1BACKGROUND OF THE COMPANY ORIENTAL STEEL PIPE

Category: Accounting

Oriental Steel Pipe Sdn Bhd (OSP) was incorporated under the Companies Act 1965, Malaysia and commences its operations on 1st January 2008. OSP as a private company is limited by shares. It is a subsidiary of the Oriental Castle Sdn Bhd Group.

OSP is principally specialized in the structural pipe piles for retaining structures especially waterfront structures, channelization and tunneling (Oriental Steel Pipe, 2010). Its success projects include (1) ICTSI Berth 6, Manila, Philippines, (2) Marina Coastal Expressway-C487, Singapore, (3) Vivo City-Sentosa Board Walk, Singapore, (4) Saipem Karimun Island Yard, Karimun, Indonesia and (5) Penang 2nd Bridge, Malaysia. According to Oriental Steel Pipe (2010), OSP is the first company in Asia to produce heavy gauge, large diameter, spiral steel pipe piles up to 100m in lengths and is able to provide clients with one-stop foundation solutions such as technical spec advisory, design, material and accessories on pipe pile related projects. Furthermore, OSP can provide a variety of most economical combined wall solutions to the customers with the cooperation with its partner Oriental Sheet Piling Sdn Bhd.

Driven by ambition, OSP has selected an ideal location to serve clients around South East Asia. A modern automated spiral pipe plant with water front or ocean access was built by OSP in Port Klang area in Malaysia with private jetty loading bay to reduce the logistic cost.

According to Oriental Steel Pipe (2010), the local processing center of OSP provides 4 types of facilities which include fully automated spiral welding pipe machine, coating and sand blasting facilities, storage area, and cranes to handle-length pipe and extensive waterfront facilities. These facilities provide tailor-made and cost competitive foundation solution, which are needed by clients (Oriental Steel Pipe, 2010).

OSP also provide added-value services to optimize one-stop foundation solutions to clients. The services are pile shoe fabrication and welding, welding of clutches and types of connectors, sand blasting and coating facilities, and third party inspection and quality assurance services (Oriental Steel Pipe, 2010).

Currently, OSP has a total of 150 staffs, which consists of 40 staffs in the management team and 110 staffs as the general or contract workers. Management team has been divided into accounting management which consists of 6 employees and non-accounting management which consists of 34 employees.

The internal accounting of OSP is handled by internal accounting and finance staffs. The minimum qualification of internal accounting and finance staff that was set by OSP is Diploma in LCCI in order to ensure the competency of the staff.

OSP will prepare the Financial Performance Report, Key Performance Indicators (KPIs), Collection and Debtors Report, and Hedging and Cash Flow every month. In addition, all these accounting reports will be audited by the external auditor.

2.0 VISION, MISSION AND STRATEGY

The vision and mission of OSP are formulated via the 10-year entrepreneurship experiences of the founder. The vision of OSP is to continuously pursue an approach on its strengths, and consolidate the markets in which it is competing in. The missions of OSP are commitment to excellence, commitment to relationship and commitment to forward-thinking.

The vision and mission are communicated to staff by practicing it in day to day works and implement it in the culture of working environment. Furthermore, the top management will emphasize on it when managing the company.

In order to enhance the competitiveness, OSP executes joint venture with associated worldwide business partner to reduce the cost of production. OSP is well equipped with integrated informational system and communication system to enhance the growth of business. The combination of IT and people's activities is to support the use of technology to support operations, management and decision making. For example, OSP invests in the Enterprise Resource Planning (ERP) system to increase the efficiency of management level. Moreover, strong business and marketing networking and loyalty of employees are the key strengths of OSP to continue to be a leading company in the industry.

The major challenges faced in the steel pipe industry are quality, safety, competitive and cost efficiency. Hence, the formulation of the vision and mission has taken into account the external environment to ensure the competitiveness of OSP in this industry. OSP are committed to reduce heavy engineering works' impacts, and they work continually to improve by implementing process that conserve energy, reduce water and control chemical substance discharge.

3.0 STRATEGY ADOPTED TO ACHIEVE THE VISION AND MISSION

3.1 Cost Leadership

Cost control is a broad set of cost accounting approaches and management techniques. It has the common goal of achieving business cost-efficiency by reducing costs.

In order to control cost, OSP adopted benchmarking with industrial practicing strategy. OSP benchmarks by using the best practices in its industry as the basis for improvement in all aspects of the business. The company regularly uses benchmarking to strategically review its position within the market place. The management usually conducts the benchmarking in an annually basis.

The areas that will be benchmarked against are profit and loss, production line, costing strategy base on customer's information on selling price minus off material cost where estimated conversion cost is derived, efficiency in terms of number of workers employed, and quality standard base on customers' feedback.

The top management of OSP carries out the benchmarking by collecting the relevant data especially financial related data via financial statements and published national/industry documents. Besides that, informal market information is collected as well through interaction with customers, machine suppliers, material suppliers and so on. The data collection process is an ongoing process.

