Wednesday, 22 January 2014

Malaysian Code on Corporate Governance 2012 (“MCCG 2012”)


By Chan Hoi Leong, Researcher
Topic: Education
Area of discussion: Corporate Governance
Chapter/Keyword(s): Malaysian Code on Corporate Governance 2012 (“MCCG 2012”)

Question

Discuss how the Malaysian Code on Corporate Governance 2012 would help to strengthen governance in listed companies in Malaysia including the roles and responsibilities of the board and management; reinforce independence, risk and financial reporting.

Introduction

           Essentially, Malaysian Code on Corporate Governance 2012 (“MCCG 2012”) lists down wide principles of good governance and detailed recommendations on structures and processes as well as commentaries to aid understanding by giving out guidelines and examples. Ideally, companies are advised to follow its best practices which are flexible, as it will lead to the creation of sound corporate governance culture, besides promoting ethical and sustainable values. It encourages companies to put extra efforts on their governance needs instead of merely fulfilling the minimum requirements or “box ticking”. This is beneficial as Mallin (2013, p.291) highlights that many listed companies in Malaysia are still family-controlled; at such shareholders’ rights are often being ignored while transparency and independence are relatively weak. It is indeed the keys for efficiency, market confidence and investor protection. Below is the careful analysis of each principle including their impacts, advantages and effectiveness:

Content 

             Under the first principle of establishing clear roles and responsibilities, the board shall formalise ethical standards through a code of conduct. For example: trade practices, ethics guidelines and working standards. Organisations should view codes as a great tool to inculcate its employees with sound principles besides regulating their behaviour only (Steger & Amann 2013, p.149). At such, codes can add value to firms by creating an ethical and positive work culture throughout the entire company. Ideally, well-administered and properly executed codes can offer numerous benefits such as provide guidelines to assist employees whenever they face ethical dilemmas in finding the proper course of action; minimise the risk of having too many subjective and inconsistent management standards; build public trust and improve business reputation; and ultimately, promote market efficiency. PricewaterhouseCoopers (PwC) and Deloitte are some of the industrial examples that are having a strict code of conduct.

             Next, the board should also assure that the organisation’s strategies promote sustainability especially in the area of environmental, social and governance (ESG) whereby their respective policies and implementation need to be disclosed in the company’s annual reports and website. Such disclosures are important for long-term growth and profitability. For instance: the ways on how an organisation operates, measurement of progress towards achieving their sustainability targets, identification of new market opportunities for sustainability-related products and services, mitigation of sustainability-related risks and so on. It is apparent that sustainability initiatives can aid in boosting a company’s competitiveness, employees’ morale and ability in getting more capital (Main & Konigsburg 2011, p.3).  

            Then, the board ought to formalise and make public of its board charter, which point out the board’s strategic aims, roles and responsibilities. This is vital especially for the area that concerns with the division and separation of authorities and responsibilities between the board and the management, the chairman and the CEO, and all the board sub-committees; all roles should be clear-cut, non-ambiguous and preferably be split. By doing so, it will give a better insight to the person in charge whereby they can discharge their duties delegated to them more effectively in their own area of control as well as increasing their understanding ability on what needs to be done so that they can do the right things correctly. Tasks if possible should not be overlapping to avoid confusion. This is to prevent ‘pointing finger attitude’ when something went wrong and indirectly, it will boost their seriousness in doing work too. This is because everyone is held accountable or liable for what he or she did while the others can know who to refer or blame when they identify work errors and mistakes. As a consequence, it will promote efficiency in each individual, team and division. Performance evaluation and assessment can also be done more accurately and fairly. It is noted that Sime Darby already doing this.

            Meanwhile, it is undoubtedly that the nominating committee’s responsibilities have been increased tremendously under Principle 2: Strengthen Composition. Since they are in charge to supervise the director’s selection and assessment, it is strongly advisable that the nominating committee should comprise exclusively of NEDs of which majority of them must be independent. Besides, the nominating committee’s chairman should also be a senior independent director. The benefits of this move are it gives additional independence and increase objectivity in the director appointment process (Azmi 2012, p.13). Thus, avoids the directors from being appointed on the basis of personal connections or networking (Mallin 2013, p.171).

