Johnson Turnaround

1 January 2017

It owned a chain of restaurants and retailing outlets. JPL had on average, 1000 employees including 80 general administration staff. JPL was wholly-owned by the Indian government before 80% of its shareholdings were acquired by the Hong Kong group of companies after 20 years operating. The objective of the takeover was the strategic priority to gain rapid international market share as well as to increase its ability to service an expanded and geographically dispersed customers based in the Middle East and the Indian subcontinent states.

The company was structured into four main functional units namely, the Sales and Marketing, Finance and Accounting, Production and Services, and Human Resource Management. Each functional unit headed by a director, and together with the CEO, they formed the executive management team of the company. According to the Chairman, the company has been overwhelmed with problems ever since the takeover. The sales figures are keep declining but the operating costs are up. He suspected that the underlying causes of those problems are from the company’s credit control and inventories management.

The Protagonist Azmi has been determined to be the protagonist in this case. He had been personally chosen by the Chairman of JPL to be the CEO of the company commencing in November 2009. The main task given to him by the Chairman was to plan and execute an appropriate turnaround strategy for the company. To have that to be done, Azmi had been reviewing the company’s financial statements and also focusing on the company’s credit control and inventories management. Prior to the reviews, he had found several problems that cause the downturn of the company.

The Problems There were a few retail outlets owned by the company were persistently incurring losses, perhaps because of non-strategic locations. This problem worsened the conventional high operating costs that JPL has to face because of the rising of the raw material prices. While reviewing the financial statements, Azmi found out that for the year ended 31 December 2008, the company had incurred a loss of $10. 14 million. This was prior to the excessive spending in advertisement and promotional cost which amounted to $5 million in 2008.

Azmi also found out that the company’s account receivable was poorly manage which cause the debt kept multiplying over the year. There was a significant $40 million total provision made for bad debts in the accounts over a 10 year period. Upon investigation, he discovered that the problem stemmed from wholesale distributors who were defaulting. The company also had been having negative cash flows in 2008 as well as the preceding years. This was due to the mismanagement of inventory and account receivable as well as the poor asset management.

There were insufficient bank guarantees given by the dealers and wholesalers for the goods taken on credit up to one month. The company’s overall account receivable showed an average overdue more than 90 days. The company also accepting the placement of motor vehicles as part of collateral for the goods obtained. Azmi observed that there were a number of empty factories with old steel structures intact for the last 10 years. Azmi found heaps of obsolete spare parts left untouched in the store room while inspected the company’s assets.

Azmi run through the fixed asset motor register and he realised that the most of the vehicles were more than 5 years old and had zero net book values. The Major Issues Most of the problems occurred in JPL were mainly caused by the company’s poor management control. This is including the debt or credit control management, inventory management, as well as asset management. If there is a deficiency in debt or credit control management, there will be a possibility of slow collection of receivables.

The longer an account goes without being collected, the bigger the risk that it will never be collected, which later leads to insufficiency of operating cash for the company. The lack of inventory management shows that inventories move slowly to the customer, increasing storage and obsolescence cost. Because more money is tied up in inventory, the company was cashless and this will increase borrowings, which will increase interest expense. An efficiently run business produces lots of sales for each dollar invested in assets. On the other hand, an inefficient run business will tend to have assets sitting around idle and not generating sales.

This was what happens in JPL where there were a number of empty factories with old steel structures intact for the last 10 years, and there were heaps of obsolete spare parts left untouched in the store room. Alternatives Available There are two alternatives available for Azmi to choose on how will he plan and execute an appropriate turnaround strategy for the company. Firstly, Azmi could just plan a strategy that will give an immediate benefit for the company but only for short-term, or secondly, he could plan an appropriate strategy that will consistently improve the company’s performance for a long-term period.

Decision Criteria Since the company is in an industry that facing a lot of pressures such as product pricings, low entry barriers which causes high competitive, and differential consumer preferences, it is the best for Azmi to plan and execute the appropriate strategy that will consistently improve the company’s performance for a long-term period. This is to ensure the survival and successfulness of the company in this highly competitive industry in the future. Actions and Implementation Plans First and foremost, JPL should include Research and Development (R&D) into the main functional units of the company.

It is known that it will be very costly to invest to establish a R&D department in a company, but it will later serve the company for the future benefits. This was proven by Nestle and Unilever whom dominated the consumer-based market in Asia Pacific region. These two companies invest heavily in R&D, advertisement, and promotion. These are the market leaders and they spent in the range of 2-3% of their turnover to improve or at least maintain their market shares. With R&D, JPL could do more research on demographic strategy so that the retail outlets can be located on strategic locations as sales can be improved for achieving higher profits.

The case shows that the company incurred excessive spending in advertisement and promotional cost which amounted to $5 million in 2008. It is true that to generate more sales, advertising and promotion are essential, yet, $5 million is a big value. Sales and Marketing department should another efficient method and not too costly to advertise and promote products. The trick is to find the right balance between generating sales and controlling the expenses needed to generate those new sales.

A company generating tons of sales will go bankrupt if its expense is out of control, and a company that tightly controls its expenses will fail if it does not generate enough sales. Net profit margin takes this trade-off into account, and indicates the company’s ability to generate sales while controlling expenses. Consecutively, to have good inventory and credit management control, the company should monitor and review their sale and collection record monthly or quarterly in order to make sure the supply of products will not be continued if the customers meet their credit limit.

This is to discourage defaulting by customers, particularly in this case, the wholesale distributors. The supply will only be continued when the customers make the payment. By doing monitoring process, the company also can send the reminder to customers at least 2 weeks before actual date of payment. The faster the inventories move to customer and the faster the collection of receivables, the more cash the company will have available. The excess can be invested to earn interest income or reduce borrowing, which reduces interest expense.

A number of empty factories with old steel structures intact for the last 10 years, and heaps of obsolete spare parts left untouched in the store room, are either to be utilized or to be liquidized. It is because if the assets are to be kept idle, it shows inefficiency of business. Therefore, if the company is able to operate on full capacity, it is best for utilizing all assets. Otherwise, if the company’s capacity is lower, the idle assets should be liquidized to avoid unnecessary maintenance costs.

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