1.0 INTRODUCTION
Oilene Refineries’ management was unhappy with the quality of crude palm oil (CPO) delivered by Palm Haul Sdn Bhd (PHSB), their transporter. The contract will expire within the month. Oilene Refineries will have to analyse the scenario and make a decision whether to renew the contract with PHSB or find other solutions.

1.1 GENERAL INFORMATION –Crude Palm Oil (CPO) transportation

* Approximately 1,500 tankers transporting CPO from the mills (where palm kernels are harvested) to the refineries (where palm kernels are processed for CPO extraction) in the peninsular and East Malaysia. * Palm oil estates operated by MNC have their own mills while smallholders send their palm kernels to co-operative mills for processing. * Once the CPO is extracted, it is then sold to refineries where it is refined for local consumption or export. These refineries are concentrated in areas where palm oil cultivation is a major activity. * The refineries commonly OUTSOURCE the transportation of CPO to transport companies. The transport companies are responsible to deliver consignments of CPO from the mills to the refineries. * The tankers have to be modified to carry CPO. * Approximately 17.73 million metric tonnes are moved yearly from the mills to the refineries by the tankers operated by transport companies. * Gross profit margins: 35%-45% * Administrative overheads are low. Net profit can be made if operated efficiently. * Achilles’Heel (a deadly weakness in spite of overall strength, which can actually or potentially lead to downfall) is COST OF SALES due to: * Vehicle maintenance costs * Compensation payments to refineries for short delivery of CPO.

Picture 1: The Supply Chain of Palm Oil

1.2 MAJOR ISSUE IN THE TRANSPORT OF CPO: OIL PIRACY

* Stealing of CPO by the drivers, depot (palm oil storage or storage of tankers) operators and transporters and selling it to syndicates. * Transport companies are held accountable and will have to pay compensation to refineries for the losses.

1.3 POSSIBLE SOLUTIONS BY THE REGULATOR (MPOB) * Make Fleet Management System compulsory and users must be licensed * Quality Regulation 2005 (MPOB) states that anyone found guilty of either stealing or contaminating CPO can be fined up to RM250,000 or send to jail for 2 years or both. * Hindrance: Inability to catch the thieves red-handed.

1.4 PHSBBUSINESS INFORMATION

Year established: 2002
Founders: Datuk S. Najeed
Type of organization:Smalland medium enterprise (SME)
Type of Business:CPO transportation business based in the peninsular Malaysia
No. of employees: 200 (80% - 160 workers in operations, majority drivers)

Main Assets:

No. | Description | No. of Unit | Acquisition Year | Status | Exit Date | 1. | Tankers (customised) | 80 | 2002 | Fully depreciated | - | | Total | 80 | | | |

Main Operations

1. PHSB transported 3000 tonnes of CPO daily from palm oil mills to respective refineries that purchased the oil form oil palm plantation companies and cooperative mills. 2. Since PHSB owns 80 tankers, therefore it has the capability in terms of fixed assets to meet the demand of the customers. 3. Secured service contracts that were renewable on a 5-year basis 4. Contracts are due to expire on June 2009

Organisation Structure

Diagram 2: PHSB Organisation Structure
Major Customers: Oilene

Business Performances * Initial capital outlay: RM2 million * Average annual turnover: RM25 million * Annual gross profit margin: 10%- RM2.5 million (Industry gross profit 30% - RM7.5 million) * First Quarter of 2009 (Q1, 2009: Jan-April) profits dropped comparing to Q1, 2008

Rational: * High compensation paid out due to the shortage of CPO when the tankers made the deliveries * Tankers were loaded with the amount stated in the delivery order from the mill. But when the tankers arrived at the refineries, the quantities delivered were short. * Suspected palm oil theft occurred between the mills and the refineries.