             Subsequently, nominating committee shall develop, maintain and review a set of criteria to be used in director’s recruitment process and annual assessment. By doing this, it could help in identifying the best director, preferably who is balance in all aspects and can add value to the board as a whole (Azmi 2012, p.13). Logical thinking suggests a person’s performance will vary from time to time, that is why yearly assessment is essential. When assessing the suitability and quality of directors, nominating committee shall check, monitor and appraise each individual whereby considerations should be emphasize on performance, competencies, commitment (time spent in company and number of meetings attended), contribution, behaviour and et cetera vigorously and regularly (Mallin 2013, p.172). If necessary, remove incompetent or unsuitable directors. Not only that, the board should set a policy related to boardroom diversity and take proactive steps to ensure that women candidates are included in its recruitment exercise. Research suggests that mixed-gender teams are superior in solving complicated problems and examining more aspects of a problem (Gladman & Lamb 2013).

          At the same time, the board should create a remuneration committee to develop official and transparent remuneration policies and procedures as well as to design fair remuneration packages which are align with the company’s long-term aims and business strategies in order to attract, retain and motivate directors. This move is critical as it can reduce the possibility of quality directors from being headhunted easily, encourage directors to strive harder and avoid companies from paying more than necessary. Remuneration committee needs to ensure that the design of contracts exclude ‘rewards for failure’, to prevent rewarding poor performing directors (Mnzava 2012, p.45). In addition, companies are highly encouraged to disclose board remuneration policies and procedures in their annual reports. In connection with that, previously Zakaria (2011) highlights that many company directors in Malaysia were still unwilling to reveal their remuneration details whereby only 8.3% of directors have declared their remuneration fees in 2011. Hopefully, this situation can be improved further in the future.

           Another principle would be reinforcing independence. Undeniably, independent directors could help in mitigating risks arising from conflict of interest or unduly influence given by interested parties to control board’s decisions. Therefore, assessment of independent directors needs to be done yearly to evaluate whether they are still capable to provide independent and objective judgement as well as unbiased opinion during the board discussion. In this case, it is recommended that the nominating committee should set out the independence assessment’s criteria. For example: check whether they got received additional remuneration (apart from director’s fee) from the company; check whether they have any family or close relationship with other directors or advisers of the company (if any), level of commitment (time devoted and meetings’ attendance) and et cetera (Mallin 2013, p.175). 

           Besides, companies are discouraged to retain an independent director for more than nine years (Oh 2012); the reason behind this is long tenure might jeopardise independence because independent director has been receiving benefits for quite a long duration and started to feel attached with the company already. Hence, the danger is they might become biased and side the internal people. Anyway, they still can opt to serve the company in the capacity of a non-independent director. Furthermore, shareholders’ approval must be sought and board must give reasonable justification also before an independent director who has served for more than nine year can continue to remain independent (Law 2012, p.1). Another recommendation is the CEO and chairman shall not be the same person, and the chairman must be a non-executive director. This is extremely important to promote accountability and also to ensure that the CEO cannot easily influence the board. Thus, the risk of CEO abuses power to do something that are not beneficial to the shareholders and company can be potentially be reduced (Mallin 2013, p.167). If the chairman is non-independent, the board must consist of a majority of independent directors to “neutralise” the board. This is truly useful and helpful for corporation that are dominated by families like Berjaya Corporation.  

            As per the fourth principle: foster commitment, the board shall come out with its expectations on its members’ time commitment and set new directorship acceptance protocols. Ideally, directors should allocate enough time to run their duties. This recommendation is vital especially for those individuals that hold multiple directorships as they are more prone to distraction, easily lost focus and usually cannot provide sound advices as compared to the person that hold only one directorship (Hashim & Rahman 2011, p.137). This move encourages directors to at least notify the chairman about how much time that they could spend on the new appointment, before they accept any new directorships. Moreover, board also need to ensure that its member will frequently update their knowledge and refine their skills via suitable continuing education courses and long-term learning. This is because as time passed by, knowledge and skills will become irrelevant and obsolete due to globalisation and changing market dynamics. This move promotes sustainability whereby it enables directors to engage actively in board deliberations.    

              According to the fifth principle to uphold integrity, audit committee should ensure that the preparation of financial statements is in line with applicable financial reporting standards to promote reliability, besides having policies and procedures to evaluate the appropriateness and independence of external auditors. This includes a review of the audit fee and fees paid for non-audit work (Mallin 2013, p169). The external auditors’ independence would be threatened if they provide non-audit services to client without adequate safeguards and control as they might grow closer to the company (ICAEW 2013). This is even could be worst if the non-audit fees are higher than the audit fees as it is open to suspicion. That is why it is recommended that the audit committee shall establish policies to govern those non-audit services issues and procedures for external auditors to follow. In addition, external auditors’ written assurance should be obtained by the audit committee to confirm that they have been independent throughout the whole audit engagement.

