CHAPTER V Strategy Formulation and Recommendation A

CHAPTER V
Strategy Formulation and Recommendation

A. Strategy Formulation

Strategic Objectives to be Employed

Raw Materials Safety Assurance
Fortuitous events such as flood and drought may damage the crops and may cause shortage of raw materials for the company. Since the occurrence of crop shortage will crucially affect the production, CAT must have an alternative source of sugar cane. In effect, the level of inventory will still be sufficient even after an emergency.

Product Safety Stock
Safety stock is a supply of outputs held as a reserve to safeguard against fluctuating markets, warehouse mistakes and supplier problems. Safety inventory is especially helpful when customer demand is much higher than expected. CAT must have buffer stocks in order to be able to meet the incremental demand of the market or other firms.

Update Technology
Operational facilities, especially those involved in the production, are a critical factor in executing an efficient production and producing top-quality products. Technological advancements, which are progressively increasing in number and caliber, cause improvements to equipment and machineries. In order to be at par with big, international companies with the latest innovations, Central Azucarera de Tarlac must also update its technology.

Prevent Employee Strike
Mass refusal of employees to work or labor strike will affect both the company and the employees. The company is likely to lose money due to delayed service to clients or to lose production time. The employees will lose their pay due to the “No work; No pay” principle and they might even be dismissed from their jobs. CAT must be able to eliminate the possibility of such act to avoid inconvenience to the production.

Proposed Strategic Alternatives

Outsourcing/ Importation
Outside suppliers can ensure an alternative source of raw materials for CAT in case a crop shortage takes place because of unfortunate events. In the event that it is not possible for the company to buy crops from local suppliers, Central Azucarera de Tarlac may consider importing from suppliers in the country or from other countries.

Allot Safety Stock
CAT must allot certain supply of sugar to prevent shortage due to foreseen and unforeseen events. The company should have a safety stock but it must have better inventory management. CAT should prevent piling up unnecessary outputs to avoid loss from infestations and moisture out. In effect, CAT will not only ensure the supply of sugar but will also prevent stock outs and will keep customer service and satisfaction level high.

Technology Bench Marking
In order to be a globally competitive company, production efficiency must be attained through the effective use of technology. The CAT must be aware of the technological innovations within the industry. The company should allocate budget for the research and development of facilities that will improve the efficiency of the productions.

Increase Employee Benefits
CAT should focus on increasing incentives and rewards system to motivate employees. Since CAT greatly values its employees, the company must ensure a safe and healthy work environment. Also, one of CAT’s missions is to provide them with opportunities for growth and development, the company should provide trainings and seminars to do so.

Strategy Recommendations

Purchase Raw Material from Other Suppliers
It has become common for companies to outsource raw material supply. Outsourcing will help the company grow and save money when it is done correctly. It can also allow the company to focus on other resources. In outsourcing raw materials, specifically sugar cane, CAT should prioritize finding low cost raw materials without sacrificing its quality.

Invest in Research and Development Services
Since the company aims to be globally competitive, updating the facilities is essential. This is also to ensure that the products are of high quality and that the production is efficient. Extensive research is needed in adopting technology to determine whether a specific advancement will yield a positive effect to the overall operations of the company.

Ensure Production to meet Incremental Demand
Normally, it is required by companies to guarantee that they have sufficient outputs in stock. Due to uncertainties in supply and demand of products, CAT should produce products in excess of its standard or budgeted production units to mitigate risk.

Boost Employee Morale
Trainings are provided in order to maintain and develop a competitive workforce. It should focus on the development of the alignment of purpose and performance across the company, particularly on the individual employee, team and the total organization. Seminars will be provided to refresh employees on what they already know about their job. Lastly, providing non-monetary or monetary incentives can also boost employees’ morale and motivation. In effect, CAT will not only increase their productivity but will also maintain harmonious relationship on their workplace.

B. Strategy Recommendations

Suggested Implementation
Due to budget constraints, Central Azucarera de Tarlac should implement the recommendations in order of priority. Based on the risk assessment, raw materials stock safety assurance and adaption of new technology should be implemented first during the year 2018.

CAT should have alternative suppliers such that if there will be unforeseen events, they will not worry about shortage of suppliers. It should also take into consideration seasonal changes and other predictable circumstances that may affect the demand and supply of such inputs before entering a contract of outsourcing.

CAT should invest into globally competitive technology and facilities utilized in the operations to achieve world-class level of performance. The company should also continue to seek innovative technologies that could modernize their business.

Since demand is expected to climb up in first half of the year 2019, the company should then implement its product safety stock. It is necessary to implement such recommendation in order to shelter the excess demand over the standard products produced.

It is the company’s mission to provide for the welfare of its employees. In order to cater to the mission, CAT should have enough budgets to provide trainings, seminars and incentives to the employees. These employee benefits are likely to incur a lot of cost but it will have a long-term effect especially on the employees’ performance and productivity. The best possible time for the recommendation to be employed is during the second half of 2019.