* If Oilene decided to not renew their contract in June 2009, PHSB will not be profitable in 2010.
2.0 PROBLEMS
We are viewing the problems as Oilene Refineries Sdn Bhd’s (Oilene) perspective against Palm Haul Sdn Bhd (PHSB), which they contracted to transport crude palm oil (CPO) from the mills to their refineries. There are 3 major issues:

1. Poor Quality of CPO

The crude palm oil (CPO) received by Oilene from PHSB is low quality. The CPO transported from mills to refineries is being siphoned off by the oil pirates and is contaminated with liquid like water, used oil or sludge. The suspected culprits may include tanker drivers, transporters and depot operators. Because of the low quality of CPO received, Oilene need to shut down their processing plant to clean out the sludge almost every week. This incur high expenses (i.e. repairing cost and maintenance cost, time lost, low production) and not to mention their failure to meet delivery order by customers.

2. Insufficient Quantity of CPO

CPO consignments received from PHSB did not tally with the amounts listed on the delivery order. Oilene was not able to meet production demand. It is suspected that CPO theft were rampant among the PHSB drivers.

3. Failure to Meet Order Delivery

The poor quality and quantity of CPO received from PHSB affected Oilene’s production capacity. If these problems persisted, Oilene’s profits and good reputation will be jeopardised. Their customers might shift to other refineries since Oilene repeatedly failed to deliver the orders (the exact quantity and delivery time).

4. Caused the most problem comparing to the other transporter, Tiger Oils Transporters

PHSB competitor, Tiger Oils Transporter is performing better than PHSB. Therefore Oilene may not hesitate to terminate and/or opted not to renew contract with PHSB. Instead, they might be interested to offer the contract to Tiger Oils Transporter or other transport company.

3.0 ROOT CAUSES OF THE PROBLEMS
In order for Oilene to decide whether or not to renew their contract with PHSB, they must understand the root causes of the problems faced by PHSB. According to the PHSB Financial Reports 2008-2009, the possible root causes of their problems are stated below:

Problem 1: High Absenteeism/Driver Shortage
Root Cause: Strict delivery requirements to conform to Just-In-Time

Consequences: * Drivers shortage * High absenteeism among drivers due to tiredness from long working hours
Problem 2: Unattractive remunerations package from PHSB
Root Causes:

i) Low salary – The drivers may be involved in siphoning activities due to the need for some quick cash and escalating personal expenses during the year-end especially when major festivities occur during this period.

ii) No benefits such as Insurance coverage (Personal Accident policy), medical expenses, trip allowance, bonuses, increments, over time allowance, food expenses allowance and etc.

Analysis of Current Staff Salaries, Allowances and Benefits (stated in PHSB Income Statement) against the recommended Salary Guide for Truck Drivers and Other Employment Benefis from MIDA

* Compensation payments and Staff Salaries and Allowance - Drivers doubled in 2009 * As stated that 80% (160 out of the total 200 staff) are drivers, we can make an analysis of the average current salaries and allowances received by PHSB’s drivers in 2009.

* Therefore, the accusation of low salary may not be the root causes of the problems faced by PHSB as the average driver’s pay (monthly) is comparative to the suggested minimum/maximum salary rates for lorry and truck drivers in 2009/2010. Assuming that the salary is RM1,770 per month, a driver may take home an allowance of RM2,414.07 (RM4,184.07-RM1,707). A driver at PHSB is earning a sound salary and allowances.

* Assumptions made with reference to Schedule 1: Administrative and Operating Expenses of PHSB Income Statement * Drivers and staff may receive Ex-Gratia * PHSB are making the compulsory contributions and giving employment benefits in the form of Employee Provident Fund (EPF), General & Life Insurance, Medical and SOSCSO).

Hence, PHSB cannot be accused of not giving other employment benefits.

* However, since PHSB is differentiating between the drivers and staff for the administrative expenses, therefore drivers are not given incentive, refreshment and training. * At the same time, PHSB did not give out bonuses andretirement benefits to all workers. As an alternative, PHSB gives out Ex-Gratia payments but it prove to be ineffective to build integrity and loyalty to the company. * Due to shortage of drivers, they may not be given their earned paid time off (holidays, sick leave and vacation leave). Therefore, the drivers opted to be absent. * PHSB does not have attractive fringe benefits to attract and retain skilled drivers. The benefits may include tuition assistance, flexible medical or child-care spending accounts (pre-tax accounts to pay qualified expenses), other child-care benefits, and non-production bonuses (bonuses not tied to performance).

