Table of Contents

Executive Summary ........................................................................................................................ 1

1.0 Introduction ............................................................................................................................... 2

2.0 Main issue ................................................................................................................................. 3

3.0 Analysis and Discussion ........................................................................................................... 4

3.1 SWOT Analysis..................................................................................................................... 4

Selling price from Cold Cuts ................................................................................................... 5

Cold Cut Singapore Annual Sales and Margin ........................................................................ 5

3.2 Target Costing ....................................................................................................................... 6

3.3 Cost Volume Profit Analysis (CVP) ..................................................................................... 7

3.4 Financial Analysis ................................................................................................................. 8

3.5 Technology Analysis ............................................................................................................. 8

3.6 Payback analysis- machine.................................................................................................... 9

3.7 Ethical analysis ...................................................................................................................... 9

3.8 Analysis on Anti-dumping Tax ........................................................................................... 10

4.0 Recommendation .................................................................................................................... 13

4.1 Just In Time Manufacturing ................................................................................................ 13

4.2 Lean Manufacturing ............................................................................................................ 15

4.3 Convince the client .............................................................................................................. 15

4.4 Take actions towards the person who proposed the bribe ................................................... 16

4.5 Ignore the bribe ................................................................................................................... 16

4.6 Seek for legal advices .......................................................................................................... 17

5.0 Reference ................................................................................................................................ 20

Table 1 SWOT Analysis on Cold Cuts Ltd .................................................................................... 4

Table 2 Cold Cuts Ltd’s Selling Price ............................................................................................ 5

Table 3 Annual Sales and Margin ................................................................................................... 5

Figure 1 Just In Time Manufacturing ........................................................................................... 13

Figure 2 Lean Manufacturing Tools ............................................................................................. 15

1

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 Ltd’s 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

Convince the client

Take actions toward the person who proposed bribe

Ignore the bribe

Seek for legal advices

2

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 company’s current performance. These observations

do have limitations which will be noted.

3

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.

4

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 CC’s SWOT analysis.

Strengths

Specializing in refrigeration

components

Develops own products Fuzzy Frost

Alpha system

Exported product worldwide

Only Singaporean supplier for FFA

technology

Enable perishable items to be stored

far longer than conventional fridges

Weaknesses

Selling price higher than competitors

Do not have proper price strategy

The cost of manufacturing is higher

No proper knowledge on

antidumping

Opportunities

Expansion to China

Invest in new market

Threats

The China competitor produce

similar products with cheaper price

Bribery

Will lose the biggest customer

Table 1 SWOT Analysis on Cold Cuts Ltd

5

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

administration costs

82 42

Selling price from Cold Cuts 140 100

Table 2 Cold Cuts Ltd’s Selling Price

Cold Cut Singapore Annual Sales and Margin

Annual Sales Margin

Units Selling

Price ($)

Total

($)

Units Unit price

($)

Total

($)

Secconz 25,000 140 3,500,000 25,000 82 2,050,000

European

customers

50,000 100 5,000,000 50,000 42 2,100,000

8,500,000 4,150,000

Table 3 Annual Sales and Margin

6

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.

7

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

8

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.

9

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 CC’s staff privately to

make some personal arrangements so that the case can go away.

10

3.8 Analysis on Anti-dumping Tax

In order to determine whether CC need to pay penalty or bribery in China, CC first need to

understand what anti-dumping tax is. Anti-dumping tax is a protection tariff imposed by a

domestic government on foreign imports that it believes is priced below fair value market. In the

United States, anti-dumping tax is imposed by the Department of Commerce. They come into

play when a foreign company is selling an item significantly below the price at which it is being

produced.

Dumping is defined in the Agreement on Implementation of Article VI of the General

Agreement on Tariffs and Trades (GATT) 1994 as the introduction of a product into the

commerce of another country at less than its normal value. Under Article VI of GATT 1994,

WTO Members can impose anti-dumping measures, if, after investigation in accordance with the

Agreement, a determination is made (a) that dumping is occurring, (b) that the domestic industry

producing the like product in the importing country is suffering material injury, and (c) that there

is a causal link between the two. In addition to substantive rules governing the determination of

dumping, injury, and causal link, the Agreement sets forth detailed procedural rules for the

initiation and conduct of investigations, the imposition of measures, and the duration and review

of measures.

11

An anti-dumping measure shall be applied only under the circumstances provided for in

Article VI of GATT 1994 and pursuant to investigations initiated and conducted in accordance

with the provisions of this Agreement. Below are the criteria that determine whether Cold Cuts

Ltd break the law or not.

a) A fair comparison shall be made between the export price and the normal value.

This comparison shall be made at the same level of trade, normally at the ex-factory

level, and in respect of sales made at as nearly as possible the same time. Due allowance

shall be made in each case, on its merits, for differences which affect price

comparability, including differences in conditions and terms of sale, taxation, levels of

trade, quantities, physical characteristics, and any other differences which are also

demonstrated to affect price comparability. The authorities shall indicate to the parties in

question what information is necessary to ensure a fair comparison and shall not impose

an unreasonable burden of proof on those parties.

b) Determining injury

The Agreement defines the term “injury” to mean either (i) material injury to a domestic

industry, (ii) threat of material injury to a domestic industry, or (iii) material retardation

of the establishment of a domestic industry, but is silent on the evaluation of material

retardation of the establishment of a domestic industry.