             For the sixth principle, the board should set up a good risk management framework and disclose in the annual report the primary features of the company’s risk management framework and internal controls system. All risks must be clearly identified, assessed and monitored as they can affect the bottom line, company and employees. For example: liquidity risk, political risk and reputation risk. Company ought to take appropriate measures to reduce and minimise risk such as diversification and transfer of risk; whilst to ensure that internal controls system is always practicable and robust, periodic testing of the effectiveness and efficiency of its procedures and processes must be carried out consistently. Such moves will safeguard shareholders’ investments and the company’s assets. Besides, an internal audit function that reports directly to the Audit Committee should also be established. Internal auditors shall have relevant qualifications and experiences to run their duties smoothly including review and appraise the governance, risk management and internal controls processes.

             Meanwhile, the new additions under the seventh principle stress drastically on the importance of well-timed and sound disclosure. Firstly, organisations are required to have proper corporate disclosure policies and procedures, which include the reconsideration on the need for non-financial information data’s disclosure. Basically, it encourages companies to move away from merely satisfying the minimum reporting requirements to high quality and comprehensive disclosures. Ideally, more disclosures generally mean that the shareholders can have a clearer view about the company and indirectly, improve shareholders’ decision making as well as erase doubt. This will surely heighten transparency and shareholders’ confidence. Secondly, it promotes better and extensive use of technology; so that timely information can be communicated and circulated to all the shareholders (Pasricha 2012). For instance: setting up a platform exclusively for corporate governance in company website to display information like board charter, shareholders’ right and the annual report. As compared to traditional snail mail or postal system which is slow, costly and need a lot of effort, such technology-based dissemination methods are more effective, fast and convenient. Plus, it promotes higher accessibility, no delay and it is capable to reach wider audiences including foreign investors. The advantage is shareholders will not received out-dated information which is irrelevant in decision making. 

         Finally, the eighth principle defends and enhances shareholders’ rights as well as foster closer ties between company and shareholders. Sensible actions shall be taken by the board to encourage shareholders to take part in general meetings. Although the current minimum notice period is 21 days (OECD 2011, p.17), companies are allowed to give notices earlier than that to show their commitment. The board needs to think carefully whether they wish to utilise advanced electronic voting since it can potentially increase shareholder participation as physical attendance is not needed. Plus, shareholders are able to vote from remote computer terminals conveniently. Nonetheless, security and cost issues remain a challenge. Likewise, the board needs to move towards poll voting too. Shareholders need to be informed about their right to request a poll vote at the beginning of the general meeting. Pasricha (2012) voice out that the normal practice of show of hands voting is unfair because it does not take into account the shareholders’ percentage of shareholding. Since each shareholder who present physically has one vote, it empowers minority shareholders unequally. Fortunately, poll voting supports ‘one share one vote’ principle and the display of detailed results regarding the number of votes cast for and against each resolution will improve transparency significantly. In addition, electronic poll voting is also recommended as it can eliminate human error in counting votes and hence, recounts are unnecessary. Besides, the board needs to promote fine communication and actively engage with their shareholders. At such, they can consider to carry out regular meet ups, conference meetings, dialogue sessions and corporate visits to boost mutual understanding.

Conclusion

            All in all, as the fulfillment of those principles and recommendations are voluntary, the adoption will heavily depend on a company’s willingness. Most importantly, if companies have decided to follow and execute majority of all those recommendation, it will certainly help them in strengthening their governance and create a win-win situation which is beneficial to the companies as well as to the shareholders. Profit aside, at least such code will push the board and sub-committee to perform their duties efficiently. Hence, companies should view it as a great opportunity to increase their corporate governance’s rating. A pleasant rating attracts new investments, gives a good impression to shareholders and indirectly increases their confidence. The adoption will improve overall performance, reduce fraud and help to gain better reputation. Not only that, core values such as transparency, independence, integrity, accountability, fairness and so on can be further improved too.


