Pak Leather Crafts Limited Pakistan

PROJECT REPORT ON THE CASE OF

PAK LEATHER CRAFTS LIMITED

GROUP MEMBERS: Sheraz Hasan Syed Arslan Shakir Zaigham Abbas 9890 9582 9671

Submitted To: Mr. Salah uddin Course: Strategic Management

Pak Leather Crafts Limited Pakistan

INTRODUCTION
We are one of the leading manufacturers and exporters of finished leather and leather garments from Pakistan. Our company was established in 1971. Currently our monthly production is 1.2 to 1.3 million sqft of finished leather and of about 40,000 leather garments. The finished leather is produced in several different articles and colors in Lamb, Goat, Cow and Buffalo at our most modern tannery. Our leather is suitable for garments, shoes and leather goods. We have qualified leather technicians who can always develop new finishes as required by the customers while maintaining high quality of production. All products are free from PCP, AZO, Nickel, Dye Dispersion, Chrome VI and other health hazardous materials. Our prices are highly competitive and our deliveries are almost always on time and as per requirements of our valued customers.

Pak Leather Crafts Limited Pakistan

CURRENT FINANCIAL POSITION:

FOR THE PERIOD ENDED SEPTEMBER 30, 2011

CONDENSED INTERIM BALANCE SHEET (UNAUDITED)

AS AT MARCH 31, 2011

Unaudited March 31, 2011 ASSETS Non-current assets Property, plant and equipment Long - term deposits and loans Current assets Stores, spares parts1,050 Stock - in - trade142,631 Trade debts - considered good101,817 Loans, advances, deposit and othr receivables 10,996 Cash and bank balances265 1,718 258,969 42,581 13,055 211 Audited June 30, 2010

(Rs. In '000')

27,653 1,589 29,242

42,027 1,618 43,645

TOTAL ASSETS EQUITY AND LIABILITIES Authorized share capital Issued, subscribed and paid up capital Accumulated losses Total Equity Non-current liabilities Long term loans

256,759 286,001

316,534 360,179

34,000 (200,914) (166,914) 59,635 1,993

34,000 (147,503) (113,503) 71,974 1,652

Deferred liabilities Current liabilities Short term borrowings Current portion of long term liabilities Trade and other payables Accrued Markup Provision for taxation

215,038 36,793 62,877 74,536 2,043 391,287

255,875 24,455 76,249 41,877 1,600 400,056

CONTINGENCIES AND COMMITMENTS TOTAL EQUITY AND LIABILITIES

393,280 286,001

401,708 360,179

The annexed notes from 1 to 7 form an integral part of these condensed interim financial statements.

MUHAMMAD SALEEM AHMED Chief Executive

MUHAMMAD SHOAIB AHMED Director

CONDENSED INTERIM PROFIT AND LOSS ACCOUNT (UNAUDITED) FOR THE PERIOD ENDED MARCH 31, 2011 (Rupees in Thousand) For the Quarter ended March 31, March 31, 20112010 For the Nine Months ended March 31, March 31, 20112010

Net sales Cost of sales Gross loss

2,126 36,520 (34,394)

65,672 77,149 (11,477)

90,667 135,333 (44,666)

162,328 191,245 (28,917)

OPERATING EXPENSES Distribution cost Administrative expenses

9 1,057 1,066 (35,460)

2,548 2,101 4,649 (16,126)

355 3,930 4,285 (48,951)

11,789 8,339 20,128 (49,045)

Operating loss Other operating income

30,442 (5,018) 14,176 (19,194) (19,194)

1 (16,125) 8,743 (24,868) 460 (25,328)

30,543 (18,408) 34,560 (52,968) 443 (53,411)

67 (48,978) 29,117 (78,095) 1,435 (79,530)

Financial cost Loss before taxation Taxation Net loss after taxation Earnings/(loss) per share (Rupees)

(5.65)

(7.45)

(15.71)

(23.39)

The annexed notes from 1 to 7 form an integral part of these condensed interim financial statements.

