SUPPLY CHAIN MANAGEMENT
Mah Yong Jun
I20018766
(MGT356A)
(Individual Assignment)
Program:
DCMAUI
Subject Code & Title:
MGT356A Supply Chain Management
Assessment Title:
Individual Assignment (20%)
Session :
January 2023
1
Marking Guidelines for Assignment (Individual Assignment 30%)
Assignment Topic:
Research on performance measures used in F&N Holdings Bhd
Name(s):
1.___Mah Yong Jun
CRITERIA
Presentation & Structure: Good title,
clear structure (contents page); Clarity
and conciseness of the issues covered in
the topic; keeps to word of 2000 (+/10%)
Business Application & Integration of
Data/Literature:
Literature review with good sources
included and some assessment/ summary
of published work; integration &
application of information
Discussion/Analysis/Expression or
Reflection: Joined up thinking: From
title to argument to conclusion
(Evaluation-Synthesis-Analysis);
Building an Argument – using your
references adeptly
Content/ Terms/ Findings/ Definitions/
Calculations:
Exploration of topic showing excellent
knowledge & understanding through
thorough & appropriate research.
Impressive choice and range of
appropriate content.
Use & presentation of Harvard
Referencing: Follows Harvard style
for in-text citation & Reference List
Use a minimum of .10 sources
Individual
Report
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Feedback
10%
30%
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20%
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Feedback Summary:
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lateness Deductions:
Final mark:
Student(s) Signature:__Jun____________________ Date: 4/4/2023
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Table of Content
No.
Content
Page No.
1
Introduction
4
2
Background
5
3
Literature Review
7
4
Description of Organization’s Supply Chain
Measurement System
9
-
-
Inventory Turnover
Cash to Conversion Cycle
============
9
10
5
Recommendation
12
6
Barriers of Recommendation
14
7
Conclusion
15
8
Personal Reflection
15
9
References
16
10
Plagiarism Rate Page
19
3
Introduction
Source 1: https://www.rit.edu/articles/what-can-you-do-supply-chain-management-degree
By ensuring the supplies reach the end consumers, there is a chain of procedures that links
the holding of the raw materials to turn into the finished goods being transported out, which are
being managed and maintained proficiently by the Supply Chain Management department of
every company. Their job consists of purchasing raw materials, inventory management,
ensuring production lines are in operation, and logistics for distribution through
transportation. Being the centralized department, which controls the flow of the making of goods
& services, they oversee the entire process to help the company cut costs and deliver the products
to the customers efficiently. To avoid supply shortages, minimizing unnecessary steps and
reducing avoidable risks in the supply chain are one of their top priorities. (Fernando, 2022) This
report will be discussing the Inventory Turnover & Cash to Conversion Cycle of one of the
largest manufacturers in the ASEAN Food & Beverages industry for 139 years, Fraser and Neave
(F&N).
4
Background
VISION
To be a stable and sustainable Food &
Beverage leader in the ASEAN region.
MISSION
Fraser & Neave Holdings
Bhd
To be ASEAN’s leading owner & provider
of quality & innovative products that
consumers choose & trust.
In 1883, F&N was founded by John Fraser
& David Chalmers Neave, F&N produces halalcertified products ranging from packaged food,
mineral water, beverages, and dairy products. Not
only that, but they have also achieved an annual
turnover (for every x amount of assets held, how
many sales are made) of RM4 billion (2022),
exported to over 89 countries around the world.
Well-known for their leading beverage brands 100PLUS, F&N Fun Flavours and F&N Ice
Mountain, they have diversified their portfolio by
taking acquisition of a food product brand called Sri
F&N Product Brands
Nona, they are able to expand Malaysia's local tastes &
cooking styles to other countries, including: ketupat (rice cakes), cooking condiments and many
more. While focusing on exporting to overseas’ halal market, they have been awarded as the “Top
3 Performers in ASEAN'' for having a strong Environmental, Social, and Governance (ESG) for
acting responsibly towards the needs of all stakeholders by putting commitment into sustainability
for the earth. (F&N, 2023) (The Investopedia Team, 2023)
5
100PLUS Product
Line
F&N Soft Drinks Product
Line
6
F&N Asian Drinks Product
Line
Acquisition of F&N
Sri Nona Product
Line
Literature Review
Before mentioning Inventory Turnover, inventory management must be explained.