References

Azmi, MF 2012, PwC Alert: Malaysian Code on Corporate Governance 2012, viewed 17 June 2013, <http://www.pwc.com/en_MY/my/assets/publications/pwcalert103-cg.pdf>

Gladman, K & Lamb, M 2013, ‘Board diversity: can voluntary change succeed?’, The Guardian, 21 May, viewed 17 June 2013, <http://www.guardian.co.uk/women-in-leadership/2013/may/21/can-voluntary-change-succeed>

Hashim, HA & Rahman, SA 2011, ‘Multiple board appointment: Are directors effective?’, International Journal of Business and Social Science, vol.2, no.17, pp.137-143, viewed 21 June 2013, <http://www.gravitasllc.com/resources/article_docs/14%5E66502343.pdf>

ICAEW 2013, The provision of non-audit services to audit clients, viewed 22 June 2013, <http://www.icaew.com/en/technical/ethics/auditor-independence/provision-of-non-audit-services-to-audit-clients>

Law, A 2012, Malaysian Code on Corporate Governance 2012 – Implication and challenges to the Boards of PLCs, Crowe Horwath, 30 August, viewed 13 June 2013, <http://www.crowehorwath.net/uploadedFiles/MY/insights/insights-assets/MCCG%202012%20article%20Final%20Risk%20Advisory%20-%20Sept%202012(1).pdf>


Mallin, CA 2013, Corporate Governance, 4th edn, Oxford University Press, Oxford.

Mnzawa, B 2012, ‘Directors’ remuneration and its determinants: What do we know?, Business and Management Review, vol.2, no.4, pp.42-59, viewed 19 June 2013, <http://web.ebscohost.com.ezproxy.inti.edu.my:2048/ehost/pdfviewer/pdfviewer?sid=b6859758-ad2c-4b1a-912d-79b4b252c462%40sessionmgr111&vid=5&hid=9>

OECD 2011, Corporate Governance in Asia: Progress and Challenges, Corporate Governance, OECD Publishing, <http://dx.doi.org/10.1787/9789264096790-en>

Oh, E 2012, ‘Ready for recommendations?’, The Star, 31 March, viewed 13 June 2013, <http://biz.thestar.com.my/news/story.asp?file=/2012/3/31/business/11022663>

Pasricha, N 2012, New Malaysian Corporate Governance Code 2012, The Malaysian Institute of Chartered Secretaries and Administrators [MAICSA], 30 May, viewed 23 June 2013, <http://www.maicsa.org.my/article_coverstory/2012/article_coverstory_1204.aspx>

Steger, U & Amann, W 2012, Corporate Governance: How to Add Value, John Wiley & Sons Ltd, Chichester.

Zakaria, SH 2011, ‘Directors unwilling to reveal remuneration’, The Edge, 8 December, viewed 19 June 2013, <http://www.theedgemalaysia.com/highlights/197487-directors-unwilling-to-reveal-remuneration.html>

Monday, 16 December 2013

Internal Control Systems (PAPAMOSS)


By Chan Hoi Leong, Researcher
Topic: Education
Area of discussion: Auditing
Chapter: Internal Control Systems (PAPAMOSS)


The primary objective of this posting is to critically discuss and explain each element of PAPAMOSS in detail, with some practical examples given to facilitate a clearer understanding. I noticed that there are lack of detailed notes available online nor in books about this topic, so I decided to do some researches and write about this PAPAMOSS’s concept. By the way, this topic is examinable in ACCA examinations (e.g. P1 & P8). Seriously, I hope that this posting can help you to understand the concept better. Kindly share this information with your friends, if you find that this is useful. In addition, if you have any comments which can improve the content of this posting, please do leave a message below.


Internal control systems

                As defined in Paragraph 4(c) of ISA 315, internal control is “the process designed, implemented and maintained by those charged with governance, management and other personnel to provide reasonable assurance about the achievement of an entity’s objectives with regard to reliability of financial reporting, effectiveness and efficiency of operations, and compliance with applicable laws and regulations.”

                     It includes all the policies and procedures (internal controls) adopted by the directors and management of an entity in order to achieve their goals of ensuring, as far as practicable, the orderly and efficient conduct of its business, including: adherence to management policies; safeguarding of assets; prevention and detection of fraud and error; ensuring the accuracy and completeness of the accounting records; and timely preparation of reliable financial statements (Kan, 2013; Kwok, 2005). Auditors generally seek to rely on the internal controls within an entity to reduce the amount of testing on final balances.

