Case Study

Case 1

• A loss making warehouse project by a sizeable logistics company in China
• It is for a five year contract with fixed monthly warehouse income
• It was found that a huge loss making project was accepted because the cost were understated at the time of contract negotiation
• The contract with landlord is little tricky, the warehouse rental is much lower for the first two years compared with the last three years
• The unit cost were underestimated because it based on the assumed volume but not committed volume
• The training cost, recruitment and redundancy costs were excluded in the total costs
• Inflation were not taken into account for all costs
• Due to change in labour law, over time is limited per staff and extra overtime required increase in overtime rate
• Many costs were not considered and labour efficiency was overestimated as they are just not familiar with the work requested
• It is due to accounting manager do not understand operation and operation manager do not fully understand how to calculation the cost
• The project were approved by the senior management so that some experienced staff do not voice out the problems.
• They think there might be special relation between the senior management and the landlord, it is the senior management duty not us.
• They are not paid to take the risk of objection to senior management
• Another rumor was that the customer will use both freight forwarding service and warehousing service. As a result, even the warehousing service made loss the freight forwarding service should generate more profit to cover the loss.
• There was no sharing of best practice and standard operation practice due to competition for performance bonus by project managers in the past
• There was huge loss each month and it lasts for almost two years. The loss was getting bigger because of inflation and because the Pallet stored was getting down.
• The customer business was not getting down but shifted to other vendor who offer higher price but the location of its newly built warehouse is closer to the customers. It save the customer trucking costs. Company A did not consider the new warehouse will be built at the time of contract negotiation and did not consider the coming competitions
• At that time, no one understand what happened and believed that it was due to lack of control by operation. A cost audit was carried out by a cost consultant.
• It was found that the following cost were not normal
• The loss making object absorbed much overhead without reasonable basis. It is because no one query this project. Other project earns reasonable profit after shifting overhead costs to this loss making project. The lower cost by these projects also mean that the company could afford lower price to customers. The job security for labour involved in these projected is secured but the loss project seemed never ending
• Unapproved expenses such as training and entertainment were recorded under this project
• There were idle manpower for this huge loss making project as the idle labour with higher than normal wages cannot assigned to other project. The project managers just do not want to absorb higher wages which erode their margin
• By the same reason, the idle fixed asset like forklift cannot pass on to other projects due to its high shift cost together with the transportation costs involved in moving the forklift
• The pricing decision based on the historical cost could not function at all as the costs were not accurate
• The performance based on the profit and loss could not function at all
• To conclude, there was some unnecessary costs but it was not sole cause for huge loss
• It was also found there was a huge claim by customer for robbery of inventory in the warehouse. It was not reported as it was claimed that it should be the responsibity of subcontracting trucker.
• It was found that the senior project manager who waived the claims against subcontractor and had left the company already
• The finance department was blamed because of not report the contingent liability and did not hold the payment to the trucker.
• The finance department claimed that it had not been informed and it is not finance department to decide to hold payment or not.
• The staff turnover rate is exceptional huge due to there would not any bonus as the warehouse section made huge loss.
• It would incur loss for five year. Every capable staff did not think they should stay with this company.
• Plenty senior managers who had left joined the competitors in the same industry. They were competing us for the same business from our customer
• As some capable staff had left and the replacement is just not capable due to limited experience and no proper handover procedures. The warehouse section is in a mess. Many costs were not necessary and were not absorbed by customers and what is more, there is huge compensation for mishandling. The mishandling was due to the purchase of unsuitable forklift which is difficult to operate after certain height. It was modified but sometime it created some accidents. Some Compensation were hidden by reversing revenue and finance department cannot identify.
• Improvement in service required extra investment in cost and it could not recover from customers due to fixed cost
• The senior management decided to terminate to the contract with the landlord but it was found there was not exit clause for this five year contract.
• The senior management then considered to move other customers into this warehouse but unfortunately the location is too far away as many newly built warehouse has a better location to save the trucking costs
• The decision to terminate the contract is a immediate huge loss and the senior management would be fired. There was just no initiates for anyone to click this termination

The consultant opinion is to reduce cost and to grow in order to get of the difficult situtation