Inventory means stocks of finished goods & raw materials that are kept for future use. The kept
stock of raw materials is prepared to satisfy normal demand patterns. What affects the inventory
turnover is the internal & external variability (unfixed pattern) that disrupts the supply and demand
in the market. Internal variability includes machine failure or production rate; External variability
includes lead time, demand rate or low forecasting accuracy. Customers are given a lead time for
an approximate timing from the placement of an order until the customer manages to receive the
finished goods, but they expect lead time to be short & reliable. Inventory & safety stock helps
companies to absorb the temporary hectic fluctuation to keep customers happy through customer
service. Another variability is market variability where the price/exchange rate varies and discount
offers that stores apply, for example: once the price goes down, the supply decreases and the
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demand start to increase. The company has to manipulate prices of raw materials or finished goods
to stabilize its value, to have control on the market variability.
Inventory Turnover shows how efficiently a company makes usage of its inventory, by
the Cost of Goods Sold (Net Sales) by dividing average inventory value, which is being stored
in the warehouse in a given period. This supply chain measure helps businesses make wiser
adjustments on pricing products, manufacturing stocks, marketing the goods, and purchasing raw
materials. Efficient inventory usage helps the company warehouse to have its capacity to be used
at potential levels, it can be used to compare to similar companies, so changes can be made to
improve within the company. Low inventory turnover ratio shows signs of weak sales or too
many stocks, but high inventory turnover ratio shows strong sales or too few stocks. To
maintain a good ratio and have strong liquidity, the supply produced must meet the quantity
demanded by consumers, not more and not less. Policies stated by accounting, intensive changes
in costs, and seasonal factors (such as cultural festivals) may bring inaccurate information when
comparing inventory turnover with other companies. (Fernando, 2023) Kwak (2019) made a
research on the inventory turnover (IT) as an important measure as it shows that it can be a good
indicator of a firm's performance in terms of financial sustainability.
Cash to Conversion Cycle (CCC) explains how much time (in days) the company spends
to turn its investments in inventory stock and other assets into sales that provide cash flows.
Basically, the repetitive cycle to convert the raw materials, finished goods, WIPs and consumables
into money. The purpose of this measure is to calculate how long each input (dollar) is stayed in
the production & sales process before it gets converted into account receivables, to pay debts and
bills. The company may face penalties or receive a bad reputation if the process is unnecessarily
slow. This is another quantitative way to evaluate the efficiency of a company’s operations and
management. (Hayes, 2022)
Companies who are holding a low Cash to Conversion Cycle shows that they make sure
their products are converted into cash at a fast rate. Return on Equity (ROE) & Return on
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Assets (ROA) should be considered along with CCC when doing analysis with competitors’
management. Not only the company itself uses this measure, but suppliers will also refer to CCC
in financial statements as a credit score before supplying raw materials or stocks. If the company
has high CCC, suppliers will know if they will face a harder time to collect payment from the
company who are facing cash flow problems. (Mueller, 2022) Al-Mohareb (2019) has investigated
that CCC also plays a part in working capital management, where it is a process that the company
makes sure its financial resources to its best usage. (Tuovila, 2023) The lower the CCC brings a
lot of cash, where companies’ profitability shows high results, shareholders’ value increases
because of decreasing receivables accounts and fast inventory.
Description of Organization’s Supply Chain Measurement System
Inventory turnover
9
Source 2: https://www.tradingview.com/symbols/MYX-F%26N/financials-statistics-and-ratios/invent-turnover/
The graph provides the 6-year inventory turnover of F&N Holdings BHD (F&NHB). From
2016 to 2019, they have kept a stable value of 5, but the value has fallen until 4 from the year 2020
to 2022. The optimal value of an inventory turnover is 5 to 10, and F&NHB has shown its
decreasing value, showing that their inventory holds an excess of stocks which reasons can be
having low sales, the decrease in market demand, interest of consumers is directed to another brand
or people’s purchasing power had decreased due to COVID-19. (Jenkins, 2022)
The formula consists of net sales divided by the average value of inventories. So, for every
value of inventories that F&N holds, how much sales would they have in a period of time. F&NHB
serves customers all over the world, where their supply is produced on an enormous scale in 9
different cutting-edged plants. It is difficult to control its supply when the market demand suddenly
falls; let alone a company that wishes to keep aiming for more sales to generate profit, maximize
shareholders’ wealth & focus on growth.
