Chicken run Essay

Executive summary: 1998, Excel Poultry & Meat Sdn Bhd (EPM) was a SME located in Kluang, Johor, operating business of chicken farming and supplying chicken throughout Malaysia. This subsidiary of PCK holding since 2005 was managed by Encik Selamat, a Certified Public Accountant (CPA). It became one of top 5 chicken suppliers within mid-tier producers in the country due to increasing demand in year 2000 from superstores and fast-food chains, high chicken consumption by Malaysian, and expansion of chicken industry. However, in 2008, cost of poultry production increased. EPM operating cash was low and severe, that it â€Å"had puzzled Encik Selamat† (p. 4). Other problems were also identified. Decision Maker: Credit Controller Ms Choy is the decision maker as she has the responsibility to make the right decision regarding unethical conduct of Encik Selamat, she can convince Board of Directors about En. Selamat. If she failed to convince BOD to take action, she can then reveal the issue to the auditor, besides mentioning to the auditor the lack of segregation of duty in the business operation. She can execute and monitor implementation and performance of employees under her responsibility and convince her friend, Puan Azura to do the same. What should Ms. Choy do? Analysis: 1) SWOT analysis S – STRENGTHS | W – WEAKNESSES | * One of top 5 chicken suppliers * Continuing profitability and growth * Good promotional strategy * Qualified accountant (Encik Kasim) * Reliable Credit Controller (Ms Choy) * Encik Selamat’s reputation in community| * En. Selamat’s lack of expertise in poultry and meat industry * 2008’s operational crisis * Lack of focus of business operation * Cash flow issue * Conflict of interest * Possible error/ fraud/fictitious transaction * En. Selamat’s connection | O – OPPORTUNITIES | T – THREATS | * Malaysians’ highest consumption rates * Popular quick-service restaurants * East Coast Economics Region (ECER) * Emerging of giant superstores * Institutional retailing| * Production cost had risen about 56. 5% * Drop in demand * Credit limit of Cold Gold| The company has strong position in the industry as it is one of top 5 chicken suppliers. This means that EPM has a big portion of the market share in the industry. EPM also is strong for its sustained profit and growth. EPM had been able to maintain its operations and started making profit since the buoyant demand of chicken consumption. Besides, with initial capital of RM3. 6 million and starting with 20 employees, now, EPM had more than 200 employees. Occupied with good promotional strategy, EPM’s management team seized every opportunity in the industry. Moreover, EPM has capable key employees, which two of them are a qualified accountant, Encik Kasim and a reliable Credit Controller, Ms Choy. These employees contribute significantly towards the operation of EPM especially in the finance sector. In addition, Encik Selamat’s reputation in community is a strong influence of EPM towards the society where EPM was based. He was a public figure that will be contested in the local city council. En. Selamat’s lack of expertise in poultry and meat industry contributed a negative element in EPM as En. Selamat need to gain skills and expertise in the industry. Even though he was especially worried about the current unfavorable condition of EPM, his experience in this industry may not be sufficient. Besides, 2008’s operational crisis of EPM placed En. Selamat away from a smooth career track as recorded before 2008. EPM was lack of focus of business operation as it was at the infant stage and yet to mature in a proper method of management. Next, within EPM, there was cash flow issue and the company had to resort to short term borrowing which subjected to higher interest payment obligations. There was conflict of interest between Encik Selamat’s personal deal with Encik Azman, former college mate which was one of the executive of Cold Gold and the company’s interest. Cold Gold was one of EPM’s major customers. This relationship may impair En. Selamat’s judgment. In EPM, a few possible error/ fraud/fictitious transactions were detected, especially the irregularities in debtors’ account. The symptoms lead to a conclusion that it was caused by the former employee of EPM, En. Munir. Another factor that can be considered as EPM’s weakness point is En. Selamat’s connection with parent company of EPM, PCK Holding, where En. Selamat might be able to secure his position in EPM despite the problem he created without facing any punishment. The industry is in quite a potential market where Malaysians’ highest consumption rates of poultry and meat product. Malaysia was having one of the highest per capita consumption rates in the world – for chicken (32. 5 kg) and eggs (298 units) – and there were no dietary prohibitions (during these years) and religious restrictions against chicken consumption. In addition to household and traditional delicacies demand, the surge of popular quick-service restaurants from outside Malaysia and home-grown fast food chains intensified the market. Besides being the recognized poultry exporter, the industry was supported by the government through the East Coast Economics Region (ECER) as the poultry sector was part of the plan. Emerging of giant superstores and institutional retailing also enhanced the bright future of the industry. Despite the favorable situations in the market, EPM faced threat of chicken feed which resulting the production cost to rise about 56. 