1.

0 Introduction

Mr Dali. the Managing Director of .Id 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 t. CC has already recouped the
original inves.ent. .1d Cuts Ltd really need to think about this in order to keep its relationship with its
biggest customer. F thermor . their supply contract is a.ost 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 Ulthed States International Trade or bribe them to drop the case. T.
issue .ses because United States International Trade Commission has begun investigation on CC
exports from China to Ulthed States. They are saying that CC is pricing its products much lower than
the fair value even CC believes that they acted accorthng 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.

T. report is prepared to anal, the issues in Cold Cuts Ltd that put it in this kind of sit.ion. It provides
information obtained through financial analysis to help CC to decide on whether it wa. to continue or
stop the supply contract with Secconz. h aLso helps CC to evaluate the financial matters t. will be
affected by CC decision. T. report pay particular attention to the a. dumping tax law and will highlight
major strengths and weaknesses while offering some explanation for observed changes. The report .
1comment on the prospects of the company and make recommendations that would improve
company's current perfonnance. 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 t. CC fords 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. T. 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 Cu. Ltd (CO 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 thitildng to produce the technology thenuelves instead of buying from
CC if the price cannot be bwers down.
3.1 SWOT Analysis

SWOT analysis is stands for strengths. weaknesses. opportunities and threats which can be use to
anal, the organism ion and environment. However, below is CC's SWOT analysis.

Table I SWOT Analysis on Cold Cuts Ltd

Se11Mg price from Cold Cuts

Table 2 Cold Cuts Ltd's Selling Price

Cold Cut Singapore A mual Sales and Margin

Table 3 Annual Sales and Margin

ANNUAL SALES MARGIN

SELLING UNIT
TOTAL
UNITS PRICES TOTAL UNITS PRICE
($) ($)
SECCONZ 25,000 140 3,500,000 25,000 82 2,050,000
EUROPEAN
50,00 100 5,000,000 50,000 42 2,100,000
CUSTOMERS
8,500,000 4,150,000
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 .S140 - S.

We will analysis , using target costing method, which nse the anticipated selling price to deduct the
desired profit that CC wants to get. As we calculated, the anticipated selling price which is 5140
selling to Secconz and the desired profit that can get is S40. Therefore CC will get a target cost of
S100. 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 pans 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:

R(sel ling price•variable cost), x (Quantity sold), - (Fixed cost) = ,R5140550)1 x (25.000)1 —(S8 x
25.000)

=S2.250.000 - 5200.000

Alternative 2

The other alterngive is not keeping Secconz and do not renew the supply contract with CC.

3A Financial Analysis

Secconz is the major customer of CC in Singapore. losing the customer .1 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 Fru22y Frost Alpha ',FA) sales of CC. If this happens it will affect the company profit as well. As
mentioned above. the sellmg 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 S 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 proc.s tedutology known as Fuzzy Frost. However. the refrigeration technology
had not Awn. much since its invention. The technology became easy copy or imitation. Besides that
CC was a subcontractor of oomponents 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 busine. in order to save the cost in the long run.
However. it is important for CC and manager to stay informed on the Iat.t technology products in
their industry. Furthermore. CC sold the FFA component locally only to Secoonz. 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 t. situation. CC should able to penetrate the
European market and competing with their technologies.

3.6 Payback a nalys is- 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 tedmology. In this case. the new machinery cost S 8.3
million. The estimated annual net cash flow would be S 4.15 million.

Payback period Amount to be invested / Estimated annual net cash flow 2 years S 8.3 million /
.timated annual net cash flow

Estimated annual net cash flow S 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 ahhough producing the older types of components

3.7 Ethical analysis

A contingent from Clthia trade officials paid a surprise visit to .Id Cuts Ltd plant in Clthia 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 Stat. 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 Stat.
International Ttade Commission wants some bribes in order to smoothen things out. One of the
officers even met mith one of CC's staff privately to make some personal arrangements so that the
case can go away.
3.8 Analysis on Anti-dumping T.

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 .k 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.

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 detennine whether .Id Cuts Ltd break the law or not.

a) A fair comparison shall be made between the export mice 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 is
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 pinks in
question what information is necessary to ensure a fair comparison and shall not impose an
unreasonable burden of proof on those parties.

b) DetermMing injury

The Agreement defines the term-injury" to mean either () 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 imposing 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

proof of causality between dumping and injury and that thew 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
A fair comparison shall be
made between the export
price and the normal value.
Determining injury
Explanation
We do not have enough
financial information to
detennine whether CC sells its
product at higher prices in
China. Funhennore. factory in
Citila produces old technology
product. We do not have
information on that.
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
Break or comply
It is hard to decide whether CC
comply or bleak 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.
CC complies with the law
because it is not cause any
injury.

4.0 Recommendation

To resolve the I. issue, it is recommended that Cold Cuts Ltd cut down the cost in manufacturing by
implement any production strategy such as just in time manufac.ing or lean manufacturing.

Figure I Just In Time Manufacturing

4.1 Just In Time Manufacturing

Just in time manufacturing is a strategy used in the manufacturing industry to reduce oosts by
reducing the in-process inventory level. It is driven by a series of signals that .11 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 proce.

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. T. manufactufing strategy can lead to improvements in quality and
efficiency. It also can lead to higher

Action and Implementation

Evaluation process should be done on certain areas before the implementation of AT manufacturing.
First, Mr Dail 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 tenn 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 mast 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 expe.se 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 busine., including sales. service, engineering, maintenance, production, quality, shipping and
administrative functions. Then. Mr Deli 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.

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 Sta. 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 (SPRAH 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 thaL 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
passible 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. Thu. the goverment will pursue cases involving bribery with the sole
purpose of proving guilty, regardless of their true intent.

4.6 Seek for legal advices

Other than that we believe that .Id 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 hnports

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 thiports

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 requ'ved 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 requited. 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 importanL in light of the circumstances of the particular case at
issue.

4. Examination of impact of dumped impor. on the domestic Mdustry

The Agreement provides that, in examining the impact of dumped imports on the domestic industry.
the authorities are to evalua. all relevant economic factors bearing upon the sta. of the domestic
industry. The Agreement lists a number of factors which must be considered, including actual or
po.ntial declines in sales, profits, output. market share. productivity, return on investments.
utilizarion of capacity, actual or potential effects on cash flow. inventories. employment. wages.
growilt, ability to raise capital or investmen.. and the magnitude of the margin of dumping. However.
the list is not exhaustive. and other factors may be deemed relevant ln 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 fink

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
examinarion of all relevant evidence. The Agreement doas not specify particular factors or give
guidance in how relevant evidence is to be evaluated. Article 3.5 does require. however. that lcnown
factors other than dumped imports which may be causing injury must be examined. gives examples
of factos (such as changes in the pat.m 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
impor.. 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.

6. Cumulative analysis

(\mutative analysis refers to the consideration of dumped imports from more than one country on a
combined basis in messing 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.

5.0 Reference

Carl, W., 2013. Reliableplant. [Online]. Available: http://www.reliableplant.com/Read/11691fiean-

manufacturing-implementation. (IP January 2013)

2. Just In Time Manufacturing., 2013. Tutorialspoint. [Online]. Available:

http://mvw.tutorialspoint.conlimanagement_concepts/just_in_time_manufwturing.htm. [15°'
January 2013]

3. Technical information on dumping., 2013. World Trade Organization. [Online]. Available:

http://mvw.mo.orgienglish/tratop_e/adp_e/adp_info_e.hun. [151h.lanuary 2013]