Reduce idle warehouse costs

There is not clear procedure and structure for reducing idle capacity especially among departments during non-peak season and normal fluctuation. e.g., subleasing, co-warehousing like co-loading in freight, replacement tenant, mix storage of stored good with different peak season/hour , flexible pricing, elimination total number of warehouses, over-sales of warehouse space and premium price for temporary warehouse to customer to increase reserved MOQ and increase floating area in contract with landlord

Reduce worker cost

Increase in productivity so that you can lower unit cost per ton. 10% increase in staff cost may decrease more than 10% decrease in mishandling costs in China which is bigger than 10% staff cost. You don’t have to pay extra for the 10% increase as productivity will be improved more than 10%. You can also reduce overtime by various shift time pattern but leaving the total compensation to worker remains unchanged. The decrease in overtime can only be accepted by workers if they can be rewarded more by improving their productivity. Workers in China come from different provenance and they don’t live with their families. They want to earn more overtime pay by waiting instead of working. With the improvement in efficiency, it can help us to avoid the risk of failing to meet critical KPI at peak season and improve the living standard of workers (more leisure time). The low staff turnover rate is important for keeping consistent service to customers in China

Growth to reduce costs

Taking into account the market growth in China, and the bigger the size, the bigger the opportunity of cost saving by sharing common costs such as manpower, warehouse space and other equipment, the business strategy may be growth strategy. The growth strategy/must win do not equal to loss making price strategy. The below 10% marketing price can certainly help the company to achieve growth in revenue. But in the short run, you can’t withstand the outcome of continuous breeding. The strategy is only effective to generate both revenue and EBIT if you have reached the lowest costs or are close to lowest costs in the market. If there are full of unnecessary costs and unabsorbed costs by customer, the unlimited growth will only generate more problems on cashflow and cost control. The saving from growth is less than the wastage or the customer can still get lower offers taking into account the changeover costs from other competitors.

Case 2

An owner of HongKong freight forwarder wants to list the company in HK or to sell its business. The owner just think freight forwarding business is full of risk. The profit is tied into the accounts receivable and there are unexpected risks even though the company has bought transportation insurance. All charterd space contracts is of high risk due to fluctuating demand but it is really necessary for reliable service at competitive price. The business cannot be passed to his next generation.

The consultant expressed that listing in HK for a freight forwarder is not easy because of the high risk of under reporting of tax in China, non-compliance in China and unsustainability of business due to fluctuating demand, high IPO cost and the time involved in tiding up the accounts. It might not be as easy as you think. In particular, you have to

  1.Write off bad debt and make a provision for bad debt. Debts due over a year and due by overseas agent may not be recoverable at all.

  2.Carry out full fixed asset physical count.

  3.Prepare weekly cashflow planning so that we can show the company can go on business without problem. Due to foreign exchange control in China, you might have cashflow flow if you have collection in China

  4.Do cut off test. Operation must ensure the income and cost can be entered into the same month so that profit won’t be overstated or understated. If there is a special case that cost or revenue cannot be in pair in a particular month. It can be delayed to another month. Some operation system sometimes is just difficult to handle cut off issue

  5.Make cost provision as soon as possible for all the claim or compensation

  6.Operation and Finance data should be reconciled so that the company can provide revenue and margin by product, by customer, by routing with great confidence of P & L accuracy. In most cases, intercompany reconciliation is impossible to achieve within short period of time

  7.The credit, billing and collection workflow/SOP should be reviewed and made some apparent enhancement. Extra workload is required but it must help the cashflow and reliability of the profitability

  8.Extra work is required for verifying rate charged in billing , profit sharing to agent, volume discount and the reasonableness of amendment of freight charges in operation system. Many amendments may imply operation inefficiency to some extent. Finance should analyze the causes or the department or the person has made the recurring error

  9.Contract should be available to exercise all kinds of control and also to meet auditor’s verification requirement, collection, making a list, analyzing and making suggestion upon contract renewal. Sometimes,contract is not available or some contracts are just missing

  10.Speed up Month end closing.

  11.Verifying old balance sheet items.

The owner do not think it is feasible to go listing. After the adjustment, the profit may not meet the requirements for listing and the company just cannot afford talent resource to manage the tasks

Case 3

A feeder company which operate within Pearl River Delta. The company business is going down.