Cash-to-conversion cycle
10
Source 3: https://finbox.com/KLSE:F&N/explorer/cash_conversion_cycle/
The graph provides the 10-year Cash-to-conversion cycle of F&N Holdings BHD
(F&NHB). From 2013 to 2017, the time they need to convert inventory to cash to pay off debts is
less than 80 days, but in 2018 onwards, the time needed starts to surge upwards to a maximum of
90 days. The lowest CCC that F&NHB has achieved is 56 days in September 2015.
The formula for CCC calculates how quick (in days) a company turns its inventory to cash.
It is broken down into 3 stages in the cycle, DIO (Days of inventory outstanding), DSO (Days
sales outstanding), and DPO (Days payables outstanding). DIO is added up with DSO to take the
amount of time accounted into turning the existing inventory into cash while DPO is subtracted
because this is the money that is paid back to creditors that the company owes money to. (Hayes,
2022)
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Source 4 & 5: https://finbox.com/KLSE:F&N/explorer/cash_conversion_cycle/
To find the optimal time for F&NHB with other companies, this graph provides the
benchmark with firms in developing countries & manufacturing essential products for consumers.
For the past 12 months, the current CCC for F&NHB is 74 days stated in the performance summary;
therefore, if external stakeholders were to look at the graph, F&NHB takes a slightly longer time
(compared to other firms) to pay back debts. However, the highlighted bar is close to the average
percentile & the company has a great reputation, external stakeholders would not mind.
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Recommendation
Although F&NHB warehouses integrate the state-of-the-art technology, ASRS
(Automated Storage and Retrieval Systems), the constant changing variable of quantity of SKUs
has to be controlled more thoroughly. Thus, improving demand forecasting accuracy should be
F&NHB’s priority to recover their inventory turnover. The low inventory turnover that is faced
by F&NHB right now, is a cause that is affected by over-forecasting, where the aggregate supply
is more than the actual demand from the market. First off, the product’s demand type needs to be
found out, based on the position in the Product Life Cycle and adjust the forecasting algorithm
accordingly. For example, F&N Orange Flavour’s low demand may state that it is reaching its
decline stage. To prevent that from happening, F&NHB can plan to rebrand or change its product
a little to keep the product fresh in the market. (Drakeley, 2021)
Second method is to identify demand patterns from seasonal events, this allows F&BHB
to fine-tune the forecast to a more accurate number to maintain an average inventory turnover. For
instance, In Malaysia, Chinese people who celebrate Chinese New Year usually stock up more
Asian drinks in their home, F&NHB should push out their F&N Asian Drinks to the market by
effective marketing and seasonal discounted prices. With this method, F&NHB is prepared to
supply for the spike in demand during seasonal events with the help of more precise forecasting
accuracy. (Drakeley, 2021)
Third method is to observe the state of the economy, with the hardships many people are
facing from the aftermath of COVID-19, the purchasing power of each household has decreased
immensely and they have to cut down their costs on buying products that are wanted but not needed.
In this case, F&NHB should reply to the situation by performing market research to push out
smaller package size of F&N 100PLUS, not only for its cheaper price but also for its lesser sugar
content it has. Since the government has implemented sugar taxes to pursue unhealthy intake of
sugar for each person in Malaysia, by charging companies, which companies had to bump up the
prices.
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A way to reduce Cash to Conversion Cycle is to encourage earlier payments from
customers. F&NHB, as a supplier, set payment terms to distributors, so distributors can sell the
stock first then only pay back F&NHB with the earnings made. It varies between 30-day, 45-day,
60-day or even longer payment terms for the invoice issued. Suppliers provide no incentives if the
payment is made early, so F&NHB should consider temporary discounts for early payments.
This will increase the liquidity of cash flows and it solves the problem of running short on cash.