MUHAMMAD SALEEM AHMED Chief Executive

MUHAMMAD SHOAIB AHMED Director

CONDENSED INTERIM CASH FLOW STATEMENT(UNAUDITED) FOR THE PERIOD ENDED MARCH 31, 2011 March. 31 2011 Cash generated from operations Loss before taxation Adjustment for non-cash charges and other items: Depreciation Write down of inventory Financial cost Long-term deposits Gratuity Gain on sale of fixed assets Operating profit before working capital changes Changes in working capital (Increase)/decrease in current assets Stores and spares parts Stock in trade Trade debts - considered good Advances, deposits, prepayments and other receivables Increase/(decrease) in current liabilities Trade and other payables Cash generated from operations Financial cost paid Gratuity paid Income tax paid (15,062) (1,114) (211) (156) (53) (420) Net cash flows from operating activities Cash flows from investing activities Fixed capital expenditure Proceed from sale of fixed assets Net cash flows used in investing activities Cash flows from financing activities Short term finances (repaid) / obtained Long term loan Payments for assets subject to finance lease (40,837) 971 694 (356) 1,309 354 2,515 2,869 (1,534) (75) 42,500 42,425 (12,854) 10,688 (9,336) (695) (1,612) (11,643) (955) (52,968) 2,351 33,162 34,560 29 496 (30,402) 40,196 (12,772) (78,095) 2,719 29,117 285 743 32,864 (45,231) March. 31 2010

(Rs. in '000')

668 83,176 (59,236) 2,112 26,720

(1,872) 77,408 (24,786) 18,023 68,773

Net cash used in financing activities (40,837) Net increase/(decrease) in cash and cash equivalents 54 Cash and cash equivalents at the beginning of the period 211 Cash and cash equivalents at the end of the period 265

The annexed notes from 1 to 7 form an integral part of these condensed interim financial statements. MUHAMMAD SALEEM AHMED MUHAMMAD SHOAIB AHMED Chief Executive Director

Pak Leather Crafts Limited Pakistan

SUMMARY
Pak Leather Crafts Limited is a leather and leather garments manufacturing company. It is in business since last 30 years and have a good reputation in the industry. Everything was going fine and all the stakeholders were satisfied with the growth of the company. The decline of the company starts when the period of recession come and the company has no strategy to survive in that particular period. The core problems which are causing losses are as follows. 1. The company had a problem of over staffing. 2. There are huge machinery and plants which are not utilizing due to low production. 3. The sales of the firm had declined due to recession and the competition in the industry. 4. The management is not capable to understand the changes in the external environment so that they are suffering losses. There are some suggestions which can be helpful to survival of the company. 1. 2. 3. 4. 5. 6. Review the value chain. Achieving economies of scale through utilizing idle capacity. Selling off non-productive assets to generate cash or reduce debt. Launch an offensive turnaround strategy. Strong focus on cost reduction. Expand internationally through export strategy.

Pak Leather Crafts Limited Pakistan

EXTERNAL ANALYSIS:
PESTE ANALYSIS
Political Factors: There are some political factors like strikes, unavailability of utilities, and influence of political parties for party fund which affects the companys overall performance and productivity. Economical Factors: Economical factors like devaluation of currency, rise in interest rates, inflation rates, energy prices, petroleum prices, raw material prices, chemicals prices, heavy duties on machinery and world economic conditions which affects sales of the firm. Social Factors: Due to the uncertainty in the city there are many employees who were become less productive and which effects the structure of the organization. Technological Factors: The company has superior technology in Pakistan for manufacturing leather and leather garments but at world level there is still need for improvement because there is a lot of new technology enter in the world market by which firms are reducing costs and increasing revenues.

Environmental Factors:

The company had faced difficulties to improve the environment friendly system. The company has the membership of the plant for the treatment of waste water which was build and run by the association of leather tanneries named as PTA waste water treatment plant. There is a huge amount paying to the plant on monthly basis which is a additional cost to the company.

