Case question presentationPCI Sdn Bhd

Name Student ID

Tan Liang Aik 1091101220Chin Wei Feng 1091102028

Goh Boon Sheng 1091100070

Neo Seow Hui 1091102205Ahmed Abdel rahman Mustafa

1091105622

Prepare an analytical flowchart

of purchasing system in order to

analyses its internal control

Question 1

Identify weaknesses of internal control and

recommend improvement to the

internal control weaknesses

Question 2

Problem and impact Improvement

1. Lack of account payable Department in the internal control system of PCI Sdn Bhd.

-The Company has not established account payable departments to handle the process of the invoicing and to accommodate the need for accurate and timely payables.

- PCI Sdn Bhd needs to establish account payable Department.

- There will be a misappropriation of assets. - The Accounts Payable Department is responsible for the payment of goods and services to vendors, also to keep track on the payment to the suppliers.

- No proper tracking on the payment to the suppliers.

- Account payable department helps to organizes and maintains vendor contact information.

- There will be a manipulation of accounts and misuse of cash.

Problem and impact Improvement

2. There is no proper establishment of responsibilities.

Cik Anne received the Delivery Order (DO) and Store Received Notes (SRN) from Encik Min and invoice from supplier, at the same time she is also responsible for allocating the account payable reference number and update the account payable list in the computer.

- The Delivery Order (DO) should be sent to the Receiving Department, and then the Receiving Department has to issue the SRN and send it to the purchasing Department as well as Accounts Payable Department.

- If Cik Anne prepares the PO, she can order raw material without authorization. This is because she is the one who ordering raw materials and check the invoice.

- The invoice should be then sent to the Account Payable Department where the clerk in AP is responsible to reconcile the information.

-There could be manipulation of account and misuse of cash.

Problem and impact Improvement

3. There is no independent internal verification procedure.

- Encik Razi responsible to call for quotation and purchase order from available registered vendor of PCI Sdn Bhd through email or by telephone, without any proper verification and documentation.

-Three copies of the Purchase Order should be sent to vendor, receiving and account payable Department.

-The vendor, account payable and receiving Department will be unable to make the review and comparison between the quantities ordered as there is no PO copy to them.

-The copies of the PO would allow for the review and comparison for each department.

-The quantities received may not be the same as the quantities ordered because there is no document for them to make the verification.

-The copies of PO will ensure Independent internal verification involves the review, comparison, and reconciliation of data prepared.

Problem and impact Improvement

4. Inappropriate hierarchy of authority.

-In the resource material planning, Cik Lim is approving and recording the PO into the accounts payable with the value below the RM100,000, at the same time, she is the who approves the Monthly Raw Material Summary (MRMS).

- The Company shall assign one clerk from financing Department to be responsible to update accounts payable. This is to make sure there won’t be any misappropriation of cash or manipulation of accounts.

- Cik lim she is the one who update the accounts payable, therefore, she can easily manipulate the account “The material resources figure” because she is the one who approve the MRMS.

- Source documents for accounting entries should be promptly forwarded to the accounting department to help ensure timely recording of the transaction and event.

-The improper documentation process could lead to manipulation of accounts and misuse of cash as wells.

Problem and impact Improvement

5. Improper segregation of duties.

-The finance clerk “Encik Faris” he is the one who responsible for preparing the voucher and the cheques or Telegraphic Transfer (TT).

- The cheque and voucher should be prepared by two different clerks from accounts payable Department. This is because the payment to supplier should be authorized by account payable Department.

- There will be misuse of cash and unauthorized payment could be made to vendor.

- Voucher should be prepared by the one who updated account payable. This is to ensure the payment of bills is authorized by account payables not the finance clerk.

-If Encik Faris prepares the voucher and cheque, unauthorized cheque could be made to vendor.

Problem and impact Improvement

6. Poor planning, budgeting and controlling of stock replenishment.

-The Company inventory holding cost had increased dramatically in 2007. This is mainly due to the weakness in the current purchasing system.

- To implement replenishment system to accurately predict inventory needs and dynamically adjusts to accommodate fluctuating demand across the entire distribution network.

- The Company will be suffering from overstocking; therefore, sometimes it may lead to stock obsolescence.