Under the Anti-dumping Agreement, imposition of an anti-dumping duty requires that the

investigating authority have evidence not only to substantiate dumping, but also to prove

that the dumping has resulted in injury to a competing domestic industry in the importing

country. Moreover, dumping may result in benefits to consumers in the form of lower-

priced goods and is thus not an entirely deleterious practice. Under the terms of the

GATT, a country can take action against dumping only when there is a factual finding of

injury to an industry in an importing country. Anti-dumping Agreement contains more

detailed rules on determinations of injury. It is difficult to develop a general quantitative

standard to measure the extent of injury that has occurred. Specifically, CC must ensure

that sufficient evidence is considered when determining injury, that there is sufficient

12

proof of causality between dumping and injury and that there is no potential for injury

from other factors unrelated to dumping imports to be counted in with dumping injury.

The result of the analysis:

Basis Explanation Break or comply

A fair comparison shall be

made between the export

price and the normal value.

We do not have enough

financial information to

determine whether CC sells

its product at higher prices

in China. Furthermore,

factory in China produces

old technology product. We

do not have information on

that.

It is hard to decide whether

CC comply or break the

anti-dumping law because

we cannot calculate the fair

price comparison. If the

domestic price is lower than

export price, CC is

complying with the law.

Determining injury

Based on the analysis, CC

did not cause any injury to

the domestic industry,

threat of material injury to

a domestic industry, or

material retardation of the

establishment of a domestic

industry

CC complies with the law

because it is not cause any

injury.

13

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.

14

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.

15

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 Convince the client

Another option that can be implementing is to convince Secconz to continue the business and tell

them that the product’s quality is far better than any competitors and that is why Cold Cuts Ltd

sells the product with high prices.

16

4.4 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.

4.5 Ignore the bribe

Other than that, Mr Rithisak can totally ignore the bribes from the United States International

Trade Commission’s staff and seek for any legal advices regarding the matter. This will prevent

CC’s 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.

17

4.6 Seek for legal advices

Other than that, we believe that Cold Cuts Ltd is not guilty for breaking the law base on the

analysis. Therefore, we recommend CC to seek for legal advices and demand further explanation

from the authorities about the accusation. CC deserves clear basis on the accusation. The criteria

below can be the guideline for CC to defend itself from the accusation.

1. Consideration of volume effects of dumped imports

The Agreement requires investigating authorities to consider whether there has been a

significant increase in the dumped imports, either in absolute terms or relative to

production or consumption in the domestic industry.

2. Consideration of price effects of dumped imports

In addition, the Agreement requires investigating authorities to consider whether there

has been significant price undercutting by the dumped imports as compared with the

price of a like product of the importing Member. Investigating authorities are also

required to consider whether the effect of dumped imports is “otherwise” to depress

prices to a significant degree, or to prevent price increases, which otherwise would have

occurred to a significant degree.

3. Evaluation of volume and price effects of dumped imports

The Agreement provides that no one or several of these factors can necessarily give

decisive guidance. It does not specify how the investigating authorities are to evaluate the

volume and price effects of dumped imports: merely that consideration of these effects is

required. Thus, investigating authorities have to develop analytical methods for

undertaking the consideration of these factors. Moreover, since no single factor or

combination of factors will necessarily result in either an affirmative or negative

determination, in each case investigating authorities have to evaluate which factors are

relevant, and which are important, in light of the circumstances of the particular case at

issue.

18

4. Examination of impact of dumped imports on the domestic industry

The Agreement provides that, in examining the impact of dumped imports on the

domestic industry, the authorities are to evaluate all relevant economic factors bearing

upon the state of the domestic industry. The Agreement lists a number of factors which

must be considered, including actual or potential declines in sales, profits, output, market

share, productivity, return on investments, utilization of capacity, actual or potential

effects on cash flow, inventories, employment, wages, growth, ability to raise capital or

investments, and the magnitude of the margin of dumping. However, the list is not

exhaustive, and other factors may be deemed relevant. In addition, the Agreement again

specifies that no single factor or combination of factors will necessarily lead to either an

affirmative or negative determination.

5. Demonstration of causal link

The Agreement requires a demonstration that there is a causal relationship between the

dumped imports and the injury to the domestic industry. This demonstration must be

based on an examination of all relevant evidence. The Agreement does not specify

particular factors or give guidance in how relevant evidence is to be evaluated. Article 3.5

does require, however, that known factors other than dumped imports which may be

causing injury must be examined, gives examples of factors (such as changes in the

pattern of demand, and developments in technology) which may be relevant, and

specifies that injury caused by such “other factors” must not be attributed to dumped

imports. Thus, the investigating authorities must develop analytical methods for

determining what evidence is or may be relevant in a particular case, and for evaluating

that evidence, taking account of other factors which may be causing injury.

19

6. Cumulative analysis

Cumulative analysis refers to the consideration of dumped imports from more than one

country on a combined basis in assessing whether dumped imports cause injury to the

domestic industry. Obviously, since such analysis will increase the volume of imports

whose impact is being considered, there is a greater possibility of an affirmative

determination in a case involving cumulative analysis. The practice of cumulative

analysis was the subject of much controversy under the Tokyo Round Code, and in the

negotiations for the Agreement. Article 3.3 of the Agreement establishes the conditions in

which a cumulative evaluation of the effects of dumped imports from more than one

country may be undertaken. The authorities must determine that the margin of dumping

from each country is not de minimis, that the volume of imports from each country is not

negligible, and that a cumulative assessment is appropriate in light of the conditions of

competition among the imports and between the imports and the domestic like product.

De minimis dumping margins and negligible import volumes are defined in the

Agreement..

20

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]