CASE 7 :THE PIRATES OF THE SILVERLAND (PALM OIL PIRACY)

BACKGROUND OF THE COMPANYCompany Name : Palm Haul Sdn BhdPrincipal Activities : Crude Palm Oil (CPO) transportationCommenced Operation : 2002Number of Employees : Approximately 200 employeesHead Office : Taiping, PerakCrude Palm Oil : 3000 tonnes/dayNumber of Tankers owned : 80 (mostly fully depreciated)Initial Capital : RM 2 millionAverage Annual turnover : RM 25 million MAIN PROBLEM : Annual gross profit margin hovered around only 10% over the last few years (below the industry level which is about 30%)

CHALLENGES/ISSUES AND SOLUTIONSPALM HAUL SDN BHD1) High oil pilferageOccurs due to employees who seek the wrong route to get cash.

SOLUTION : The Fleet Management System should be bought to track the trucks. A total of RM432,000 can be saved in a year by PHB (based on The Sidhu Brothers Group who has a similar company profile with PHB 80 tanks and 3,000 tonnes/day)

The system can also prevent the problem of delivering compromised CPO since the thieves often replace the oil with water or other liquid to avoid being detected.

2) High abseenteism / Driver ShortageThe irregular routes to deliver the CPO and staying away from home for many days are difficult for many drivers. The remuneration package offered to these drivers is not attractive which reduces their motivation to come to work

SOLUTION : A new remuneration package with attractive package salary can be offered to the drivers. Other remuneration such as perfect attendance should also be considered to be included.

3) Unable to cope with the work load Administration ManagerThe Administration Manager is busy in handling the drivers scheduling and is unable to perform other administrative duty such as scheduling regular maintenance on tankers

SOLUTION : PHB should hire an assistant to help the Administration Manager. The tasks can be divided between the 2 people. 1 employee should handle the drivers scheduling since it requires a lot of time and performed daily.

4) High Administrative and Operating ExpensesThere is an increase in Administrative and Operating Expenses by almost 46% from the year 2008 to 2009 due to the following expenses:a. Directors fees were increased although the companys gross profit was declining over the years. b. Almost 100% increase in Consultancys fees. c. 300% increase in Ex-Gratia d. There was almost 225% increase in Gift & Donation in the year 2008 which was from RM12,776 to RM41,222 and in the year 2009, the expense has increased to RM43,260.e. Medical expenses have also increased about 91% from 2008 to 2009 probably due to the drivers who often fall sick due to the long travel duration.

SOLUTION :a. Director fees should be maintained to RM400,000. Since the companys performance was depreciating from 23.21% on 2006 to 16.51% in 2008, this should indicate that increasing the directors fees is a bad move. b. PHB need to find the real reason to hire a consultant. This cost can be reduced if an analysis is done to find out whether hiring consultants increases the companys revenue. c. Payment of Ex-Gratia to the employees should be reevaluated and other possible avenues should be considered to replace the ex-gratia. d. Gift & Donation can be replaced with Bonus to the employees. Sharing the companys revenue with the staff based on their performance also could be done. This effort can motivate the employees to perform better and reduce the compensation payments (staff salaries and allowances), which has been doubled in the year 2009. This can also lower the compensation amount that is being paid to the refineries. e. PHB should consider engaging with insurance company to support the employees medical expenses. Paying premium every year can avoid a sudden increase in the medical expense.

5) Most of the tankers have depreciated and causes the high maintenance.

SOLUTION : Replace a few of the oldest tankers to new tankers - need further analysis (cost of the new tankers need to be known). Since the payment for the new tank will fall under long-term liability, payment can be made for the next 10 years. Maintenance will be much lower compared to the current cost. Not only that, expense on spare parts can also be lowered

OILENE1) Oil contaminated and plant shut down.According to Oilene the CPO supplied by PHSB is contaminated with water or sludge. As the result, Oilene have to shut down their processing plant to clean on the sludge almost on a weekly basis. When this happened, the expenses will increase and as the result, Return on Investment (ROI) will decrease due to plant shut down.

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2) Shortage of CPO delivered.CPO delivered did not tally with amount listed on the delivery orders. As the result this will decrease the inventory of Oilene and cost of goods sold will increase.

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So, gross profit will be decrease and after deducting all the operation expenses, nett profit will also decrease.

SOLUTION & CONCLUSIONOilene should consider alternative option in replacing PHSB to avoid these problems as soon as possible due to these several reasons:-i. To maintain the reputation and image of Oilene.ii. To reduce cost incurred due to plant shut down and to avoid the decrease in Return on investment (ROI)ROI= (Return on asset) it describes the rate of return management was able to earn on the asset that it had available during the year.iii. To overcome the loss occurred because of late delivery to customers and clients.iv. To engage with MPOB (Malaysia Palm Oil Berhad) to restrict and enhance the rules and regulation process.v. Oilene should suggest to all related companies in same industry to form an association to curb this problem efficiently.

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