Risks Management
Central Azucarera de Tarlac face risks both from its external and internal environment. In order to reduce occurrence of such risk, the company conducts risk management. Risks are not that easy to be eliminated, rather the only option a company has is to minimize it.
Identified external critical success factors or the so called external risks possibly faced by Central Azucarera de Tarlac are climate change and pest infestations. To manage and minimize loss from such risks, CAT should implement expansion and intensification programs. CAT should also improve its facilities such as the irrigation system and pest control. In these ways, any adverse effects and environmental hazards are addressed.

Assessed internal risks such as crop shortage, product shortage, obsolete technology and employee strike have been traced to CAT. In order to manage crop shortage, it is best that the company enter into contracts with outside suppliers of which offer high quality raw materials at the lowest cost possible. The risk of having product shortage can be managed by assuring supply of the products to meet demands in excess of what have been forecasted. The risk of obsolete technology is the inefficiency-causing-downtime factor. Loss from the said risk can be minimized by updating and modernizing machinery used in production. Lastly, the risk of employee strike can be subdued by increasing incentives and by conducting trainings and seminars that would empower employees as well as enhance employee’s knowledge of their specific work.

Resources
The company will need contractual suppliers for the raw material safety assurance and the buffer stock of products. The quality of the sugar cane and sugar products to be outsourced must be at par with the company’s own. Additional facilities with updated technology should also be acquired for the improvement of the production efficiency and the company’s competitive position. Lastly, financial resources will be required for the purchase of raw materials and supply from other suppliers, conduct of research for technology developments, acquisition of new facilities, augmentation of labor incentives, and provision of trainings and seminars for employees.

Financial Statement Projections

Unapplied Recommendations

Table 7. Projected Comprehensive Income: Unapplied Recommendations

Assumptions Used:
• Revenue from sale of sugar and its by-products will decrease by 2% on the year 2018 due to train law and continue to grow by 7.48% annually for the next three years. All other revenue will increase by 7.48% annually.
• Cost of Goods Sold and cost of services will increase by 9.48% annually.
• Operating Expenses will increase by 14.5% annually based on the average increase in operating expenses of the years 2016 and 2017.
• Interest Expense shall increase by 11.23% annually based on last year’s growth rate.
• A tax rate of 30% is assumed.
• All other income and expenses increase by 10% annually.

Analysis:
The Train law is said to be effected by the year 2018 thus an assumption of a decrease of 2% in the revenue of Central Azucarera de Tarlac from sale of sugar and its by-products is assumed. It was explained in chapter 3, political-legal factors affecting the company, that the company is indirectly affected by the train law. Since sugar is a commodity and necessity, the drop in the demand of the product is only temporary. In order to reduce the loss of unsold goods, it is possible that the company would lower the price of the product and therefore lessen revenue earned. Revenue from other activities and for the succeeding years will increase by 7.48% annually based on the revenue growth from 2016 to 2017. The cost of goods sold of the company is assumed to increase by 9.48% annually. Cost of goods sold is not expected to decrease as a result from the Train law, because as discussed earlier, the company would rather sell the product at a lower price than incur a loss from unsold goods.

As a result from the specific assumptions mentioned above, the gross income declined from 2017 to 2018 but steadily increases form the year 2019 to the year 2021. The schedule of Central Azucarera de Tarlac’s net income, however, is down-sloping from 2017 onwards.

Table 8. Projected Balance Sheet: Unapplied Recommendations

Assumptions:
• 5% growth rate
• AFS, Land, Investment property, Goodwill, Deposits, Capital stock will remain constant
Applied Recommendations

Table 9. Projected Comprehensive Income: Applied Recommendations

Assumptions Used:
• Revenue for Sale of sugar and by product for 2018 will decrease by 2% due to train law and will increase by 10% in the next three years. All other revenue will increase by 7.48% annually.
• Cost of Goods Sold will increase by 10.5% annually. Cost services will increase by 9.48% annually
• Operating Expenses for 2018 will increase by 14.5% based on last year’s operating expense growth rate and increase by 15% in 2019 onwards due to the increase in employee benefits for the next three years.
• Interest Expense will increase by 12% from the year 2018 onwards.
• A tax rate of 30% is assumed.
• All other income and expenses increase by 10% annually.

Analysis:
The Train law that has been implemented during 2017 is to be effective on the year 2018 thus an assumption of a decrease of 2% in the revenue from sale of sugar and its by-products has been made. As explained in chapter 3, the company is indirectly affected by the train law. The decline in the demand of the product is only deemed as temporary since sugar is a commodity and a necessity. If raw materials are to be outsourced or imported starting 2018, there will be an expected increase in the cost of raw materials and therefore increase the cost of goods sold. Also decreasing machine time through updating machinery is costly and therefore increasing cost of goods sold. Operating expenses of CAT are to increase in the year 2019 and in the succeeding years due to the implementation of the products’ safety stocks. Operating expenses would also increase in 2019 once it conducts trainings and seminars and increases employee incentives. An increase in interest expense starting 2018 is expected if the company will obtain short or long term financing that is to be used in updating facilities and machinery.

As seen on the projected comprehensive income, both the gross income and the net income declined from 2017 to 2018. The reason for the decline is the implementation of the strategies proposed. However, the net income gradually increases in the succeeding years.

Table 10. Projected Balance Sheet: Applied Recommendations

Assumptions:
• 10% growth rate
• AFS, Land, Investment property, Goodwill, Deposits, Capital stock will remain constant