PCI Case Study Maf680

PCI SDN BHD CASE STUDY 2
MAF 635 AC2208A Page 1

Introduction
Of
The company



Penda Cable Industry (PCI) Sdn Bhd was founded in 1957. Its vision was to be a global
leader in cabling solutions and energy related business by 2020 and is committed to excellence
in their products and services by adopting continuous improvement, quality work culture,
expertise and technology. PCI was principally involved in the manufacturing and distribution of a
wide range of power cables.
The issues in PCIs Sdn Bhd started on Februaru 2008 when the new appointed
Managing Director of PCI Sdn Bhd, En Ghani reviewed 2007 Financial Report and found out
there were increase in the cost 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 the redundant purchasing and high invemtory
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 operation and at the same time would ensure it has the
proper controls in place. This is because, the purchasing system have a lack in their internal
control system that can lead to the inefficient in their operation especially in the purchasing
system.
Then, 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.



Figure 1: PCI Organization Structure

Encik Ghani
Managing Director

Encik Yusof
Chief Human
Resources & Admin
Cik Siti Aminah
Chief Financial Officer
Encik Razi
Assistant Purchasing
Manager
Encik Min
Raw Material Storekeeper
Cik Aliah
Finance Manager
Encik Sam
General Manager
Purchasing
Cik Lim
General Manager Material
Resource Planning
Encik Azman
Chief Production Officer
Cik Anne
Purchasing Clerk
Encik Fauzan
Assistant Finance
Manager
Encik Faris
Finance Clerk


Flow chart
On the
Purchasing system





Problem/Issues
And
Recommendation



1. Purchasing Procedure issue

Issue 1: 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.
Recommendation: Authorization by General Manager for 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.
Issue 2: 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.
Recommendation: The procedures on calling the available vendors should be made
available and have a proper authorization to avoid pravitism done by the assistant
manager.

2. Segregation of duties issue

Issue 1: Calling for quotation, evaluating the quotation and purchase order
generation are solely done by the assistant purchase manager, En 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.
Recommendation: The task or job should be done by different people at the
different level of staff. For an example, 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, Encik Sam.



Issue 2: The received on material required and raw material store are solely done by
storekeeper, En Min under the same department.
Recommendation: 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.

Chart 2.2 Relationship of segregation of duties.
Issue 3: The cheque and voucher preparation done by the same account clerk,
Encik Faris. This problem can brings to fraud on the companys money especially
when it did not been supervised by the manager.
Recommendation: 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.
Receiving
Department

Raw Material
Store


Chart 2.3 Relationship of segregation of duties.
Issue 4: There is no committee being setup for the approval on the purchase of
materials in the purchasing department.
Recommendation: 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
Issue 5: Material stored at the store does not have any proper inventory
reconciliation that should be made by material department.
Recommendation: 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.

3. Asset and record Safety Issue

Issue 1: 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.

Recommendation: Document 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.

Account
Clerk 1

Assisstant
Finance
General
Manager


4. Completed recording and documentation Issue

Issue 1: 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.
Recommendation: 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.
Issue 2: 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.
Recommendation: 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.

5. Verification by independent department

Issue 2: There is no verification made by the independent person or internal auditor
being made by the company upon the balance of raw material request being
prepared and authorized by the General Manager of Material Resources Planning,
Cik Lim.
Recommendation: The verification by independent person or internal auditor should
be done on the balance of raw material for each of ending month before the MMR
being authorized by the General Manager. Therefore, pilferage of the material can be
avoided as well as can increase the efficiency in the companys management.



Financial Ratio
analysis



1. Liquidity Ratio
Ratio 2006 2007 Increase/Decrease
Liquidity Ratio
Current Ratio 0.73 x 1.15 x Increase
Acid Test Ratio 0.27 x 0.5 x Increase

Liquidity ratios are used to determine a companys ability to meet its short-term debt
obligations using assets that can be easily liquidated. Current ratio measures a companys
current asset against its current liabilities. For manufacturing companies such as PCI Sdn Bhd,
the ideal ratio is 2 times, that is for every RM1 of the current liabilities, the firm should have RM2
of current asset. Therefore, the company will have no problem paying their current obligation on
time. From this PCI Sdn Bhd case, the increase in the current ratio from 0.73 times to 1.15 times
indicate that, there is more current asset to cover current liabilities in 2007 compared to in 2006.
Therefore, PCI Sdn bhd should reduced their current liabilities by taking more discounts so that
they are able to pay their current liabilities on time.
Next, acid test ratio is or known as quick ratio a liquidity ratio that is more refined and
more stringent than the current ratio. The acid test ratio uses a figure that focuses on the most
liquid asset and it is more conservative than the current ratio. From this case, the acid test 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, acid test
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 acid test ratio in 2007 is higher
than in 2006, it still indicates that PCI Sdn Bhd has problems in settling their obligations because
it still possesses high asset. That may have lead to the difficulty in paying their current liabilities
when the need arise. Therefore, PCI should reduce their inventory by doing more aggressive
sales such as conducting more promotion or advertisement on their sales.