              Interestingly, the eight features of an internal control system are popularly known through these two mnemonics words, namely “PAPAMOSS” or “SOAPSPAM”. The eight features are:

Physical control:

This is mainly concerned with the custody and protection of assets such as cash and inventories. It involves tight security measures and procedures to ensure that only authorised personnel have access to the records and assets. For examples, the installation of fences, gates, doors as well as the use of locks and keys.

Authorisation and approval control:

No transactions should be carried out and no documents should be processed, without the approval or permission from an appropriate and responsible person. Approval like signing must be done with consent. Not only that, limits on authorisation should be clearly specified too.

Personnel control:

These are procedures put in place to ensure that staffs have capabilities commensurate with their responsibilities. Kan (2013, p.162) highlights that the hiring of well-motivated competent employees, who have the required integrity for their tasks, will ensure that the control system operates properly. Most importantly, the consideration here should stress on the qualification, selection, training and the worker’s innate personal characteristics. Besides, big companies usually have their own dress code systems which require personnel to wear specific attire or uniform in order to indicate a personnel’s rank or department.

Arithmetical and accounting control:

Persons in charge should ensure that all transactions have been authorised before they are sent for recording and processing purposes. After that, the persons in charge must check whether they got left out anything and make sure that all transactions are correctly recorded and accurately processed. Such controls may include checking the arithmetical accuracy of the records like control accounts, cross totals, reconciliations, trial balance and sequential controls over documents.

Management control:

These are the controls exercised by the management outside the daily routine of the system. For example, overall supervisory controls, review of management accounts, budgetary controls, internal audit function and other special review procedures.

Organisational control:

Kan (2013, p.162) states that a well-defined organisational structure shall show clearly how responsibilities and authorities are delegated as well as identify lines of reporting for all aspects of the enterprise’s operations. A tall organisational structure usually has a narrow span of control where managers can manage their subordinates easily but communication might be distorted due to higher level of hierarchy plus employing many managers is costly. Research organisations normally have these characteristics. Conversely, a flat organisational structure has a wider span of control where managers have fewer time to supervise all their subordinates but there will be lesser distortion in communication as the hierarchy level is shorter plus subordinates are cheaper to hire as compared to managers. This is common in manufacturing industries (Jones and George, 2003, pp.311-312). 

Supervision control:

Supervision by responsible officials of the day-to-day transactions and the recording thereof is an integral part of any control system. For instance, management accounts are reviewed for reasonableness by a qualified accountant. Centralisation might facilitate supervision across management.

Segregation of duties:

Ideally, responsibilities and duties must be separated to a number of people, so that no individual can fully record and process a transaction completely. Furthermore, it reduces the risk of intentional manipulation or mistake and increase the element of checking. Functions which should be separated include authorisation, execution, custody, recording and so on. However, if collusion takes place or if people work together to circumvent the system, then segregation of duties may be ineffective as this situation often making fraud difficult to detect (Gray and Manson, 2011, p.282).  

Conclusion

            It is noted that significant deficiencies in internal controls shall be communicated in writing to those charged with governance in a report to management. The written communication should include a description of the deficiencies and their potential effects. ISA 265 requires auditors to find out the number of identified deficiencies and their relative significance. Auditors may also provide suggestions for remedial action.

References

Gray, I. and Manson, S., 2011. The audit process: principles, practice and cases. 5th ed. Australia: South-Western Cengage.

Jones, G.R. and George, J.M., 2003. Contemporary management. 3rd ed. New York: McGraw-Hill.

Kan, E., 2013. Audit and assurance – principles and practices in Singapore. 3rd ed. Singapore: CCH.

Kwok, B.K.B., 2005. Accounting irregularities in financial statements: a definitive guide for litigators, auditors, and fraud investigators. Aldershot: Gower Publishing Limited.

Friday, 4 October 2013

Just-in-time systems


By Jackie, Researcher
Topic: Education
Area of discussion: Management and Cost Accounting
Chapter: Cost Management – Just-in-time systems


Question: Discuss the benefits and drawbacks of implementing JIT systems



Introduction

           Just-in-time (JIT) is a popular lean manufacturing tool especially in supply chain management. Unlike conventional manufacturing practice which utilises “push approach” of which finished goods are completed and stored in advance before customer orders are received, JIT uses “pull approach” whereby the manufacturing of products begins right after the customer places an order with the company (Weygandt, Kimmel & Kieso 2009, p.174). Fundamentally, JIT aims to produce the required items, at the required quantities and quality only when they are needed (Drury 2008, p.556). Essentially, JIT system covers three main areas: purchasing, production and distribution (El Dabee, Marian & Amer 2013, p.140). Some industrial examples of companies which have successfully use JIT are Toyota, McDonald's, Harley-Davidson and Dell. Below are the discussion on the pros and cons of implementing JIT system.