Problem 3: High oil pilferage * Tankers did not arrive at the refineries: CPO stolen, driver’s missing and tankers abandoned

Root cause: i) Lack of integrity due to low encouragement and motivation for the drivers. ii) Lack of incentives for ‘honesty’ to deliver on time, quality CPO maintained during delivery and making sure the quantity delivered as ordered by customers. Consequences: * Allianz Insurance which is PHSB’s insurers against Goods-in-Transits wants to increase the premiums * Tankers arrived with the quality of oil compromised with contaminants Problem 4: Compromised Quality of CPO from transportation * Loading, travel and pumping has specific temperature ranges and must be consistent or the oil will solidifies in the tankers (cannot be liquefied again). * Gradual heating up the oil when nearing to refineries must be done to meet the pumping temperature. Root Causes: i) Tankers not maintained well ii) Drivers lack the training to load, travel and pump oil in the correct way.

Problem 5: Manual Driver Allocation and Scheduling

Root Cause: Insufficient number of administration staff to schedule delivery route, allocation of drivers and schedule maintenance.

Consequences: * Time consuming * Manual rescheduling of delivery route and allocation of drivers when a driver does not turn up for work * Neglect on scheduling regular maintenance of tankers

Problem 6: High Cost of Maintenance and fuel cost

Root Causes: i) No scheduled preventive maintenance done ii) Reactive unscheduled breakdown is most often due to lack of preventive maintenance. Reactive maintenance can be costly and should be minimized by a proactive and regular preventive maintenance program. iii) Tankers operate well past their useful life to fully maximised the cost of the tankers and customization costs iv) Lead time for the delivery of new tankers have to be planned in advance to include the time needed for tankers’ modification.

4.0 POSSIBLE SOLUTIONS
There are 3 possible solutions by Oilene Refineries Sdn Bhd to consider: A. To operate in-house transport services

Cost Benefits Analysis

1. Truck Drivers

The truck drivers are one of the important factors to make sure every delivery of the crude palm oil can be done successfully. If Oiline wants to form its own transportation facilities to handle delivery of the crude palm oil, the drivers’ income and benefits should be manage seriously.

The driver’s remuneration package would follow the current market salary packages. The salary of the truck drivers should range from RM778- RM1770 based onthe number of years experiences.

Besides that, to make sure the amount of truck is balanced and able to keep up with the company’s needs, Oiline will need at least 60 truck drivers that consist a balance amount of experienced and inexperienced truck drivers.

2. Vehicles

Oiline needsto purchase at least 30 Prime Mover Trucks which is specially used for delivering crude palm oil. Each trucks can carry up to 34,000 litre of crude palm oil and a prime mover truck would cost around RM180,000. The total cost for the 30 prime mover trucks is RM5.4 million. If the vehicles are valued to be depreciated in 10 years, therefore the cost of the purchases can be distributed evenly. Oilene will be looking at a yearly assets depreciation value at RM540,000over 10 years.

Besides the cost to buy the trucks, the Oiline also need to take care the additional expenses on the vehicle for every year which include the cost of spare parts, cleaning, tyres and tubes, insurance and roadtax, maintenance, petrol and license, permit and inspection.

By comparing with the PHSB expenses, Oiline’s Direct Cost would be lesser because their trucks are new.The cost of maintenance and spare parts would be minimal.

On the down side, if Oiline implements in-house CPO transportation, they will not be able to receive any compensation if the consignments received in tonnes do not telly with the delivery order.

3. Fleet Management System implementation

We proposed that Oiline implement the Fleet Management System which has been practice by major transportation companies. The Fleet Management System is able to track the trucks’ movement and route taken while delivering the packages. It serves as a deterrent totheft of crude palm oil.

Each Fleet Management Systeminstallation would cost approximately RM1,300 per year/truck. If Oiline purchases 30 trucks, the total installation cost is RM39,000 per year.