The main reasons are

• The operation cost in HK is high and the customer choose to transport directly into china through China ports.
• As the sea transportation between HK and Pearl River Delta is imbalance, the operation cost is higher
• Feeder transport is low end, the margin is low compared with the overhead cost. The overhead cost keeps rising in China and HongKong
• Feeder transport involves huge volume data and outdated operation system is difficult to handle. An investment in new system involves extra cashflow that the company cannot afford
• The business is high risk due to seasonal factor
• The company has to commit chartered volume for leased feeders
• Due to excess feeder capacity, the feeder company cannot increase its selling price but to offer further discount
• Some CCA and freight forwarder threat to have further discount or they will shift the business to other competitors
• The company has around 40 accounting staff but they are only doing basic billing and bookkeeping
• There are no internal control within the company. Many deadlines were missed

The consultant opinion is that the company should develop new business instead of feeder transport. The existing business can be sold to competitor who will have higher loading factor and lower cost after acquiring the business

Case 4

A courier has expanded very fast in China by paying commission to sales, agents and branch managers. But the business has declined suddenly from the last years. It seems that there won't be any solution at all and the company is going to close soon.

The main reasons are

In the past, the company expanded by offering commission to third party who transferred the business. The third party has become rich and more knowledgeable on the market and has opened its own company. The third party either ask higher commission from the company or it will transfer to other competitors

The branch managers has opened their own companies and compete business with the company. They are paid by the company but transfer the business to their own companies. As the branch managers controls everything locally. The company can do nothing to maintain the existing business who have operation managed by such branch manager.

The sales were paid certain percentage on sales less their salary. As the sales volume grew, the sales commission is high compared with the profit of the company, the company has changed to lower percentage. The sales then transferred the business to other companies who can offer higher commission. What is more, even the sales commission were paid after account receivables has been paid, the sales just don't press for payment and allow longer payment term to some customers. The sales delay the commission but the company delayed the cashflow. The company suffer more and it won't work at all. The sales can just bring low margin and long payment term business to the company.

The consultant opinion is that the company should maintain a proper customer relationship management system which helps to serve the customers well and to maintain their loyalty. If the company has operated efficient, it can offer higher commission and compete the business again. When the business grows, the company can regain the control by volume discount which in turn offer more buffer for selling rate and the commission that can allow

Case 5

A Germany family freight forwarding company was established in HK. Its headquarter is in Germany. It is around 300 staff for the whole group.

The Germany company is a small freight forwarder in HK in terms of shipments from HKG to Germany. It has to source from HK General Sales Agents.

The first problem to a new Germany managing director in HK is that he do not understand the true profit from its customers.

It is difficult for him to exercise discretion on pricing and credit control.

The main reason is that operation staff do not allocate the MAWB cost to each HAWB to save processing time as the existing system cannot do it automatically

Another reason is the company charges it customers under all in rate covering for routings between HK operation and Germany ports.

The profit portion for Germany is much higher than that of Hong Kong. It is the Business Head in Germany determines the transfer pricing between HK and Germany

What MD concerns are

The staff in HK do not care much on the buying rate for HKG/Germany shipments as the profit will mainly be absorbed by headquarter

The bonus system seems not working to motivate the staff in HK as it is outside MD's control

The customer profitability for HK alone is meaningless for price negotiation and credit control

The Germany taxation is much higher than that of HK. The group pays higher tax than necessary

The consultant opinion is that allocation of MAWB cost to each HAWB is necessary for understanding customer's profitability.

Customer profitability is important for business decision like chartered space, partnership opportunity, vendor performance.

If an existing operation system cannot cater for, alternative method should be used.

The transfer pricing between Germany and Hong Kong should be adjusted to save the tax burden for the whole group.

As to the performance measurement of HK and Germany operations, an agreed adjusted KPI should be agreed between them.

Case 6

A Japanese freight forwarding companies who operates in Greater China for over 10 years. The management pays less attention on management.

The whole accounting department and management is in a mess.

The main reason is that the department head of accounting department must be Japanese and he must work well in the MD.

