Product

The following excerpt is from Richard Koch and Greg Lockwood’s book . Buy it now from  | | 

With price-simplifying, price is the strategy. Everything else is tactics — the means to arrive at the target price. Price-simplifying rests on the observation that if you can halve the price, your market will more than double (and may well increase by 10 times or more). So everything you do from now on — in thinking, in planning and in execution — must be done with price in mind. It must become a burning obsession… but for a purpose.

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If you’re contemplating cutting prices in half, three fundamental changes must take place:

• The product must be redesigned to make it simpler and cheaper. Visualize your target customers — those whom you wish to create and reward.
• The business system must be redesigned to make the product simpler and cheaper to produce and deliver, and to provide protection for your firm against imitators.
• The business must be scaled — that is, its sales must multiply, and continue to multiply — as quickly and extensively as possible.

We’ve examined the most successful price-simplifiers’ strategies and have determined three steps that are related to product redesign.

Step One: Subtract features/performance and return to the product’s core function

With IKEA, buying a sofa or a table isn’t a rite of passage, not a signal that you’ve arrived or established independence from your parents. It’s a monetary transaction, pure and simple. You don’t want advice from a salesperson, don’t want to bounce up and down on the sofa, don’t need to know if you can get it in yellow polka-dots or brown leather. You buy it because you need it. With McDonald’s, you don’t demand a wide assortment of food, candlelight, a man in a tuxedo, a friendly waitress or even somewhere to sit down. You want a quick, tasty, filling meal. Romance is thrown out of the window; hard utility is everything.

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Every price revolution goes back to basics, back to economics, back to utility. If you’re clear about a product’s core function — and about everything that isn’t its core function — you’re well primed for product redesign. Many of the features and services that everyone once viewed as essential fall by the wayside, and as a result, some customers will be lost. Trade-offs usually involve dropping features and/or customers to get the price as low as possible. Subtract everything that isn’t absolutely essential for a product’s usefulness. Doing so will leave you with nothing but the core function.

For a physical product, subtraction should also be pursued in two other dimensions — weight and size.

Subtract weight. Expense always rises with weight. Economic historians tell us that in the U.S. and UK, the weight of all the goods that generated GNP in 2000 was roughly the same as it had been in 1900. Yet that same output was twenty times more valuable in real terms. In other words, products went on a huge diet during the last century, but the same value was generated for one-twentieth the weight. A typical timepiece bought in 1900 would have been a heavy fob watch. Contrast that with a Swatch. The latter is far more accurate yet weighs much less, and costs a fraction of its predecessor.

Products also lost weight when manufacturers started using lighter versions of existing materials (such as Ford’s vanadium steel), when they developed entirely new materials (such as plastics), when they eliminated heavy components and when they replaced hardware with software.

Follow Henry Ford’s advice:

“Start with an article that suits and then… find some way of eliminating the entirely useless parts. This applies to everything — a shoe, a dress, a house, a piece of machinery, a railroad, a steamship, an airplane. As we cut out the useless parts and simplify necessary ones, we also cut down the cost of making.”

Subtract size. Expense also increases with size. A bigger product uses more materials, and it occupies more space throughout its journey from assembly to the consumer’s hands — more space in the factory, the warehouse, the shop and during transportation between these stages and finally to the consumer. It’s no accident that those products that have slimmed down most over the past decades have also been those that have seen the greatest price reductions and consequent explosions in demand: computers, mobile phones, music players and other electronic devices, and, of course, the biggest space-saver of all: the Cloud. Investigate every possible means of miniaturizing the product, and of saving space, especially in transit.

Step Two: Reduce variety and invent a universal product

Successful simplifiers slash the variety of what’s offered to customers in order to cut costs and prices. Ideally, a single “universal product” emerges, one that’s both cheaper to produce and achieves high fame and scale: the Model T Ford; the Big Mac; IKEA’s light-colored pine furniture; single-class travel on Southwest Airlines.

Consolidating many different products into a few — or just one — has really strong economic advantages: large reduction in stock-keeping units; higher stock turns; lower purchasing costs with greater volume per product; lower marketing and selling costs; and lower production costs. Moreover, a universal product stands out from the crowd as an anomaly, so it attracts attention and commands respect, reducing the need for advertising and the cost of international growth, and multiplying visibility and sales.

In redesigning your product, ask yourself, “Can I invent a universal product, or something close to it, that incurs much lower costs and has the potential to appeal throughout the world?” Think about Ray Kroc, who wanted to make McDonald’s burgers and fries identical in appearance and taste everywhere. Simplicity breeds universality; and universality demands simplicity.