2. Efficiency Ratio
Efficiency ratio
Inventory Turnover Ratio 6.01 x 5.49 x Decrease
Average Collection Period 31.56 days 10.21 days Decrease
Fixed Asset Turnover Ratio 4.7x 8.9x Increase
Total Asset Turnover Ratio 1.67 x 2.3 x Increase

Efficiency ratio is to measure the performance of the company in handling their fixed and
current asset. Efficiency ratio consists of inventory turnover ratio, average collection period,
foxed asset turnover ratio as well as total asset turnover ratio. Inventory turnover ratio measured
the companys efficiency in handling their inventory. The higher the inventory turnover rates
means the more efficient the company handling their inventory and able to grow sales volume.
PCI Sdn Bhd has lower inventory turnover in 2007 compared to the year 2006 which are from
6.01 times to 5.49 times. The lower in inventory turnover might be due to the reduction in sales,
and inventory slow moving in 2007. This problem might be because of an ineffective sales
strategy, inefficient handling the inventory and does not provide trade discounts to encourage
bulk purchase thus, lead to overstock in the company. Therefore, PCI Sdn Bhd can increase
their efficiency in handling inventory by introduce an effective stock control system or change its
present methods of ordering stocks as well as do a stock clearance sales.
Next, the average collection period measured how well the company in their collection of
debtors account. The shorter the average collection period, the faster the debtors are paying
their accounts and it indicates that the company is efficient in their debtors collection. In PCI Sdn
Bhd, it has been calculated that there shorter average collection period in the year of 2007
compared to 2006 which are from 31.56 days to 10.21 days. This less in collection period
indicates that cash collection from the debtors is faster due to the more control of debtors by
being more stringent in collecting debts and efficient credit policy in 2007 compared to in 2006.


Then, fixed asset turnover ratio of PCI Sdn Bhd in 2007 are 8.90 times which is higher
than in 2006 that only 4.70 times. This indicates that, PCI Sdn Bhd is efficient in utilizing its fixed
assets in generating sales in 2007 compared to 2006. Last but not least, total assets turnover of
PCI Sdn Bhd in year of 2007 is higher than 2006 which are from 1.67 times to 2.30 times. This
indicates that PCI Sdn Bhd is generating a higher volume of sales with the given amount of
assets in 2007 compared to in 2006.

3. Debt ratio
Debt Ratio 88.83 % 65.27% Decrease

Debt ratio is to measure on how the company is financed. For the debt ratio above 50%
then it is often considered to be highly leveraged that means the most of the company assets are
financed through debt not equity. In contrast, if a company has a low debt ratio that below than
50%, it indicates that most of the company assets are fully owned through equity not debt. From
PCI Sdn Bhd debt ratio, it shows the decrease in the debt ratio from 88.83% in 2006 to 65.27%
in the year 2007. It indicates that about 65% of PCI Sdn Bhd 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 their leverage ratio, PCI Sdn Bhd can have an optimum mixture in
its sources of financing, should review their dividend policy as well as try to avoid from taking an
additional debt financing from the other company or investors.



4. Profitability Ratio
Profitability Ratio
Gross Profit Margin 6.83 % 16.12 % Increase
Net Profit Margin (5.22 %) 10.94% Decrease
Return on Asset (8.71 %) 25.21% Decrease
Return on Equity 77.96% 72.58% Decrease

Profitability ratios more focus on the profit gain by the company. Gross profit margin
indicates the percentage of each sales remaining after the firm has paid for their goods. The
higher gross profit margin, the better pricing flexibility and cost management controls a firm has
in its operations. 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 companys pricing policy.
Next, net profit margin measures the amount of profits available to the shareholders after
interest and taxes have been deducted on the income statement. The higher the profit margin,
the more pricing flexibility a firm may have in its operations or the greater cost control by the
management. 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. Therefore, it can
be conclude that the company has a better control over its costs in 2007 compared to the
previous year.
The return on assets of the PCIs 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 return of assets 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.
Last but not least, return on equity measured the return earned on the owners equity in
the firm. The higher the rate on return on equity, the better the firm has increased wealth to
shareholders. 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. 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.



