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
Take actions toward the person who proposed bribe
Ignore the bribe
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.
2.0 Main issue
The first issue in this case is Secconz, the biggest customer of Cold Cuts Ltd (CC) asked for
lower price since that they have a lot of competition from China who have been able to produce a
product like CC at much cheaper prices. CC and Secconz are coming towards the end of the
second year of the supply contract. If CC wants to continue the supply contract, Secconz hope
that CC finds a way to reduce the price. In addition, Secconz insists that they should think about
the viability of their partnership in long term.

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 anti-
dumping 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.
3.0 Analysis and Discussion
The first issue in Freezing Out Profits case is Mr. Nelly, the Supply Manager from the biggest
customer, Secconz, expected Cold Cuts Ltd (CC) to reduce the price since that they have a lot of
competition from China who have been able to produce a product like them at much cheaper
prices. Furthermore, Mr. Nelly also thinking to produce the technology themselves instead of
buying from CC if the price cannot be lowers down.

3.1 SWOT Analysis

SWOT analysis is stands for strengths, weaknesses, opportunities and threats which can be use to
analyse the organisation and environment. However, below is CCs SWOT analysis.

Strengths Weaknesses
Specializing in refrigeration Selling price higher than competitors
components Do not have proper price strategy
Develops own products Fuzzy Frost The cost of manufacturing is higher
Alpha system No proper knowledge on
Exported product worldwide antidumping
Only Singaporean supplier for FFA
technology
Enable perishable items to be stored
far longer than conventional fridges
Opportunities Threats
Expansion to China The China competitor produce
Invest in new market similar products with cheaper price
Bribery
Will lose the biggest customer
Table 1 SWOT Analysis on Cold Cuts Ltd
Selling price from Cold Cuts
Secconz European
customers
Per Unit ($) Per Unit ($)

Direct materials 40 40
Direct labour 10 10
Direct costs 50 50
Factory overheads 8 8
Manufacturing cost 58 58
Margin before machinery depreciation and 82 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 Margin
Units Selling Total Units Unit price Total
Price ($) ($) ($) ($)
Secconz 25,000 140 3,500,000 25,000 82 2,050,000
European 50,000 100 5,000,000 50,000 42 2,100,000
customers
8,500,000 4,150,000
Table 3 Annual Sales and Margin
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.

3.2 Target Costing

Target Cost = Anticipated selling price Desired profit
Target Cost = $140 - $40
= $100

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.
3.3 Cost Volume Profit Analysis (CVP)
Cost-volume-profit analysis estimates how much changes in a company's costs, both fixed and
variable, sales volume, and price affect a company's profit. In cost volume profit analysis, we are
looking at the effect of three variables on one variable profit. In CVP analysis, we have to
calculate the breakeven point in units. Breakeven point in units is the number of units the firm
has to produce and sell in order to make a profit of zero. In other words, it is the number of units
where total revenue is equal to total expenses.

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.

3.4 Financial Analysis

Secconz is the major customer of CC in Singapore, losing the customer will give a huge impact
to the financial of the company especially in their revenue. The revenue of CC will drop about
one third of all Fruzzy Frost Alpha (FFA) sales of CC. If this happens it will affect the company
profit as well. As mentioned above, the selling price of FFA models to Secconz is much higher
than European customers. Furthermore, the annual requirement of Secconz was 25,000 units of
FFA which is one third of the sales of CC. Meanwhile, CC might lose $ 3,500,000 yearly which
is almost 41% of total sales.

3.5 Technology Analysis

CC was a manufacturing in Singapore specializing in refrigeration components and developed its
own brand of refrigeration process technology known as Fuzzy Frost. However, the refrigeration
technology had not altered much since its invention. The technology became easy copy or
imitation. Besides that, CC was a subcontractor of components for customers who were original
equipment manufacturers (OEMs). It was a company from which refrigeration manufactures
outsourced their special components. CC was facing the competition from similar supplier of the
products and it was also vulnerable for those customers to manufacture in-house on their own.
CC should have a proper adoption of the right technology products for the business in order to
save the cost in the long run. However, it is important for CC and manager to stay informed on
the latest technology products in their industry. Furthermore, CC sold the FFA component
locally only to Secconz. By not keeping Secconz, CC only left export models of FFA to those
European customers at much lower cheaper prices against competing European technologies. In
this situation, CC should able to penetrate the European market and competing with their
technologies.
3.6 Payback analysis- machine
CC might not be able to achieve payback on its investment in the new machinery within two
years despite the rapid obsolescence of the FFA technology. In this case, the new machinery cost
$ 8.3 million. The estimated annual net cash flow would be $ 4.15 million.

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.

3.7 Ethical analysis

A contingent from China trade officials paid a surprise visit to Cold Cuts Ltd plant in China.
They informed Mr Rithisak, the plant manager in China that the United States International
Trade Commission has begun to investigate their exports from China to US. They also
mentioned that CC had put their price much lower than the fair value on their products.
Therefore, if CC were found guilty, the United States International Trade will either close down
their business or at the very least, CC need to pay a huge anti-dumping tax. Thus, the ethical
issue came when the staff of United States International Trade Commission wants some bribes in
order to smoothen things out. One of the officers even met with one of CCs staff privately to
make some personal arrangements so that the case can go away.
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.

Figure 1 Just In Time Manufacturing

4.1 Just In Time Manufacturing

Just in time manufacturing is a strategy used in the manufacturing industry to reduce costs by
reducing the in-process inventory level. It is driven by a series of signals that tell the production
line to make the next piece for the product and when it is needed. The signals used are usually
simple visual signals, such as the absence or presence of a piece that is needed in the
manufacturing process.

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.
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.
 Figure 2 Lean Manufacturing Tools

4.2 Lean Manufacturing

Lean manufacturing is being utilized by businesses of all sizes today. Although it took a few
years to become mainstream, the success stories from mid-size to large corporations have pushed
lean manufacturing down to very small organizations.

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.
4.3 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.

4.4 Ignore the bribe

Other than that, Mr Rithisak can totally ignore the bribes from the United States International
Trade Commissions staff and seek for any legal advices regarding the matter. This will prevent
CCs staff too from any ethical issue. As for the company itself, CC should implement a strategy
for combating possible practices of bribery that might happen in the future.

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.
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]