The finance department head who can meet these two requirements is not very capable. All working partners including internal staff, vendors and customers are more or less with the same culture

Many unexpected things like huge exchange loss, bad debt, complain, omission of billing, overpayment to vendors, legal claim and compensation. Overtime is not controllable and no pre-approval is necessary.

Billings are late due to the late receipt of cost invoice, waiting for destination charges and urgent handling of unexpected events.

The company is profitable but the cashflow is very tight due to the late billing, error in billing and late payment by customers.

There is no visible approval on singing contract, profit sharing, vendor selection, creation of vendor profile, amendment on charges and costs, credit limit, selling price and buying cost.

Operation just use what exists in the operation system

It is difficult to run this business and the company has to finance from banks by all sources, overtime, factoring, short term loan and bank guarantee.

The owner has decided to go listing.

The consultant opinion is that it takes year to restructure and it is high risk as the underlying condition won't be changed due to lack of senior management support

The best option is selling to competitors or listed competitors who value its business much.

To prevent the situation from getting worse, the authority structure should be set up to prevent problems rather than to handle the problems.

A well planned system enhancement can avoid most of the unexpected events and the corresponding processing time

Case 7

A foreign logistics company in Hong Kong. The MD is a foreigner. Recent business strategy is to have system implementation in HK, both operation and accounting. He is a little worried about as he is a good sales but he is not good at system issues at all. He wants to hire a new financial controller who can manage the system implementation as well as expansion in China. Unfortunately, the existing accountant is very upset and she is going to leave as she don't want to have a new boss. it is difficult for The MD to hire someone who is really good at system implementation due to the fact he has limited knowledge on system issues. The system implementation experience for finance is very limited and each system is different.

The consultant opinion is that the company can hire a temporary project manager who really has professional experience in system operation and accounting for the same industry. It is for the temporary project manager to show the MD the approach. In the worst case that the existing accountant will leave, there should be some backup accountant resources that can support. That is what the company require to do.

The consultant also give a checklist which shows critical steps for system implementation.

  1.The company should conclude the information need with the management team to run the business smoothly,to explore market opportunity and finally to avoid business risk. There are so much information that can be available. We should focus on all the necessary information that can be available timely. Take into foreseeable future need as well as some critical controls like KPI and performance related bonus, Cost Control, regional office control, customer relationship information and automation.

  2.Try to interface from the main systems to all sub-systems to produce all the information automatically covering vendor management, procurement, credit control, Customer relationship management, inventory, Payroll, warehousing and trucking(if any). If part of the information cannot be produced efficiently after discussing with ERP service provider (take too long, too complicated, prone to error or risk too high), we will suggest alternative solution by other system such as Excel

  3.Try to interface from the main system to vendors and customers

  4.Set up the best practice management system flow, policy, procedure under ERP environment before implementation

  5.Provide user acceptance test opportunity to operation/finance staff/management at the beginning, during the critical stages and the completion of system implementation

It is easy to say than done. System implementation is once off and difficult for anyone to have accumulated relevant experience.

Case 8

A 68 years old man who owns a secured logistics company operating in Hong Kong and China. The secured logistics business is growing fast in China even though the decline in business in logistics during the past ten years. He graduated from Chinese University and he is exceptional intelligent. He trusts management and be lives reasonable KPI and reward can help to manage the company well. But the company is in a mess and the staff turnover rate is exceptional high. He has around 200 staff in Hong Kong and China

Suppose he can grow the business very fast but he stays at the same level with unexpected events every day. The old man is exhausted and every staff is useless as he mentioned.

The main reasons are

The old man trusts no one. His son has opened his own company as he can't work with his dad.

He offer lower than market salary rate. For example, he outsources IT to a China base company. He hires Pilipino to work as sales.

He fires a few staff each month to pressurize the staff and he is the department head of all departments. He learns the departmental management skill by interviewing with talent interviewee

He likes to recruit talent but lay them off before probation. He pays temporary salary in return for permanent benefits.

He always want to move the job to South China to save rental and staff cost

Many staff who left the company reported the non-compliance by the company to the China official department.

The consultant believes that the culture don't work at all and the KPI and related performance don't work without job security. The staff just do as requested and try to delay the work.

A consultant involvement won't help the situation