Advantages

1. High Quality Of Crude Palm Oil (CPO)

The strategy of implementing own transportation company by Oilene gives them the ability to control the quantity and quality of CPO for their production. This can be achieve by using customized tankers to carry the CPO from the mills to the refineries and reduce the risks of CPO damage. Therefore, Oilene can minimise the risk of plant’s shut down, reduce the delivery timelines and improve the quality of oil produced demanded by customers. Implementation of in-house transportation and Fleet Management System will also prevent oil pilferage. This is because, the Fleet Management System is specially design to track the vehicle location and driver activities. The management can easily access information on drivers’ activities during transporting the CPO.

2. Cost Effectiveness

Oilene can cut down unnecessary operation costs. The purchase of new prime mover trucks will not usually have major breakdown. This will lower the cost of vehicles maintenance. By having its own transportation and Fleet Management System, Oilene will not be expose to oil piracy and oil pilferage because Fleet management System will track the routes taken by the drivers and this will make sure they arrive at the mills and/or refinery as scheduled.

3. Efficient Time Management

Fleet Management System provides real-time information to the management to access through devices such as mobile phone, tablet or desktop to control and measure the operational activities. The information given will enable the drivers to go directly to the respective destination and will not waste time. More CPO will be transported from palm oil mills to the refineries and this will enable them to perform more trips per day due to the improved dispatching. Therefore, efficient time management will increase productivity and Oilene can perform using the Just-In-Time method.

4. Safety and Security

The vehicles that are secured by Fleet Management System will protect the drivers, vehicles and inventories. Fleet Management System offers information such as a 'breadcrumb trail', vehicle speed and direction, location, driver assignment by vehicle, and maintenance status (Howland, 2009). This system promotes effective driving methods so that the drivers will be more careful and reduce fuel consumption. In the long run, the vehicle maintenance cost will not escalates due to the effective driving performance.

5. Customers Satisfaction

The implementation of own transportation and Fleet Management System will increase productivity and quality of CPO as requested by the customers. Problems such as oil piracy, practice of siphoning CPO and adulterating the consignment with water can be avoided and Oilene can supply high quality of refined oil to its customers. This will gain customers’ trust and loyalty. Therefore, it will improve the reputation of Oilene and more customers are willing to make business with Oilene in the future.

Disadvantages

1. High Cost

The decision to build in-house transportation for CPO will surely lead to high start-up and operation expenses i.e. the purchase of vehicles for transportation of the CPO, purchase of Fleet Management System software and drivers’ salaries. The minimum estimated initial (for the first year) is RM6 million. Therefore, to build own transportation does incur high cost.

B. To renew contract with PHSB with stricter requirements

Oilene should consider renewing the CPO transportation contract with PHSB. Loyalty is the result of an implicit relationship. Substantial relationship has been built between the management of Oilene with the management of PHSB over the years. Based on the Income Statement, the problems of low quality and quantity of CPO that forced PHSB to pay compensation to Oilene started in 2006. The problems began to escalate in 2008-2009. One of Oilene’s General Managers contacted to complain to Datuk S. Najeed, owner-cum-founder of PHSB. It shows that Oilene still have faith in the management team of PHSB to rectify the problem before the contract expiry and subject to review for renewal. At the same time, Oilene has less than a month to make a decision. However, Oilene can make a better judgement on whether to renew the contract with PHSB or not based on PHSB’s financial analysis as follows:

BUSINESS ANALYSIS OF PHSB

A. PROFITABILITY
Reference: PHSB Income Statements from 2002-2009

Objective: To assess the company’s ability to generate earnings, make profit and efficiency in the ability to get return from its investments.

1. Times Interest Earned (Interest Coverage Ratio) is calculated to determine the company’s solvency. In layman term, to show that the company’s earnings is covering their interest payments.

Times Interest Earned (Interest Coverage Ratio)
= Profit before taxation / Interest Payments

Generally, PHSB has the ability to pay its financing expenses with the gross profit they made from 2002-2009. Therefore, PHSB can consider to buy new tankers and the accompanying systems needed to be more efficient and effective in delivering CPO from the mills to the refineries (investing in fixed assets) and reduce the cost by proper disposal of the old tankers.