Benefits

               Firstly, JIT keens to eliminate wastes in time, effort and resources as well as get rid of non-value added activities (El Dabee, Marian & Amer 2013, p.140). For examples: inspecting, moving items, reworks, storing, queuing and waiting. Such activities only add cost without creating additional usefulness to the product; customers will not pay extra for these. Under JIT, the removal of all non-value added activities can be attained if raw materials are converted to finished products with lead times equal to process time (Drury 2008, p.557). For that reason, factory is laid out based on flow line principles instead of batch production functional layout to maintain a continuous flow of components with no stoppages and storage. This will minimise transfer time and shorten the lead time (Bower 2010, p.4).

               Secondly, in pursuing “zero inventories” goal, JIT entails keeping a minimum inventory of raw materials, work-in-progress and finished goods (Scarlett 2010, p.44). As a consequence, it may reduce the number of warehouses that a company maintains or even allow them to completely eliminate all warehouses in one-shot. Subsequently, it layoffs storekeepers as stocks related tasks like counting, recording, checking and arranging are no longer required. Likewise, the number of security guards can also be cut down because there will be limited items for them to safeguard. Besides, it can also reduce direct physical stocks loss and damage caused by burglary and pilferage activities or perhaps in other extents like fire and flood. Therefore, inventory insurance seems to be unnecessary as the risk is at minimal level since companies that are practising JIT will not keep the stocks for a long duration. In short, this enables companies to enjoy a greater saving in warehouse rent, warehousing salaries and insurance payments. Money saved can be used for other better usage like investment. Ideally, this is perfect for companies that are dealing with stocks that expired quickly such as daily newspapers, products that spoiled easily like food as well as electronic items that are quickly outdated.

                 Thirdly, JIT aims for zero defects. This can be achieved if total quality control exists. Vincent (2011, p.3192) points out that quality and productivity need to be refine throughout all manufacturing stages. As per Kanbans - visible signalling systems: if problems happen at a later stage, earlier stage will not receive the pull signal; if problems arise at the earlier stage, the later stage will not have their pull signal answered (Drury 2008, p.558). Total quality control requires workers and supervisors to monitor continuously at every work station. Hence, if any defects are found in any work station, operations will shut down immediately (Weygandt, Kimmel & Kieso 2009, p.175). Then, appropriate corrective action could be taken instantly to rectify the problems at that exact work station. For this reason, the products that are being produced at the end are of high-quality and defects free. So, inspection is not needed anymore and there will be no reworks or replacements of products too. At such, it enables saving in inspection cost and cost of replacement for defective items (Singh & Singh 2013, p.1582).

                Fourthly, Vercio and Shoemaker (2007) state that JIT processes stress on reducing batch or lot sizes to one. Undeniably, production in large batches often causes delays, long waiting time and creates a higher level of inventories. So, producing in smaller batch size will eventually shorten the production cycles, reduce finished goods inventories and enables more customer-specific or customised manufacture (Holl, Pardo & Rama 2010, p.525). Drury (2008, p.558) supports by stating that JIT allows works to flow smoothly to the next stage without the need for storage and to schedule the next machine to accept this item. This facilitates a firm to adapt more readily to short-term fluctuations in market demand and react quickly to customer requests. Not only that, JIT helps in reducing and eliminating set-up times too. For instance, purchase a sophisticates manufacturing machine that allows settings to be adjusted automatically instead of manually. When this happens, small batch sizes will be economical and cost-effective.     
Drawbacks

                Al-Matarneh (2012, p.63) highlights that one of the biggest obstacle in implementing sound JIT is lack of integrated cooperation, direct communication and mutual understanding between suppliers and management. Meanwhile, variability in demand patterns caused by random purchases will worsen the situation; sharing accurate, timely and relevant information about sales forecasts remains a challenge due to trust and incompatible information systems (Horngren, Datar & Rajan 2012, p.736). Although significant coordination between them could be improved by having a real time management information system by using technologically advanced software, it is very costly to carry out. For this reason, sometimes the cost of implementing JIT system outweighs the expected benefits derive from its application, making it not worthwhile to do so. Normally, this happens in small organisation during initial start ups. As production is heavily reliant and dependent on suppliers and if stock is not delivered on time, the whole production schedule can be delayed.

