ratios are financial metrics used by analysts and investors to measure and
evaluate the ability of a company to generate income (profit) relative to revenue, balance
sheet assets, operating costs, and shareholders’ equity during a specific period of time.
They show how well a company utilizes its assets to produce profit and value to
shareholders.

6.2.1 Gross Profit Margin

Gross Profit Margin compares gross profit to sales revenue. This shows how much a
business is earning, taking into account the needed costs to produce its goods and services.
A high gross profit margin ratio reflects a higher efficiency of core operations, meaning it
can still cover operating expenses, fixed costs, dividends, and depreciation, while also
providing net earnings to the business. On the other hand, a low profit margin indicates a
high cost of goods sold, which can be attributed to adverse purchasing policies, low selling
prices, low sales, stiff market competition, or wrong sales promotion policies.

Gross Profit Sales - Cost of Goods Sold

=
Margin Sales

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 While, for the PCI Sdn Bhd, their gross profit margin has much increase compared to the
last year which are from 6.83% on 2006 to 16.12% on the year 2007. This indicates that,
the company is making RM 0.60 gross profit for every RM1 sale being made. This can be
explained that, the more cents are earned per ringgit of revenue which is favorable because
more profit will be available to cover the non-production costs. However, since the ideal
percentage of positive gross profit margin is 20% to 40%, this indicates that the gross profit
margin of the company is still quite low. Therefore, in order to get a positive gross profit
margin, the company can make a few improvements such as changing their supplier to
lower cost of suppliers, reduce their labor costs, reduce their production wastage as well as
review their company’s pricing policy.

6.2.2 Net Profit Margin

Net profit margin is the ratio of net profits to revenues for a company or business
segment. Typically expressed as a percentage, net profit margins show how much
of each dollar collected by a company as revenue translates into profit.

Net Profit
Net Profit Margin =
Revenue

The net profit margin for PCI Sdn bhd in 2007 is higher compared to 2006 which
are from -5% to 11%. The 11% or net profit margin means that the company has a
net income of RM0.11 for each ringgit of sales, which means that the company
made more money than it spent. While, the -5% net profit margin indicates that the
company have a loss of RM0.05 for each ringgit of sales, which means that the
company spent more than it made.

6.2.3 Return on assets (ROA)

Return on assets (ROA), as the name suggests, shows the percentage of net earnings
relative to the company’s total assets. The ROA ratio specifically reveals how much
after-tax profit a company generates for every one dollar of assets it holds. It also
measures the asset intensity of a business. The lower the profit per dollar of assets,
the more asset-intensive a company is considered to be. Highly asset-intensive

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 companies require big investments to purchase machinery and equipment in order
to generate income.

Net Income
Return on Assets (ROA) =
Total Assets

The ROA of the PCI’s company is increase from -8.71% in 2006 to 25.21% in 2007
that indicates that the company is earning RM0.25 from each dollar of assets the
company controls. Therefore, since the company has a huge increase in their ROA
compared to the previous year, this is saying that the company is earning more
money on its assets or has effectively turned its investments into profits in 2007.

6.2.4 Return on equity (ROE)

Return on equity (ROE) expresses the percentage of net income relative to

stockholders’ equity, or the rate of return on the money that equity investors
have put into the business. The ROE ratio is one that is particularly watched
by stock analysts and investors. A favorably high ROE ratio is often cited
as a reason to purchase a company’s stock. Companies with a high return
on equity are usually more capable of generating cash internally, and
therefore less dependent on debt financing.

Net Income
Return on Equity (ROE) =
Shareholder's Equity

From the cased, the return on equity for the year 2007 is slightly lower than
2006 which are from 78% to 73% in year 2007. The 73% means that the
company generated of RM0.73 of profit for every RM1 of shareholders’
equity while the 78% means that the company generated of RM0.78 of
profit for every RM1 of shareholders’ equity in 2006. Therefore, it indicates
that, the company is slightly less profitable in 2007 compared to 2006.

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 However, it is not a cause for concern since the reduction in the return of
equity is not below 15%. Therefore, the company should have done any
improvement ti maintain its return of equity such as reducing their tax
obligation, increasing their sales turnover, increasing their profit margin as
well as switching to cheaper financing options.

6.3 Debt Ratio

The debt ratio quantifies how leveraged a company is, and a company's degree
of leverage is often a measure of risk. When the debt ratio is high, the company has
a lot of debt relative to its assets. It is thus carrying a bigger burden in the sense
that principal and interest payments take a significant amount of the company's cash flows,
and a hiccup in financial performance or a rise in interest rates could result in default. When
the debt ratio is low, principal and interest payments don't command such a large portion
of the company's cash flows, and the company is not as sensitive to changes in business or
interest rates from this perspective. However, a low debt ratio may also indicate that the
company has an opportunity to use leverage as a means of responsibly growing the business
that it is not taking advantage of.