For example, F&NHB has a payment term of 45-day, but gives a discount if the distributor makes
the payment under 30-days. (Gaviti, 2021)
Another way to encourage earlier payments is to promise faster delivery for customers
who pay in full & on time. During seasonal events, the market demand usually goes up for one
product or a range of products. In this case, if the distributor manages to sell their stock quicker
than usual & manages to pay on-time, F&NHB can find ways to speed up the process of delivery
to the distributor. Since both parties want to take this opportunity to make as much sales as possible.
(Gaviti, 2021)
One more method to encourage earlier payments is to offer better bulk discounts for
distributors who make a larger purchase order. By giving better bulk discounts, distributors
themselves can sell at a lower price than their competitors, which results in more sales & better
cash flow. Not only that, distributors can make offers to their customers by giving them FOC stock
for bigger purchases. E.g. Customers of the distributor are eligible to receive 1 carton FOC for
every 10 cartons of F&N Fun Flavour purchased, available to mix-and-match. This FOC carton
allows the customer to earn extra income for themselves or even can pay the distributor’s invoice
earlier, which the distributor also can pay F&NHB faster.
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Barriers of Recommendation
To have better forecasting accuracy for inventory turnover, there are 4 components that
forecasting has to face. The 4 components are Qualitative, Time Series, Causal & Simulation.
Firstly, the qualitative component is primarily subjective & relies on judgment depending on the
current situation. This means that to have accurate forecasting, only people who are experienced
in the F&B industry and read a lot of information in the market can provide better forecasts to
follow. However, the forecaster has a huge responsibility and requires a high salary as it is a high
pressure job to predict the supply needed to produce to cover the demand. Second, the time series
component only uses historical data to perform forecasting, it is best when the data has stable
demand, but at the same time the demand may fluctuate suddenly due to unforeseen events. Third,
the causal component is about the relationship between demand & other factors, where F&NHB
has to adjust themselves to the external environment accordingly, like newly launched product
from competitors or pandemic situation that affects worldwide. Lastly, the simulation component
requires F&NHB to imitate consumer choices that heightens the demand, so they can know which
products to increase the supply in. To think from a customers’ perspective allows F&NHB to relate
& understand what the customers’ want or need, so they would find a purpose to purchase the
products.
The recommendations of encouraging earlier payments from customers may backfire in
the procedure. Temporary discounts and better bulk discounts increases liquidity of cash flow, but
reduces the profit earned from each carton or pallet sold. F&NHB may have lesser returns to
provide to their shareholders, or find it harder to pay back loans. Allowing faster delivery may
reduce the quality of the products being sent to the distributors and end customers. Having to
prioritize the goods to reach to customers fast by any means may cause the production to cut off
quality or missing steps, delivery drivers causing reckless driving which leads into accidents and
the loading docks may carelessly unload stocks that can cause damage to the packaging.
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Conclusion
Supply chain management plays the biggest role in all organizations as it includes the start
of the handling process of acquiring raw materials to getting the finished goods sent to end
consumers. Having a good inventory turnover shows that F&NHB have good inventory
management and forecasting tactics. Being able to react to trends proficiently proves that there are
no SKUs in their warehouse is considered as slow-moving inventory. (Jenkins, 2022) More
external stakeholders want to find themselves working with companies who can provide positive
results in selling the goods. Additionally, the better control in supply chain management F&NHB
has, the more profits earned by the company that can also be reinvested back to focus on expanding
its market to a global level. Operating on a global scale is a difficult task to handle as each
geographic location has its own local needs & rules and the same inventory management strategy
may not work for each decentralized warehouse that is far away from the main headquarters.
Cash to Conversion Cycle is also another measure to prove the supply chain management
of F&NHB being effective and shows the company’s financial standing being healthy. Although,
having a low CCC may decrease the liquidity of the company, preventing F&NHB to making
additional purchases to replenish the shortage of supply & generate sales, which may become an
opportunity cost if the purchases are not done. The lack of liquidity also stops F&NHB to paying
outstanding debts which are more important as to avoid penalties. Taking a slightly longer time to
pay back debts for better investments does not hurt the company, it also helps F&NHB to cover
up time wasted from unforeseen circumstances. (Hayes, 2022)
Personal Reflection
I have learnt that companies need measures to comply with in the supply chain process to
keep everything in order. It made me understand the importance of having a strong supply chain
management system that also brings a strong sustainability while keeping every stakeholder
content. From writing this assignment, I also learnt that supply chain management isn’t all about
handling goods & providing services, but also deals with other departments such as finance (to
deal with payments), accounting (cash flows) and procurement (purchasing order).