             Next, worker competencies are imperative as they are the critical success factor of JIT. Apparently, companies usually will face a lot of employees’ issues. For instance: attitudes, commitment, punctuality, participation, cooperativeness, learning ability, resistance to change and et cetera. Horngren, Datar and Rajan (2012, p.737) state that workers need trainings to be multi-skilled and enable them to perform a variety of tasks like minor repairs and routine equipment maintenance. Hence, companies might need to pay high costs for all the trainings and workshops. It is noted that having a higher proportion of temporarily workers as compared to permanent workers as well as having a high labour turnover rate will further jeopardise the implementation of JIT. This is due to low probability of achieving the peak stage in learning curve to be real efficient which need a lot of time.

             Furthermore, JIT does not provide any provision for mistakes, errors and uncertainties as it aims for perfection. Hence, it could be very dangerous and risky as back-up plans like safety stock are usually not prepared whilst complexity creates confusion. Sometimes companies face difficulties in identifying and categorising which activities are value-added and which are not (Al-Matarneh 2012, p.57). Insufficient precise information leads to inaccurate forecast and prediction too especially when sales and demand fluctuates during festival seasons. In addition, JIT does not take into account of external factors such as weather, congestion and unexpected accidents which can cause serious delay in JIT manufacturing (Cheng 2011, p.276).

                Moreover, high costs are required to implement JIT system. Cheng (2011, pp.276-278) claims that the demand for more frequent long-distance transportation, small-size and premium shipments will definitely cause high transport cost. Thus, it is not economical as carriage inwards will be more expensive (Akbalik & Penz 2010, p.2567). Yet, implementing JIT is not eligible for trade discount because bulk purchases are avoided. Besides, initial investment could be very high as companies need to purchase all those software and equipments such as global positioning system (GPS) and provide trainings for workers too.

Conclusion

                All in all, evidences have proven that JIT really helps in improving organisations’ efficiency, productivity, responsiveness, competitiveness and products quality; at the same time, minimising unnecessary costs and wastes. However, it is costly to implement. Hence, it appears to be unfavourable for small business start-ups. Plus, it requires time to inculcate this philosophy to the existing corporate culture. Although some companies have tried to execute backward and forward integrations to eliminate the conflicts with suppliers and distributors, but consideration on further analysis need to be taken like NPV, CBA and risk assessment to evaluate whether it is worthwhile to do so. Fruitful results cannot be obtained overnight; it needs quite a long time to enjoy the success as it is long-term oriented.





References


Akbalik, A & Penz, B 2011, ‘Comparison of just-in-time and time window delivery policies for a single-item capacitated lot size problem’, International Journal of Production Research, vol.49, no.9, pp.2567-2585, viewed 7 July 2013, <http://dx.doi.org/10.1080/00207543.2010.532921>.

Al-Matarneh, GF 2012, ‘Requirements and obstacles of using just in time (JIT) system: evidence from Jordan’, International Management Review, vol.8, no.1, pp.55-64, viewed 4 July 2013, <http://www.usimr.org/IMR-1-2012/v8n112-art8.pdf>.

Bower, C 2010, Inventory Control, Association of Chartered Certified Accountants (ACCA), viewed 30 June 2013, <http://www.accaglobal.com/content/dam/acca/global/PDF-students/2012t/sa_mar10_inventory_cat10.pdf>.

Cheng, LC 2011, Logistics strategies to facilitate long-distance just-in-time supply chain system, InTech, viewed 7 July 2013, <http://cdn.intechopen.com/pdfs/15540/InTech-Logistics_strategies_to_facilitate_long_distance_just_in_time_supply_chain_system.pdf>.

Drury, C 2008, Management and cost accounting, 7th edn, Cencage Learning, London.

El Dabee, F, Marian, R & Amer, Y 2013, ‘An optimisation model for a simultaneous cost-risk reduction in just-in-time systems’, Australian Journal of Multi-Disciplinary Engineering, vol.9, no.2, pp.139-148, viewed 27 June 2013, <http://dx.doi.org/10.7158/N13-GC03.2013.9.2.>.

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