-To have auto order approval, this is could be done by having consistent vendor relationship and standing order.

- Implement just in time (JIT) to make only what is needed, when is needed and in the amount needed, this inventory plan can eliminate waste, inconsistencies, and unreasonable requirements, resulting in improved productivity

Question 3

Suggest ways to improve the Company’s

performance

Establishing and maintaining profitable supplier relationship

•Suppliers play the biggest key role in their production and operation efficiency

•Opt to establish and maintain a profitable relationship with their supplier

•A good and timely cash payment on credit purchases made

•Many advantages and top priorities will given by suppliers

•Maintain a constant communication with suppliers

Confronting problems of raw material price rises.

•Price fluctuates along time according to supply and demand changes

•Cause eg: Global inflation

•When raw material price decreases, suppliers would keep their selling price constant.

•constantly keep pressuring on the suppliers to ensure that their selling price decreases.

•Hedging is a good method.

•Hedging is an investment position intended to offset potential losses/gains that may be incurred due to price fluctuations by contracting a fixed price for raw material for a period of time contracted.

•Smoothen the supply price

Ensuring good supply quality•Suppliers would reduce the price of raw material at the expense of quality reduction on the raw materials•Good ties and keeping supply price down

Technical analysis •Technical analysis done on materials, overheads, labor and on profits.•Used as tools in future leverages of cost with suppliers•Analyzing on price history, inflation of economy and many more available information

Setting up E-Procurement technology

•Known as supplier’s exchange

•E-procurement comes in 3 different basis

•Business to business

•Business to customers

•Business to government

•Enable PCI’s purchasing department to order, track and manage supply

purchases over the internet

•Improves time efficiency

E-procurement is a value chain

• e-Tendering

• e-Invoicing

• e-Auctioning

• e-Payment

• Vendor management

• Shipping Notice

• Catalogue management

• Order Status

• Purchase Order Integration

• Contract management

Strategic sourcing • Systematic approach for optimizing an organization's

supply base and improve the overall value proposition

• It requires analysis of what an organization buys, and from whom, at what price and at what volume.

• Fundamental part of purchasing and supply management process.

• There are 7 steps for the implementation.

Step 1: Understand the spend category- For example, analysis of total historic expenditure and volumes Step 2 : Supplier market assessment- Understand the key supplier marketplace and current trends

Step 3 : Prepare a supplier Survey - develop a supplier survey for both current and potential

suppliers to evaluate the supplier capabilities

• Step 4 – Building the strategy- First three steps provides the essential ingredients for the

sourcing strategy

• Step 5 – request for proposal (RFP)- Define and make clear the requirements to all prequalified

suppliers- Include product or service specifications, delivery and service

requirements, evaluation criteria, pricing structure, and financial terms and conditions

• Step 6 – Selection - Selecting and negotiating with suppliers.• Step 7 – Communicate with your suppliers- Winning suppliers are notified

Reviewing the supply chain

• Integrated manufacturing process whereby the raw materials are converted into final products and then delivered to customers.

• It maximize customer value and achieve a sustainable competitive advantage

• It also will lead to cost savings and will optimize PCI’s operational efficiency.

• It would means that virtually no safety stock and thus little inventory carrying costs. It also reduces slow moving stock and eventually removes it from a system with a careful planning.

• PCI Sdn Bhd can improve their service by only reacting to those areas where they seem to be having problems. Furthermore, continuous improvement through small steps (kaizen costing) can also be used.

Kaizen costing

• A process that the product undergoes cost reduction even when it is already on the production stage. The cost can be reduced by better deals with acquisition of raw material and also continuous product improvement

Proper planning and budgeting of controlling the stock replenishment.

• Use of Just In Time (JIT) method of purchasing system

• It accurately predict inventory needs and dynamically adjusts to accommodate fluctuating demand across the entire distribution network

Appropriate reporting structure for the employees.• Change its reporting structure to cross-functional

reporting line.

• It helps communicate more broadly, gain alignment easily and builds better products

• PCI Sdn Bhd could implement Enterprise Resource Planning (ERP) to have integrated view of all the business process and sub-process which allows efficiency and effectiveness.

Q & ASession

Q& ASession