Debt Ratio = Total Debt / Total Assets

From PCI, it shows the decrease in the debt ratio from 88.83% in 2006 to 65.27% in the
year 2007. This shows that about 65% of PCI assets are financed by debt while the
remainder are financed using the shareholders’ equity. However, the percentage of 65%
can still be considered high unless the company can reduced their debt ratio to less than
50%. Therefore, in order to improve, PCI should review their dividend policy and try to
avoid taking any additional debt financing from the other company or investors.

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 6.4 Efficiency Ratio
Efficiency ratios measure the ability of a business to use its assets and liabilities to
generate sales. A highly efficient organization has minimized its net investment in
assets, and so requires less capital and debt in order to remain in operation. In the case
of assets, efficiency ratios compare an aggregated set of assets to sales or the cost of
goods sold. In the case of liabilities, the main efficiency ratio compares payables to
total purchases from suppliers. Efficiency ratios are used to judge the management of
a business. If an asset-related ratio is high, this implies that the management team is
effective in using the minimum amount of assets in relation to a given amount of sales.
Conversely, a low liability-related ratio implies management effectiveness, since
payables are being stretched.

6.4.1 Inventory Turnover

A high turnover rate can be achieved by minimizing inventory levels, using
a just-in-time production system, and using common parts for all products
manufactured, among other methods.

Cost of Goods Sold

Inventory Turnover =
Average Inventory

PCI Sdn Bhd has lower inventory turnover in 2007 with 6.01 times compared to
the year 2006 with 5.49 times which could be cause by the reduction in sales and
also the slow moving inventory in 2007 due to the ineffective sales strategy,
inefficient handling the inventory and does not provide trade discounts to encourage
bulk purchase thus, lead to overstock in the company. Thus, PCI can increase their
inventory handling by introduce an effective stock control system or change its
present methods of ordering stocks as well as do a stock clearance sales.

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 6.4.2 Fixed asset turnover

A high turnover ratio can be achieved by outsourcing the more asset-intensive

production to suppliers, maintaining high equipment utilization levels, and
avoiding investments in excessively expensive equipment.

Sales
Fixed Asset Turnover =
Average Fixed Asset

Fixed Asset Turnover for PCI in 2007 is 8.90 times which is higher than in 2006
that only 4.70 times. This indicates that, PCI is efficient in utilizing its fixed assets
in generating sales in 2007 compared to 2006.

6.4.3 Total Asset Turnover

This ratio tells how many dollars of revenue the company gets relative to the
amount invested in total assets, not just the fixed assets. This includes cash,
receivables, inventory, property, plant and equipment as well as other long-term
assets.

Sales
Total Asset Turnover =
Total Assets

Total assets turnover in year of 2007 is1.67 times which is higher than 2006 that is
2.30 times, that implies that PCI is generating a higher volume of sales with the
given amount of assets in 2007 compared to in 2006.

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 6.4.4 Average Collection Period

The average collection period is the approximate amount of time that it takes for a
business to receive payments owed in terms of accounts receivable.

Accounts Receivables
Average Collection Period =
Net Sales / 365

For PCI, there is a much shorter average collection period in the year of 2007 with
31.56 days compared to 2006 with 10.21 days. This shows that cash collection from
the debtors is faster in 2007 compared to in 2006.

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7.0 NEW SYSTEM RECOMMENDATION

7.1 Just-In-Time System

Just-in-Time, or JIT, is a methodology that helps your business reduce waste in production.
It is geared toward making just what is needed, when it is needed, and only in the amount
needed. When applied to inventory or purchasing, JIT aims to reduce the number of
components or finished goods sitting in the warehouse. A JIT inventory management
system aims to only have parts in inventory that are needed to make enough finished goods
to meet immediate demand. Parts are ordered from the suppliers at the time they are needed;
in turn, they are delivered to the manufacturing floor only when the process that uses the
part needs it. The successful implementation of JIT depends, among other things, on having
reliable suppliers that can work with short lead times. It also involves market research to
support the development of forecasts to predict customer demand. The company must be
able to accurately forecast demand for goods and services for the just-in-time method to be
effective.

By using JIT purchasing system, PCI Sdn Bhd can purchase raw material from the outside
suppliers only as they are needed and they can also reduce the cost of holding space since
the company only order the material only when they need it and based on the customer
order which may improve the quality of product.

7.2 Enterprise Resource Planning (ERP) System

ERP is business process management software that allows an organization to use a system
of integrated applications to manage the business and automate many back office functions
related to technology, services and human resources. An ERP system focuses on the
management of business information, offering a macro view into a company by integrating
disparate systems across functional groups such as procurement, finance, distribution, and
inventory control. Each modules could share information stored in another modules and
could flow from one module to the other. Since modules are connected, the organization
could run a report on any aspects of the business to get a complete view of activities.