PHSB transported 3000 tonnes of CPO daily from palm oil mills to respective refineries that purchased the oil form oil palm plantation companies and cooperative mills.

Tanker capacity per trip = 40 tonnes

Tankers required on daily basis
= 3000 tonnes / 40 tonnes
= 75 tankers per day
= Approximately 38 tankers for 2 trips/daily

Since PHSB owns 80 tankers, buying new tanks and disposing the old tanks can be done in stages in order to continuously meet the demand of the customers and gradually able to ensure consistent good quality of CPO transported to their customers by using new tankers.

2. Net Profit Margin is the measure of overall profitability using the bottom line.

Net Profit Margin = (Net Profit / Total Revenue) x 100%
*Net Profit is also known as Profit After Tax

PHSB profit averages at 4% for 8 years in which the net loss margin was recorded in 2009 at -7% and the highest at 10% in 2006. The only way that they were able to sustain themselves throughout the years is the accumulated profit made balancing the net loss sustained in 2009 and the overall low net profit throughout their operations.

B. EFFICIENCY
References: Income Statement and Balance Sheet

1. Return on Assets shows the ability of a company to leverage its assets to generate earnings from its activities.

Return on Assets (ROA) = (Net Profit / Total Assets) x 100%

PHSB’s assets comprised of both debt and equity. Both of these types of financing are used to fund the operations of the company.The ROA figure gives investors an idea of how effectively the company is converting the money it has to invest into net income. The higher the ROA number, the better, because the company is earning more money on less investment. The highest ROA was recorded in 2006 at 21.32% and the lowest was -10.55% in 2009. Based on the low ROA, the management's has failed to allocate its resources especially in 2008-2009 and could not make large profits with little investment.

2. Return on Equity/Investment (ROI) shows the earnings made possible through investment. It is a measure of overall profitability of a company. ROI is determined by shareholders.

Return on Equity/Investment (ROI) =
(Net Profit / Shareholders’ Equity) x 100%

PHSB management has been inefficient in 2008 and hit rock bottom in 2009. They failed in using the resources of the business. The ROI recorded at -34.06% shows negative return on shareholders’ investment. PHSB may have difficulties attracting new investors with this record.

C. LIQUIDITY
Reference: Balance Sheet
Liquidity Ratios are important to determine the company’s ability to pay its debts using current assets.

1. Current ratio is a reflection of whether a company can pay its current liabilities using current assets. The healthy ratio is 1.5 - 2.0. It also shows the company’s ability to make enough money to cover debt and make new investments.

Current Ratio = Current Assets / Current Liabilities

PHSB was secured against debt in 2006-2007 with a health Current Ratio of 1.80 and 2.04 respectively but their ability to cover debt and make new investment is shaky in 2009.

D. SOLVENCY – GEARING (LOANS/DEBTS)
Reference: Balance Sheet 1. Debt to Assets Ratio shows the percentages of business’ assets being funded through debt

Debt to Assets Ratio = Total Liabilities / Total Assets

PHSB ensures that the bulk of the investments comes from stakeholders and retained earnings rather than loans every year. It is a way for PHSB to shield itself from the risk of nonpayment if its debt is subject to sudden increases in interest rate.

E. CASH FLOW
Reference: Balance Sheet
Cash is the lifeblood of a business. The Cash Flow Ratios show the movements of cash in and out of a business.

1. Operating Cash Flow Ratio shows the ability of a company to cover its current liabilities through its cash flow from operations (CFO).

Operating Cash Flow Ratio = Cash Flow from Operations / Total Debt
Total debt includes the interest, short-term borrowings, current portion of long-term debt and long-term debt

Cash Flow from Operating Activities = EBIT + *Depreciation – Taxes
EBIT equals Net Income with interest and taxes added back to it.

The operating cash flow ratio is a measure of a company's liquidity. PHSB’s operating cash flow is less than 1 since its inception and is the worst in 2009 at -0.08%. It shows thatPHSB has generated less cash in the period than it needs to pay off its short-term liabilities. This may signal a need for more capital.