FIVE FORCES COMPETITION ANALYSIS:

Rivalry: Leather industry is a mature industry and the level of rivalry is too high. There are lots of firm operating in all major cities in Pakistan which are competing with each other. Pak Leather Crafts Limited was a leader at one time in the history and also of Asia but now a days it has a weak position in the industry due to financial crisis. Substitute Products: Substitute of leather is PVC leather which is mostly used in the garments and it is a great substitute of genuine leather due to its low cost and good looks. The trend of PVC leather is reducing the demand for genuine leather which is an alarming sign for the company as well as whole industry. Threat of New Entrant: The leather industry is wide open there is no barrier to enter the market. The cost of entry is also not so high anyone can easily enter the market and capture the market share. Bargaining power of Supplier: There is lesser supply of raw leather due to the exporting of livestock to different countries. So the supplier has high bargaining power and the prices of raw leather are increasing on weekly basis which affect the performance of the company because we cannot set prices with buyers on weekly basis if we do so than the buyer will shift to other side. Bargaining Power of Buyer:

In Pakistan the demand of leather is closed to zero because the weather and the affordability of leather goods so the main buyers of our products are other countries like U.S, U.K, Europe and other countries. So the buyers are basically foreigners and there are lots of supplier of leather in the world like India, Bangladesh, China at very cheapest rates than Pakistan which increase the buyers power for bargaining. This condition is unhealthy for the firm and we have to sell at the buyers terms not ours.

INTERNAL ANALYSIS

SWOT Analysis:
Strengths: The strengths of the company are as follows. 1. The advanced machinery and equipment to process leather. 2. The different colors and articles of leather and leather garment which only they can make not competitors. 3. The good PR in the global market which they gain in their peak time. 4. The good reputation in the market through which they can easily purchase leather on credit. Weaknesses: The weaknesses of the company are as follows: 1. 2. 3. 4. 5. The idle capacity of their plants. The over staffing which is a cost burden. Unproductive employees. Management is not taking interest to Do things better. The financial position of the firm which has effect the performance.

Opportunities:

The opportunities for the firm can be as follows. 1. They can convert their idle capacity to utilized capacity and can get advantage of economies of scale. 2. The company can again be market leader because they have a large scale setup and they have contacts. 3. The company can reduce their cost by analyzing their value chain and make some moves which can favor the company. 4. There is a huge demand of Pakistani leather in international markets so the company can grasp this opportunity by making quality products at cheaper prices. Threats: The threats for the company can be as follows: 1. The biggest threat for the company is to be bankrupt. They are trying to turn around and get to safe position where they can survive. 2. The threat of losing productivity due to uncertain situation of the country. 3. Arrival of new companies in the market is a big threat. 4. New technology in the industry will take the competitive advantage from the company. 5. The economical crisis of the world can effect the sales of the company directly because leather garments is not a commodity goods it is a semi-luxury goods which has less preference when the economic crisis occours.

VALUE CHAIN ANALYSIS:

Procurement Process: The raw material input for the firm is raw leather and chemicals used for tanning and processing the leather. Quality of raw materials are necessary for the manufacturing of leather and leather garments. We have analyzed that this department is not working properly. There are lots of mismanagement and undertable money which involves in procurement so the material quality become very low and the prices are high as compare to industry. There should be some extraordinary changes are necessary like find the employees who are involve in this and fire them from their jobs. Right staff for the department will increase productivity of the firm so that the start of value chain will be better. Production Process: As we have discussed above that the major problems in the firm is that they have enough idle capacity which is a expense burden on the firm and the employees are unproductive and unwilling to work. As per our research the production process should maintain standards that are following in international market. We can utilize our idle capacity by producing more and by making the quality of production.

Marketing:

The firm has good reputation in the international market but still there is a room for improvement. A marketing team should be made, which will develop marketing strategy for the company. The company has two divisions 1) Leather 2)Leather garments, for both division they can develop their marketing strategy by one team. The marketing strategy should be to manage B2B relation with existing customers, to find out new markets and new customers, to make advertisements in the international magazines which aware company in the worldwide leather industry, participate in the leather exhibitions and fairs in different countries in order to up-to-date with the market. Human Resource Management: Human resource department is the one which is the main pillar of the value chain of the firm because good employee selection always benefit in firms profitability and improve productivity and quality of the work. The human resource department is not efficient and not looking at the employees productivity which is effecting the performance of the firm. There should be HRIS enforced to find out the production and output level of each employee. The employees who are unproductive should be fired in order to cut costs and keep productive ones in the firm.