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 PCI should implement this system in order to achieve efficiency in their overall
operation especially in the purchasing system. By using the ERP system, from the Planning
Area, they can just sent the monthly requirement to Purchasing Department by using
without just using manual system. Besides that, ERP system also can be used in
communication among suppliers and customer, whereby En Razi can just use the ERP
system to send quotation to the vendors which would save more time in making the
purchase orders. Therefore, ERP system is one of the efficient systems that can be used in
the PCI management system so that they can improve their operation especially in the
purchasing department.

7.3 Electronic Data Interchange (EDI) System

EDI (Electronic Data Interchange) is the transfer of data from one computer system to
another by standardized message formatting, without the need for human intervention. EDI
permits multiple companies to exchange documents electronically. Data can be exchanged
through serial links and peer-to-peer networks, though most exchanges currently rely on
the Internet for connectivity. When sending an EDI document, both parties and trading
partners must adhere to the same set of rules. These standards define where and how the
information from the document will be found. Translation software processes the
information differently for sent and received messages and performs a complete audit of
each step to ensure information is sent or received in EDI format. When the translator on
the receiving computer reads a document, it knows where to find the buyer's company
name, order number, purchase items and price, for example. This information is then sent
to the receiver's order entry system without necessitating manual order entry. EDI applies
to documents such as purchase orders, invoices, shipping notices and commission sales
reports, as well as other important or classified information. For example, an insurance
company can verify that an applicant has a driver's license through an EDI exchange.

PCI is an example of a company that still uses the manual system in making a
purchase order which slows down the processing of the document process and also cause
human errors. Instead, EDI documents can flow straight through to the appropriate
application on the receiver’s computer and processing can begin immediately. The benefit
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 by using EDI system is that cost savings. All the expenses that associated with paper,
printing, reproduction, storage, filing, postage and document retrieval are all reduced or
eliminated when PCI’s company switch to EDI system, that can lowering their transaction
costs by at least 35%. Besides, an error due to illegible faxes, lost orders or incorrectly
taken phone orders are all eliminated that can save the company’s valuable time from
handling data disputes.

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8.0 CONCLUSION

As for conclusion, Siti Aminah can suggest only to maintain their old system instead of new
purchasing system. This is because, the current situation did not incurred too much damage to the
company, the company still can sustain even though they have to buy the raw materials in higher
price. It is not an easy task to implement new system & company stakeholders to accept it but it is
worth taking for to the company to save its cost and improve its performance.

PCI is not the only company that have problem in purchasing their raw materials but all the
purchasing departments across the industry experienced similar dilemma. Their main dilemma
included establishing and maintaining profitable supplier relationships, confronting the problem
of price increases and ensuring supply quantity. What they need actually do is to pressure suppliers
to keep prices low when the cost of raw materials decreases. They can better do this by keeping
their own tabs on the raw materials market.

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9.0 REFERENCE

1. Staff, I. (2017, November 17). SWOT Analysis. Retrieved from

https://www.investopedia.com/terms/s/swot.asp
2. SWOT Analysis: Discover New Opportunities, Manage and Eliminate Threats. (n.d.).
Retrieved from https://www.mindtools.com/pages/article/newTMC_05.htm
3. Yuhay Keyyra, Y. (2017, October 26). Penda Cable Industry Sdn Bhd (PCI). Retrieved
from https://www.youtube.com/watch?v=QrRUNJ7H_KA
4. (n.d.). Wikipedia, the free encyclopedia. Separation of duties - Wikipedia. Retrieved from
http://en.wikipedia.org/wiki/Separation_of_duties
5. (Ed.). (n.d.). Price War. Retrieved from https://www.investopedia.com/terms/p/price-
war.asp
6. (n.d.). Investopedia - Sharper Insight. Smarter Investing.. Profitability Ratios. Retrieved
from http://www.investopedia.com/terms/p/profitabilityratios.asp
7. (n.d.). Investopedia - Sharper Insight. Smarter Investing.. Debt Ratio |
Investopedia. Retrieved from http://www.investopedia.com/terms/d/debtratio.asp
8. (n.d.). Investopedia - Sharper Insight. Smarter Investing.. Efficiency Ratio. Retrieved
from http://www.investopedia.com/terms/e/efficiencyratio.asp
9. (n.d.). Investopedia - Sharper Insight. Smarter Investing.. Liquidity Ratios. Retrieved
from http://www.investopedia.com/terms/l/liquidityratios.asp
10. (n.d.). Investopedia - Sharper Insight. Smarter Investing.. Just In Time (JIT). Retrieved
from http://www.investopedia.com/terms/j/jit.asp
11. (n.d.). QuickBooks: Smarter Business Tools for the World's Hardest Workers. How to
Implement a Just-in-Time (JIT) Inventory System. Retrieved from
http://quickbooks.intuit.com/ca/resources/inventory/how-implement-jit-inventory-system/
12. (n.d.). Wikipedia, the free encyclopedia. Inventory management software -
Wikipedia. Retrieved from http://en.wikipedia.org/wiki/Inventory_management_software

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