After conducting the data collection, the top management will analyze the data collected, and set a parameter as base for the employees to achieve. They will mainly focus on the analysis of the industry trend especially in the cost controlling area and the financial ratios. Comparison of actual data and benchmarking or target data are often made in order to review whether there is any room for improvement.

Apart from this, the management often encourages the members of the organization to outdo the minimum parameter set as benchmarking is just a base that leads the company's direction. From the parameter set, the top management of OSP will endeavor to improve the cost controlling area via better corporate strategies and approaches.

The top management of OSP always believes that benchmarking is useful to stimulate change and therefore bringing the company towards breakthrough achievement. Besides that, they implement benchmarking because benchmarking helps to widen the perspective of the company.

3.2 Product differentiation

OSP has been striving to differentiate its products and services through one stop solution. Through this one stop solution, the company endeavors to satisfy the customers' needs by providing quality services from technical advisory to distribution logistics services. OSP provides technical support advisory which includes the design of retaining solution and/or bearing capacity, propose piles with optimized size, thickness and spacing and so on (Oriental Steel Pipe, 2010). It also provides technical installation support which includes driving plans, method statements and assistance in the choice of driving equipment (Oriental Steel Pipe, 2010).

Besides that, the company always produces and trades only those pipe piles which are of high quality. The company also provides quality fabrication services to its customers.

Apart from that, the most unique and vital service provided through this one stop solution that differentiates the company from others is that the company will assist in the sourcing of project related accessories for its customers. Hence, this one stop solution enables the customers to get all products and services that they want from one company only, which is the OSP. Customers may avoid the hassle of buying products from different suppliers through this one stop solution.

In order to facilitate the achievement of the objective of this one stop solution, the company possess spiral pipe forming machine with a production capacity of 60,000 ton per year, automatic sheet pile, and facilities for additional fabrication needs such as welding and beveling stations, automatic sandblasting and coating (Oriental Steel Pipe, 2010).

4.0 BUDGETING PROCESS IN THE COMPANY

Budgeting process is essential for a company to set a performance standard, to motivate board and employees to work towards the company's goals, and it is used as a tool to detect variances in order to take corrective actions timely. The budgeting process of OSP consists of preliminary budgeting, collecting departmental budget, reviewing and adjusting, and lastly implementation by the board of directors (BOD).

OSP will determine which type of budget that they will have to prepare before preparing preliminary budget. There are three types of budgets that are prepared by OSP, which are long term budget (usually used for the company's three year plan), yearly budget and also the rolling forecast for every three months.

Next, OSP will perform the preliminary budgeting. OSP will decide on the type and extent of information they will have to gather in order to prepare preliminary budget. In preparing preliminary budget, the information on the actual industry trends and historical data is essential.

OSP is using bottom-up budgeting method. Bottom-up budgeting is the process where lower managerial and operation levels participate actively in the budgeting process by setting their own budget (Langfield-Smith, K., Thorne, H., & Hilton, R.W., 2009). For OSP, departmental budget is prepared by the head of department (HOD) of each department which will then pass to the senior management to be reviewed and consolidated. This is because each department has more knowledge and information in the area that they responsible.

The departmental budgets are then collected by the accounting department to be reviewed and adjusted in order to come out with a detailed budgeting for the company as a whole.

Lastly, the BOD will adopt the final budget which has been reviewed and adjusted. The budgeted amount will be used as a standard for the company to control their performance.

The employees that are involved in the budgeting process include CEO, COO, CFO, Sales & Marketing General Manager, Factory General Manager and all HODs. They will produce a feasibility budget through presentation and brainstorming.

The budget of OSP is then used in the variance analysis and investigation for control purposes. Variance analysis is the process of investigating the difference between actual and expected results (Variance Analysis, 2009). It enables managers to identify problems which require further investigation and take corrective actions if there is unfavorable variance. For example, when the costs of certain projects are higher than expected, which mean there is an unfavorable variance, the company will investigate the reason and try to come out with solutions.

As for OSP, the variance analysis is not tied to the reward system as the company measures the performance of their employees based on the performance of the company as a whole and the Key Performance Indicators (KPI) of their employees.

MEASUREMENT OF THE COMPANY'S PERFORMANCE

5.1 Financial measurement

Financial information is needed to help the company's manager to analyze the company's performance and to make decisions. Therefore, various types of financial measures will be adopted by the company to help them measure up their company performance. OSP has used several methods to measure their company's performance, which are Key Performance Indicators (KPI), gross profit, net profit, Earning before Interest and Tax (EBIT), Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA), Return on Capital Employed (ROCE), Operating Working Capital Requirements (OWCR), Operating Free Cash Flow (OFCF), and Gearing Ratio.

KPI is important to help OSP to identify and evaluate progress towards organizational goals (Reh, 2011). The KPI of OSP is sales tonnage of the steel pipe piles. As OSP is a company that produces heavy gauge, large diameter, spiral steel pipe piles in lengths up to 100m, sales tonnage is the best indicator to help OSP to measure the company's performance.