5%. Federation of Livestock Farmers’ Associations of Malaysia (FLFAM) made a call for higher chicken prices in order to protect producers’ earning in the face of feed cost hike. However, when the sellers did increase the retail price, some producers complained that they seen a drop in demand. Another threat was the credit limit of Cold Gold Sdn Bhd which had exceeded its level. This has significant effect to the company as Cold Gold is one of EPM’s major customers multiplied with the other issues faced by EPM. Increment in production cost Drop in demand Low cash flow High interest expense INABILITY TO PREDICT ENVIRONMENTAL CHANGE & FORCAST CONSEQUENCES: LACK OF COORDINATION IN CONTROL AND REPORTING: Credit limit control Debtor confirmation Misstatement Lack of segregation of duty LACK OF COMMITMENT FROM SENIOR MANAGEMENT: Lack of expertise Lack of focus Conflict of interest Unethical behavior Reluctance in taking action LOW PERFORMANCE 2) Fishbone diagram According to Peter Drucker, â€Å"management is doing things right; leadership is doing the right things†. Thus, the major issue in this case is unorganized management which leads to bad performance of the company. EPM faced problem as it fails to get commitment from senior management. As a leader, Encik Selamat was lacking of expertise in poultry industry, actively involved in social and community work instead of focusing more on business operation like, had conflict of interest (agency problem) while handling credit limit issue, and had under table deal with the client. Director himself had shown lack of leadership skill and ethical awareness as he kept silent regarding the unethical behavior of Encik Selamat and had more concern on reputation than ethical conduct. Besides, management of EPM is lacking of coordination in control and reporting. This can be seen from the severity of insufficient cash flow which was noticed only when significant borrowings had been made, high expenses, and loss incurred. Lack of segregation of duty also had given wide opportunity for misstatement by employees. Finally, EPM fails to predict environmental change regarding cost of production that leads to low profit making as EMP did not make any preparation or back-up plan to overcome such problems. 3) Financial Evidence on the operation of EPM: Financial Ratio Ratio| Formula| 2006| 2007| 2008| Interpretation| GP ratio (%)| (GP/Sales)*100| 5. 4845| 1. 6542| 1. 0814| Due to increment in COGS, EPM is profiting only 1 cent for every dollar of product sold in 2008| Inventory turnover ratio| COGS/Inventory| 16. 6774| 36. 0667| 28. 4962| EPM is turning over its inventory on average, 3 times per month in 2007 while this reduces to twice per month in 2008. | AR turnover ratio| Net sales/AR| 4. 3071| 3. 3957| 2. 8808| EPM takes around 3 months to collect its debt in 2006, while it takes more than 4 months in 2008. | Days to collect AR| 365/AR turnover ratio| 84. 7441| 107. 49| 126. 702| | Description of case exhibit (Account abstract): %Increase| 06to07| In 2007, cost increased while revenue did not increase much, and operating loss was recorded as retail price was only increased in August 2008. Thus, increment of revenue from in 2008 by 36. 16% corresponds with increment in cost in that year. Expenses took 30% of operating profit in 2006 while it took almost twice the operating profit in 2008. This might be due to interest payment made for short-term borrowing. Increment in trade receivable may not be the true amount as there were cases of misstatement. Stock in 2008 was higher due to lower demand. 07to08| Rev| 0. 57| 36. 16| COGS| 4. 64| 36. 95| Oper profit| -69. 67| -10. 99| Exp| 37. 50| 45. 45| Net| -108. 64| -315. 79| Trade rec| 27. 56| 60. 49| Stock| -51. 61| 73. 33| Trade cr| 62. 16| 50. 00| Alternatives available to the protagonist: Option 1: Ms. Choy can choose not to disclose the issues that she managed to investigate within EPM. This will benefit in saving the reputation of the company in public as well as the General Manager, Encik Selamat to secure his reputation in the coming city council election. Besides, Ms. Choy can justify her action of not bringing the matter up as Encik Selamat is an important staff of EPM and she had done her part by approaching one of the directors who was reluctant to take action against Encik Selamat. The drawbacks of this choice are ethical aspect and long term impact towards the company as a whole. Choosing not to disclose the facts is an unethical behavior on Ms Choy’s part. As for the long term, the public will find out the reality of the company as time goes because the auditors are likely to question the irregularities and Ms Choy will be interrogated. In the end, the company, En Selamat and Ms Choy need to face the huge impact of being nontransparent to the stakeholders. Option 2: Ms Choy has the right to disclose her findings straight to the external auditors as she has no direct authority to take any action towards the misappropriate culture in the company as well as the director which she had approached was hesitated to do so. By this, Ms Choy’s responsibility to report to public is passed to auditors and the problem is most likely will be solved. However, this aggressive decision will affect EPM severely in terms of drop in share price and reputation. Besides, the share price of the parent company will be affected too and the dropping trend will continue for a long time. Furthermore, the reputation of Encik Selamat will be highlighted by the public and media, subsequent of the auditors’ disclosure. Option 3: Ms Choy can opt to disclose the matter internally to the board of directors. Besides, she had found evidences to support her claims about the low performance of EPM. The benefit that EPM will gain from her disclosure is to ratify the problem before the auditors’ visit the following month. If the auditor is not satisfied with EPM’s condition, justification of ratification can be made and EPM will not be punished with qualified financial reports, which is not favorable. This decision may result in impairment of EPM’s and PCK’s reputation and share prices but the impact will be lower than the second option above. Recommendation and action plan: Based on analysis above, it is recommended for Ms Choy to choose Option 3 which is to disclose the matter internally to the board of directors. Suggested steps to follow are: 1. Bring the matter with sufficient evidences and justifications together with possible solution to board of directors 2. Check whether EPM has a written guideline relating to these issues and take proper actions against these issues (e. g. salary cut, not giving bonus etc. ) 3. If no written guideline is established, in case to avoid similar situation in the future, Ms. Choy should suggest for EPM to; a. Set up and appoint an independent committees of directors to monitor the performance and compensation of staffs b. Establish policies for clear ethical conducts, job scopes and management of EPM especially to solve ethical and agency problems c. Establish a whistle-blowing policies to encourage staffs to report any irregularities d. Communicate and implement guidelines and policies across levels of management, and absorb them as the EPM’s corporate culture to be shared within the organization.