New System
Recommended



1. ERP system
Enterprise Resource Planning (ERP) system is a method for the effective planning and
controlling of all the resources needed to take, make, ship, and account for customer orders in
manufacturing, distribution or Services Company. It is type of software that provides an end to
end information management solution for a company. The software could be used by all the
departments of the company to manage the information. One of the objectives of ERP system is
that right information is available to the right person at the right time in the company or
organization.
How does ERP system work? ERP software integrates all areas of operations including
Product planning, Manufacturing process, Sales, Marketing, Finance, Human Resources as well
as Procurement. Being integrated all areas means that it consists of multiple modules that are
connected to each other. Each module is focused on one area of business processes such as
finance, human resources and manufacturing. 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.
From this case, PCI Sdn Bhd should implement this system in order to achieve efficiency
in their holding inventory as well as in their overall operation especially in the purchasing
system. For an example, by using the ERP system, from the Planning Section they can just sent
the monthly requirement to Purchasing Department by using ERP system without just using
manual system.
Besides that, ERP system also can be used in communication among the third party
such as suppliers and customer. From this PCI case, En Razi can just used the ERP system in
sending for quotation to the vendors. This would save more time in making a purchase order
with the vendors. This is because, by using manual system, En Razi has to call for quotation
and have to wait the vendors to send back the quotation that can lead to the time cost in handle
the quotation. Therefore, ERP system is one of the efficient systems that can be used in the PCI
Sdn Bhd management system so that they can improve their operation especially in the
purchasing department.



2. Just-In-Time System
Just-In-time system is the philosophy of having raw materials arrive just in time to be
used in the production and for the finished goods inventory to be completed just in time to be
shipped to the customers. From the financial analysis ratio, it can be determined that PCI Sdn
Bhd has a problem in handling their inventory and ineffective sales strategy. So that, by using
this just in time system it can help the company to improve their operation in their inventory.
How does just in time system being implemented? It is done by eliminate the non-value
added activities and focus only the value added activities. Value added activity is the activity
that customers perceive as adding usefulness to the product or service they purchase which is
that giving a great satisfaction to the customer. While, non value added activity is that activity
that does not add any value to a product from the perspective of a customer or business that
needs to be eliminated.
By using JIT purchasing system, PCI Sdn Bhd can purchase raw material from the
outside suppliers only as they are needed. By using JIT system can reduce the cost of holding
space which means that reduce the cost of handling the inventory since the company only order
the material only when they need it and based on the customer order. Besides, it can improve
the quality of product. This is because, since the company only purchase with required amount
of material so the product will not have defect and high in quality.
Apart from that, JIT system also can reduce any obsolescence and theft that could
happen. Theft usually happened when there is many extra material or inventory in the company.
Therefore, by using JIT system since there is no inventory left, it can prevent from the theft
problem in the company as well as improve the company performance especially in their
inventory controls and productions.



3. Electronic Data Interchange (EDI) System
Electronic Data Interchange (EDI) system is the computer-to-computer exchange of
business documents in a standard electronic format between business partners. Computer-to-
computer exchange means that EDI replaces postal mail, fax and email. While email is also an
electronic approach, the documents exchanged via email must still be handled by people rather
than computers.
In PCI Sdn Bhd case, this company also using manual system in making a purchase
order. By having people involved slows down the processing of the document process and can
lead to human errors. Instead, EDI documents can flow straight through to the appropriate
application on the receivers computer and processing can begin immediately. A figure below
shows the different between manual system and EDI system.

Figure 3.1 Typical manual purchasing order processes

Figure 3.2 EDI system processes



From the above figure, it clearly shows the different in using the manual system and EDI
system. The most benefit 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 PCIs 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 companys valuable time from
handling data disputes.
Just like PCI Sdn Bhd, they are still using the manual system in do a purchase order
that required a lot of time to do the purchasing processes. Therefore, EDI system is the best
system that the company should implement so that they can improve their purchasing process
and increase their efficiency in their operation in the organization.



Summary



Based on the issues that have been explained above, it can be conclude that PCI Sdn
Bhd currently having more on the internal control system and that have been highlighted. A
weakness in the internal control can lead to many consequences. This is because, for example,
weak in internal control can lead to the decrease in the performance, securities as well as can
affect the profit of the company overall. Besides, the company will have more opportunities to
commit fraud while affected the business performance. More than that, by having a weak in
segregation of duties can lead to the human errors that are cost to the company as well.
Besides, as the financial analysis has been done, it can be conclude that, the company
having most problems in their inventory handling process. The inventory handling problem is
believed mostly from the weaknesses in the purchasing department. This is because, the
department currently using manual system rather than other system that are more effective.
Then, there is being introduced a new comers system that are more effective such as
ERP, JIT and EDI system. By using this new system, it can help the company in improving their
operation in the organization. These changes in new system would just not improve the
company performance, but also can improve in the company profit as well as achieving their
goals.
In a nutshell, it can be says that the company has ignore the importance of internal
control system that resulted in many operation problem especially in the purchasing system that
decrease in their accumulated.

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PCI SDN BHD CASE STUDY 2

MAF 635 AC2208A Page 1

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