16
References
Al-Mohareb, M. (2019) Cash conversion cycle and profitability, evidence from Jordan, Research
Gate. Available at:
https://www.researchgate.net/publication/337025400_Cash_Conversion_Cycle_and_Profitability
_Evidence_from_Jordan (Accessed: April 2, 2023).
Drakeley, P. (2021) How to improve inventory turnover with inventory optimization, EazyStock.
Available at: https://www.eazystock.com/blog/improve-inventory-turnover-inventoryoptimization/ (Accessed: April 2, 2023).
F&NHB, (2022) FRASER & NEAVE HOLDINGS BHD (FY2022 FINANCIAL RESULTS
BRIEFING), Fraser & Neave. Available at: https://www.fn.com.my/wpcontent/uploads/2022/02/UPDATED-2H-FY22-CEO-Presentation.pdf (Accessed: April 1,
2023).
F&NHB, (2023) BEVERAGES, Fraser and Neave. Available at: https://fraserandneave.com/ourbrands/food-beverage/beverages (Accessed: April 1, 2023).
Fernando, J. (2022) Supply Chain Management (SCM): How it works and why it is important,
Investopedia. Investopedia. Available at: https://www.investopedia.com/terms/s/scm.asp
(Accessed: April 1, 2023).
Finbox, (2023) Cash Conversion Cycle for Fraser & Neave Holdings Bhd, The Complete
Toolbox for Investors. Available at:
https://finbox.com/KLSE:F&N/explorer/cash_conversion_cycle/ (Accessed: April 2, 2023).
Hayes, A. (2022) Cash conversion cycle (CCC): What is it, and how is it calculated?,
Investopedia. Investopedia. Available at:
https://www.investopedia.com/terms/c/cashconversioncycle.asp (Accessed: April 2, 2023).
Hertz, I. (2021) 5 tips to reduce your cash conversion cycle, Gaviti. Available at:
https://gaviti.com/5-tips-to-reduce-your-cash-conversion-cycle/ (Accessed: April 2, 2023).
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Jenkins, A. (2019) Inventory turnover ratio: Trouble or Paradise?, Oracle NetSuite. Available at:
https://www.netsuite.com/portal/resource/articles/inventory-management/inventory-turnoverratio.shtml#:~:text=For%20most%20industries%2C%20the%20ideal,prevent%20inventory%20l
osses%20to%20spoilage. (Accessed: April 2, 2023).
Kwak, J.K. (2019) Analysis of Inventory Turnover as a Performance Measure in Manufacturing
Industry, ResearchGate. Available at:
https://www.researchgate.net/publication/336637861_Analysis_of_Inventory_Turnover_as_a_Pe
rformance_Measure_in_Manufacturing_Industry (Accessed: April 2, 2023).
Mueller, J. (2022) Cash conversion cycle: Definition, formulas, and example, Investopedia.
Investopedia. Available at: https://www.investopedia.com/articles/06/cashconversioncycle.asp
(Accessed: April 2, 2023).
Rochester Institute of Technology, (2023) What can you do with a supply chain management
degree?, RIT. Available at: https://www.rit.edu/articles/what-can-you-do-supply-chainmanagement-degree (Accessed: April 1, 2023).
The Investopedia Team, (2023) What is environmental, social, and governance (ESG)
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(Accessed: April 1, 2023).
TradingView, (2023) Inventory turnover of Fraser & Neave Holdings Bhd –
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Tuovila, A. (2023) Working Capital Management explained: How it works, Investopedia.
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Unilever, (2018) Oligopoly market everywhere..., Kyo of Economics. Available at:
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April 1, 2023).
F&NHB, (2023) About Us, Fraser & Neave. Available at: https://www.fn.com.my/about-us/
(Accessed: April 2, 2023).
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Plagiarism Rate Page
20