The issue started on February 2008 when the new appointed 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.
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. Siti Aminah : the Chief of Financial Officer that being asked to make formal report instead of the Senior Chief of Financial Officer.
CURRENT PURCHASING SYSTEM IN PCI
Purpose : to ensure the purchase of raw material (exclude external Aluminium cable scap) that was required for the manufacturing of cable, conductors and associated products.
1) Monthly Raw Material Summary Cik Lim General Manager of Material Resources and Planning En Razi Assistant Purchasing Manager (MRMS) Review 1st week of Forecasted Monthly Every month Material Requirement En Sam General Manager Purchasing (MMR)MRMS Planning Section En Razi
2) Cik Anne Purchasing Clerk >RM100 000 En Ghani Filing En Min Raw Material Storekeeper <RM 100 000 Cik Lim PURCHASE ORDER COCORDER CONFIRMATION CompetitiveNot En Sam En Razi Vendors Competitive Quotation Quotation
3) Suppliers Invoices Cik Lim Cik Anne Coded, Batched and Checked Invoices Delivery Store Received
a) Verification Order Notes
b) Account Payable Reference No. En Min
c) Update Account Payable list in Assistant Finance Manager the computer.
4) Enclosed with the return receipt of cheque / TT for notification of payment DO,COC Vendors MaterialRAW MATERIAL STORE RMRR VCAR Financial Department (for payment)
InvoicePURCHASING SECTIONShipping Document Shipping PCI BANK Document VOUCHER Voucher Approved Delivery Order RMS 2 Form Purchasing Clerk En Min Assistant Finance Manager & Signed QUANTITATIVE DECISION | 2006| 2007| GROSS PROFIT MARGIN(Gross Profit/Revenue)| (12086851/176877312) = 0. 07| (48053370/298146915) =0. 16| OPERATING PROFIT MARGIN(Operating Profit/Revenue)| (6386819)/176877312 =(0. 03)| 35657392/298146915 =0. 12| INVENTORY TURNOVER(COGS/Inventories)| (164,790,461)/27434751=(6) | (250,093,545)/45,575,893=(5. 48)| AVERAGE COLLECTION PERIOD(Debtors/(Revenue/360))| 15,506,128/(176,877,312/360) =31. days| 8,453,275/(298,146,915/360) =10 days| Gross Profit Margin
When the company shows the higher GPM, it indicates that the company is better in controlling their cost of sales. PCI gross profit margin in 2007 is higher than 2006. It means that the company can manage their cost of sales. For becoming years they need to make an agreement with their suppliers to prevent raw material price increase. Operating Profit Margin When the company shows higher operating profit margin ratio, it indicates that the company is profitable. Based on the calculation, PCI current year shows an improvement from the previous year.
For becoming years, operating expenses in terms of administrative and selling expenses need to be avoided from getting increase to maintain the profit. Average Collection Period (Debtor) The shorter the period to collect payment from debtors, the more efficient the company is in handling their debtors.
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.
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.