Next, gross profit, net profit, EBIT and EBITDA are the most common component used to evaluate the performance of OSP. Gross Profit is equal to sales minus cost of goods sold. The net profit is equal to gross profit plus revenue minus expenses. EBIT is used to determine the company's earning power, which equals to earning before deduction of interest and payment of tax. EBITDA is one of the alternatives to measure the company's performance base on income statement. EBITDA is equal to the company's earnings before the deduction of interest expenses, taxes, depreciation and amortization.

Manager will use these four data to determine whether the company is profitable or not. By analyzing these four data, manager can determine whether the sales are favorable or not, and whether there are some unfavorable expenses that will influence the company's net profit. Besides, these data are used in budgeting to serve the purpose of planning and controlling OSP's profit and operation expenses. EBITA is also used to determine whether the OSP have large amounts of depreciation charge due to the large amount of fixed assets. Therefore, it is useful for OSP as the company has significant assets.

ROCE is equal to EBIT divide by capital employed. ROCE is used by OSP to evaluate whether the capital investment is efficient and profitable or not.

In addition, OFCF is equal to EBITDA plus OWCR minus capital expenditure. OWCR includes the current assets required in operating process (such as account receivables, inventory and cash) minus the non-interest bearing current liabilities (such as account payables). All of these data will help OSP in assessing the budget, and the healthiness of financial status based on fair or acceptable level by banker, shareholder and market practices.

Besides, gearing ratio is used by the OSP to measure its financial leverage. The higher the degree of leverage, the riskier a company is. As OSP is a private limited company, their debt equity ratio is relatively high, which is 3:1, their paid up capital is small at RM10 million.

5.2 Non-financial measurement

Non-financial information is needed to help manager in decision making and managing shareholders' capital and customers' value. Therefore, non-financial measurement is used by manager to measure up OSP performance. The non-financial performance indicators include Accident Loss Time, Severity Rate, Frequency Rate, Defect Rate, Yield Rate, Machine Downtime, Production Running Time, Staff Turnover, and Punctuality Rate.

Accident loss time is a work-related accident that causes an individual or machine unable to work on a subsequent scheduled work day. Severity rate is used to measure the impact of injuries in terms of lost time or related costs such as medical expenses or costs related to reduced productivity and quality. Frequency rate is the number of accidents out of million hours work. All these three non-financial performance indicators are generated base on the actual data collected.

Defect rate implies how many errors in production occur on average (AlysonNolan, 2010). It is important for OSP to control the quality of products. There are two ways to determine the defect rate in OSP, which are visual and non-visual (Ultrosonic data). Basically, 10% sampling will be used by OSP to determine the defect rate base on England Standard.

Machine downtime is the time when machines are not functioning or productive. Hence, minimizing the machine downtime is crucial to reduce the losses and to maximize the efficiency of production. In OSP, the machine breakdown period is recorded manually.

Staff turnover is the ratio of number of employees that had to be replaced in a given period of time. To measure the staff turnover, OSP determine the ratio of permanent leavers in the reporting period divided by the average actual number of permanent employees over the reporting period. This data is important as high turnover rate will reduce the productivity, quality and profitability of OSP.

Punctuality rate is one of the crucial non-financial data of OSP. In OSP, all the shift change, attendance is recorded via thumb print system. All these recorded data will be automatically sent to the payroll system.

6.0 REWARD SYSTEM

Generally, reward system is very important for a company to motivate its employees to work towards its vision and mission. There are two ways that OSP will reward its employees, i.e. year-end bonus distribution and safety incentive.

Firstly, year-end bonus will be given to the employees based on the performance of the company and Key Performance Indicators (KPI) of the employees. Higher amount of bonus will be given if performance of the company is better and KPI shows better signs. By having bonus incentive, OSP's employees are motivated to perform their tasks in better way.

Furthermore, the company's reward system has the feature that other companies may not normally have which is the safety incentive. OSP does take into consideration the safety commitment of employees. The importance of safety is emphasized through employing dedicated safety supervisors, continuous safety, health and environmental training and a culture where work will be stopped if it is unsafe. Employees of OSP will be entitled to receive the safety incentive when they comply with the safety rule and regulation of this company. By having safety incentive, employees are motivated to follow safety rules and regulations in this company while they perform their tasks.

7.0 CONCLUSION

After discussing about OSP, it is found that even though OSP was operated since 2008, it has well-established vision, mission, strategy, budgeting process, way of measurement of its performance and reward system. We also found that generally the budgeting process of OSP is bottom up budgeting and many financial and non-financial data are collected in order to help the company's manager to analyze company's performance and to make decisions. In addition, the reward system of OSP does not only take into consideration the performance of company, but it also considers the safety commitment of employees. Our group is in the opinion that OSP will achieve success in the future because it has a very sound management.