Research and Development:

Need for research is necessary in every industry. In leather industry the trend is changing day by as consumer needs changed. There are hundreds of articles, colors, designs, and different kind of patterns developing in the market. In this context there is a need for the company to invest in their R&D to get competitive advantage and make all varieties in leather and leather garments. It is a big cost but the return of it will also be high and give company a competitive edge over rivals. The quality of products can also be improve through R&D and it also helps in cost cutting by telling areas of improvement.

RESOURCE BASED MODEL:

Resources: The company has its plants which are very often in Pakistan leather industry which are highly productive and reduce the overall cost of production. The company has a highly qualified technical staff as compare to industry. They are lacking in their working capital requirement which is a need for a leather to run their operations in a smooth manner. Capabilities: The company can produce 1.2 million sqft of leather and 40000 leather garments in a month. The company can easily develop any color, article, and design as per customer requirement. Core Competency: The core competency of the firm is their technical staff and the plants and machinery. The utilization of the staff, machinery and plant efficiently and effectively will be a competitive advantage for the firm and firm can produce more and good quality products.

Pak Leather Crafts Limited Pakistan

RECOMMENDATIONS:

Pak Leather Crafts Limited Pakistan

An offensive turnaround strategy:

In this strategy we will be able to survival of the firm and makes it a profitable firm. The strategy consists of following. Increase efforts to boost sales: The sales of the firm should be as much as possible and the combination of efforts should be put in to increase sales to existing customers and to new customers through different incentives offered to the customers like discounts on bulk quantities, cash discounts, promotions and selective offers to existing customers by delievering superior quality and colors. Reduce extra costs: The cost which are not paying back to the company should be cut like right sizing of employees, reducing the interest cost through paying off debt, minimize the overall production cost through efficiently utilizing of staff and machinery. Selling off assets to generate cash: There are many assets with the company which are not productive like extra machinery, extra land and other assets which are not benefiting the company can be sold to generate cash or to reduce the level of debt. This can be fulfilling the requirement of working capital of the firm. Review the value chain: As we saw in value chain analysis, each department of the firm needs improvement to work effectively and efficiently.

The procurement department needs staff who are capable to purchase raw materials of best quality at lowest cost and the QC department will check each raw material in order to maintain quality standards. The production department should have a mindset to utilize all their capacity in order to meet experience curve effects. The maintenance where needed should be done in order to minimize the chances of errors and increased efficiency of production. The marketing department should focus on to boost sales in order to maintain the balance of buying and selling and put their efforts to minimize the overall marketing cost and increase revenues. The HR department should implement HRIS in order to maintain the data of each employees and to find the employees who are less productive. Establishment of research and development department is the need of the firm in order to be in the race of competition. It has not much cost but the benefit would be more. Revise the export strategy: The firm should adapt a franchising strategy through which firm can be able to open there own outlets in different countries. Government of Pakistan is financially supporting those companies who want to establish their outlets abroad. By establishing outlets company will reach to the original consumer and the middle man cost will reduce.

Pak Leather Crafts Limited Pakistan

CONCLUSION:
The industry of leather is a mature industry where level of rivalry is too high. In this type of industry a declining firm cannot be easily achieve turnaround. To achieve turnaround, company should focus on their core business and making strategies which can be best fit to company situation. A bold strategy should be adapted to attract customers, increasing sales, cutting costs, achieving economies of scale through heavy productions and good management of the operations. Improved efficiency will results in greater productivity, less costs, increasing revenues, improving quality and refine the value chain. The strategy to make outlets in different countries will allow firms to have large productions in order to meet customer demands and the company will get growth in both physically and financially.