2. Debt to Cash Flow Ratio shows how well the operating activities are generating cash to cover total debt.
Debt to Cash Flow Ratio = Total liabilities / Total Cash Flow

PHSB does not have enough cash to pay for total liabilities. Major risk of defaulting in paying debt was the greatest in 2009 at Debt to Cash Flow Ratio of -11.80.

3. Cash Interest Coverage Ratio is a measure how well cash flow are able to cover cash payment made for interest bearing debts.

Cash Interest Coverage Ratio = Cash Flow from Operating Activities / Interest Payments

PHSB had enough cash to cover Interest Payments multiple times over every year from 2002 until 2008. The negative cash flow in 2009 by -6.99 may pose a problem to PHSB to pay its interest. PHSB must find a solution to get injection of cash through payment of current assets (especially trade receivables) or find new investment to sustain itself in the coming years.

C. To engage a new transport company or expand contract with Tiger Oils Transporters

In order to prevent oil piracy and loss of huge amount of CPO, Oilene may consider giving the contract with a new transporter company or expand its current contract with Tiger Oils Transporters. Oilene has less problems with the consignments received from Tiger Oils Transporters as compared to PHSB.

At the same time, Oilene is spoilt for choice in choosing the right transport companies as this niche industry is very lucrative. A new transporter company chosen can be better than PHSB.The new transporter company must subscribes to Palm Oil Monitoring System and Fleet Management System in order to control the quantity and quality of CPO delivered to Oilene from the mills.

D. Risk Management by Oilene Refineries to improve production
Oilene’s must manage the risks involved when dealing with a third party to ensure continuous production. Oilene is responsible to check on the quality of CPO before putting the raw input in their refinery’s processes. They must invest on a system that monitors the quality of their main input (CPO). At the same time, using the Just-In-Time method of getting CPO delivered and immediately processed must still be buffered by their own stock / inventories to avoid any disruption to the production processes and delivery of orders to customers.

5.0 RECOMMENDED SOLUTIONS
A. To renew contract with PHSB with stricter requirements
There is no many other options for Oilene in solving issues above due to short period of timeline and continue to have contract with PHSB Sdn Bhd would be the correct choice in short period. Both parties should negotiate to achieve mutual consensus in drafting new contract which will benefits both sides. Oilene should implement some new requirements in the new contract with PHSB including modification of terms of current contract.In order to prevent unnecessary obligation, modification of terms of contract must be executed in accordance with the regulations stated in Contract Act 1950. Both parties should include a clause into the new contract, if the performance of PHSB can’t reach the expectation of Oilene after the end of new contract, the clause will be activate and contract will be terminate immediately with compensation. This move is to ensure that PHSB will take action to solve existing problems. However, modification of contract should be made under mutual agreement within both parties.

Strict Requirements: Monitoring of Oilene on PHSB

1. Fleet Management System

According to The Sidhu Brothers Group, Fleet Management System was very successful for them in tackle siphoning ofcrude oil. As a crude oil transportation company, PHSB should implement this system in long term in order to stop the criminal action of their drivers. The system will marks the date and time the tankers enter a hot spot and how long they stop at rest areas and eating shops. This function will actually track back their planned working schedule by administrative team, if drivers are find out to be guilty, legal action will be taken. Besides, there is a “panic button” installed near the driver’s seat in every oil tanker which enables the driver to alert headquarters if the tankers are hijacked or experiencing any difficulty. In order to avoid the cases of driver cooperate with syndicates in faking the crime scenes, company can view through the street view or “Birds Eye” in main road to check the real scene which can’t be fake. When PHSB oil tankers go off the original route and head to one of the hot spots, the FMS system will detect it, so the drivers know the risks they are taking if they work with syndicates to steal CPO. In this part, Oilene might suggest to PHSB to adopt the system and allowing them to have an access on the system.

Other Advantages: * Minimise compensation * To prepare for MPOB’s directive to make it compulsory for all transporters of CPO to be licensed and equipped with FMS.

2. Attractive Remuneration Package

As part of crude palm oil supply chain, both company should look into the safety risk in transport of crude palm oil and investigate the shortage of current remuneration package, as partner of PHSB Sdn Bhd, Oilene actually can act as an external tunnel of feedback for PHSB’s drivers. By putting both company into a same line, such undesired situations like siphoning of crude palm oil could be eluded or prevented. Oilene may also advise PHSB on this matter to contend with the issues of contamination or shortage of delivery as such solution could be effective in the long run.

Additional compensation & benefits package for PHSB’s drivers may be given in the form of year-end bonus (performance based), incentive “for honesty”, refreshment, training, retirement benefits, given earned paid time off (holidays, sick leave and vacation leave), attractive fringe benefits to attract and retain skilled drivers. The benefits may include tuition assistance, flexible medical or child-care spending accounts (pre-tax accounts to pay qualified expenses), other child-care benefits, and non-production bonuses (bonuses related to festive needs).

Introduction of “Honesty Incentive”
Severity of oil piracy case can be analyse from the Starprobe (9 June 2009) that states: * 1% of local production of CPO (0.18 million metric tonnes worth RM325 million) lost to piracy. * 100-200 litres (equivalent to 0.092-0.184 tonnes) are siphoned off from each tanker for every trip. * Each trip transports about 40 tonnes of crude palm oil * The amount stolen is just about 0.23%-0.46% of the total tank capacity * Based on the estimation of CPO worth (RM/tonnes), we estimated that only RM166-RM322 worth of CPO stolen per trip * Replacement of CPO stolen with liquid (water, used oil, sludge) * Unaware refineries will process CPO and contaminants affecting the quality of the end products * But the amount of compensation that transport companies have to pay to refineries are exorbitant. * Therefore, as encouragement to drivers to be honest (to deliver the exact amount and pure quality of CPO), an “honesty incentive” of between RM150-RM200 can be given per trip. The refineries’ feedback on the delivery quality, quantity and time delivered will serves as “key performance indicator” for the drivers’ eligibility to receive the honesty incentive.

PHSB must aims to provide market competitive pay and rewards to attract, motivate and retain the highest quality, best connected and most respected people as their drivers. Their remuneration and benefits are structured to reward employer such as the drivers for their individual and collective contribution to their success, for demonstrating our values in their actions and decisions, and for creating and enhancing value for the company.

Advantages: * Reduce the risk of theft * Minimise and/or eliminate compensation paid to refineries * Increase loyalty of drivers to the company * Increase integrity of drivers in performing their jobs

3. Improve Administration efficiency

Frequent broke down of transport vehicle will affected the cooperation between both parties. PHSB should look into the maintenance matter and consider alternative solution. Outsourcing could be one of the solution in this issues. Maintenance of truck evaluates in quality and time, a well-maintained truck is necessary to perform its duty to meet the delivery timeline. According to this case, PHSB can reduce the burden of administrative manager by not send the non-functional truck to workshop but allow the out-sourcing maintenance workshop send their worker to have regularly checkup in PHSB base. Oilene can form an audit team to check the maintenance level of PHSB truck, record all transactions and evaluate final performance of PHSB in the end of the contract.

4. Develop effective Preventive Maintenance Program for the Tankers.
A scheduled vehicle service consists of preventive maintenance, scheduled component repairs, and driver inspection. . The objective is to have the majority of vehicle maintenance and repairs scheduled rather than unscheduled. Thus minimizing the cost of breakdown and negative effects associated with unscheduled breakdown. Preventive Maintenance Program is the important key to improve vehicles and equipment life by having planned maintenance activity that will reduce risks and error. This program can identify and measure the vehicle failure and error before it happens. To maximize the availability of vehicles, Preventive Maintenance services must be performed on a scheduled basis. If preventive maintenance is not performed regularly, vehicle life span will be greatly reduced.

The benefit of implementing Prevention Maintenance Program by PHSB is to protect vehicles so that it can be use continuously in the future operations. The vehicles will undergo scheduled preventive service and identify the breakdown of the vehicles. By performing this, PHSB can prevent having a major breakdown that will cost them a lot. It is ideal to prevent vehicles’ failure and can reduce maintenance costs that will be incurred in the future.

Besides that, the implementation of Prevention Maintenance Program also helps PHSB to reduce downtime to locate and replace missing parts. Some part of the vehicles may have limited stock and to repair the missing part, PHSB may need to wait for a period of time until it can receive the replacement part to perform the maintenance. By implementing Prevention Maintenance Program, PHSB, by scheduled service, PHSB can recognizes early which part of the vehicles that needs to be replacing in order to avoid unexpected failure in future. This will make it easier for PHSB to estimate the cost and time to purchase and receive the replacement parts of the vehicles. Furthermore, the possibility to perform unnecessary repair can avoid due to the regular services.

Other that, the implementation of Prevention Maintenance Program enhances the efficiency of equipment keeping them running more efficiently and lowering power expenses. This can be achieve if PHSB runs a regularly maintenance services on the vehicle rather than perform a major breakdown and failure that will affect the usage of electricity or fuel consumption. A major breakdown of vehicle can cause more time to repair, thus use more electricity to service and repair the vehicle. By implementing Preventive Maintenance Program, PHSB can save money on power costs.

The conclusion is, PHSB can implement the Preventive Maintenance Program since the the income statement shows that it will increase their gross profit to 14.62% which is nearly half of the previous year gross profit.

Long Term - Termination of Contract
If the issues in this case persistence after (1) modification of terms of contract, (2) implementation of fleet management system on PHSB side, (3) increase remuneration package for drivers on PHSB it would be advisable for Oilene to terminate the contract with PHSB, but the first consideration prior to termination of contract between Oilene and PHSB boils down to the question that whether Oilene have an immediate replacement of transporter.

B. Risk Management by Oilene Refineries to improve production
1. Adoption to Palm Oil Monitoring System

Basically it is about filtering system. Upon uploading the tanker at the refinery station bay, the custody transfer process take place. The system was able to monitor the volume and water content of the delivery to ensure that it meets the specifications. This can be done manually or automatically using online quality monitors attached to the pipes of the truck during delivery. The result might have an impact on the price per load since higher quality CPO is more useful to buyers, however it is still cheaper compared to the risk of production shutdown that lead to the delay in orders delivery.

2. Inventory Management

In the Malaysian palm oil industry, most of the processing activities are well-planned or are geared towards fulfilling as demanded – referred as “back-to-back’ approach to improve waste management in crude oil refine process. Inventory management system is very important to meet organizational objectives to achieve optimal level of stock for raw materials and production outputs which need to emphasis on the operations of Oilene to fulfill customer satisfaction level. The amount of inventory held has a direct impact on the responsiveness and efficiency of operations of a company. The flows of supply chain process of palm oil products are relatively responsive and timely in terms of delivery or reaching to prospective buyers. According to the website of MPOB, average stock level of material that refeneries should store is 6102/ton per days to fulfill demand. Attach with this information, the inventory levels of crude palm oil of Oilene should be held at least equal to that amount whilst suffice to meet the demand of processing activities.

Oilene should follow the step of few big crude oil company in Malaysia such as Sim Darby plantation Shd Bhd in managing their stock level for crude oil, these company all outsourcing to a company name DNR Sdn Bhd in purchased their services (Palm Oil Inventory Management System) which awarded by IOI group. Oilene will get few benefits from the POLMS such as accurate and real-time inventory information and inventory management, online connectivity to ERP/MES System using open standards, audit trail for all tank farm operations for accountability and regulatory compliance and etc. In order to remain competitive of Oilene in the current market, the inventory management system must be in place.

It is recommended that Oilene could implement or improve their existing inventory management as it may help Oilene : i. to maintain an optimum size of inventory for efficient and smooth production and sales operations. ii. to maintain a minimum investment in inventories to maximize the profitability. iii. Effort should be made to place an order at the right time with the right source to acquire the right quantity at the right price and right quality.

6.0 CONCLUSION
It is recommended that Oilene renew their transportation of CPO contract with PHSB with stricter requirements while at the same time, it should take proactive measures to ensure quality, quantity and delivery of their products to their customers.

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