Step Three: Add cheap benefits

The third step is to provide benefits that cost the price-simplifier little but have substantial value for target customers. Often these benefits can cost the simplifying firm nothing whatsoever — or even less than nothing when the additional volume of customers and their spending are taken into account. For instance, IKEA offers free parking lots, childcare and restaurants in compensation for eliminating expensive features, such as pre-assembled furniture and home delivery. This might seem like a simple case of boosting the balance sheet by withdrawing expensive features and replacing them with cheap ones, but in fact, it’s far better than that for IKEA.

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All of the firm’s apparent “gifts” increase profits in themselves, usually by attracting more trade. Anything that generates more volume has high marginal value, and this usually more than offsets the extra cost of providing the service. But beware of complicating the product or business system, and avoid anything that might raise the price.

If you can, conduct a controlled experiment — at different times and/or in different places — to see whether your basic offering, or something additional, generates more net profits. Once your product has been redesigned, it’s time to consider how to redesign the business system around it, how to deliver your simplified product to customers in a way that makes the whole industry vastly more efficient and shuts out rival firms. This is an even more ambitious and critical task because you’re aiming to do nothing less than transform your industry.

CRUDE OIL REFINING OR PETROLEUM PRODUCTS IMPORTATION: WHICH IS ECONOMICAL FOR NIGERIA? ABSTRACT: One of the most crucial challenges facing Nigeria is being able to meet the energy need of the energy hungry populace; the exponential population growth makes it even more challenging. The approach adopted to meeting this need has impacted severely on the economy of the nation as reflected in the year-on-year economic figures. This can be attributed to her choice of net importer of petroleum products status to the much more economic domestic refining option.

This paper analyses the best economic option between refining crude oil and importing the products in Nigeria, at the end making probable suggestions. TABLE OF CONTENT ABBRECIATIONS 1. NTRODUCTION……………………………………………………………………………………. 4 2. CRUDE OIL REFINING AND PETROLEUM IMPORTATION IN NIGERIA …………………………………………………………………………………………… 5 2. 1 Overview ………………………………………………………………………………………………… 5 2. Challenges of Petroleum Product Refining in Nigeria …………………………………… 6 3. CRUDE OIL REFINING AND PETROLEUM PRODUCTS ECONOMICS ………………………………………………………………………………………….. 8 3. 1 The Economics of Crude oil Refining ………………………………………………………….. 8 3. 2 The Economics of Petroleum Products………………………………………………………….. 9 4. CRUDE OIL REFINING, PETROLEUM PRODUCTS IMPORTATION AND THE ECONOMY…………………………………………………………………………….. 0 5. CONCLUSION………………………………………………………………………………………… 11 BIBLIOGRAPHY……………………………………………………………………………………. 13 ABBREVIATIONS BPSD Barrels per Stream Day B/D Barrels per Day CBN Central Bank of Nigeria GDP Gross Domestic Product

NNPC Nigerian National Petroleum Corporation NPRC Nigerian Petroleum Refining Company PHRC Port Harcourt Refinery Company 1. INTRODUCTION The role of crude oil remains key among the energy sources, hence we have to still live with the consequences that are associated with it, one of which is economical. This obviously is an aspect no country, importer and exporter have been able to overcome, though its impact on some countries is less than in others.

Nigeria is definitely one of those countries whose economy has been monumentally impacted, ironically though, a leading crude oil producer and exporter in the world. However, this is not to take away crude oil’s enormous contribution to the Nigerian macro-economy over the years it holds sway. The discovery of oil in Nigeria was thought to be a big respite to the growing energy supply challenges facing her and to bring economical gains, especially as the price of oil has often been on the increase. Hence, should have made huge sums of money from it.

Incidentally, this is not to be, as oil suddenly took shine off the hitherto major sources of the country’s GDP. Sectors like agriculture and manufacturing went moribund, making Nigeria a mono-economy, with oil being the mainstay of the economy. It provides 95% of foreign exchange earnings and about 80% of government budgetary revenues[1]. The Nigeria economy plays into the hands of the volatility of extremely vulnerable external shocks, particularly the vicissitude of world oil market prices, and the consequent inflations that characterise it most of the times.

With the production of 229,008,126 barrels of crude oil and condensates increased in the third quarter of 2010 with an average of 2. 49 million barrels per day of domestic production in recent years, four refineries of 445,000 b/d refining capacity, the issue of meeting domestic oil demand should have been substantially addressed. However, with the 0 – 15% refining capacity in 2009[2], which is often the case over the years, importation became the only available alternative. Hence, Nigeria though a leading exporter of crude oil in the world is also, ironically, a net importer of petroleum products.

This paper is divided into four chapters; chapter 2 looks at crude oil refining in Nigeria, offering an overview and challenges that confronts it. In chapter 3, crude oil refining and petroleum products economics is examined and chapter 4 looks at the implications of both crude oil refining and importation vis – a – vis the economy. The chapter 5 concludes the paper with few suggestions as to what the best economic option should be in meeting the petroleum products demand in Nigeria. 2. CRUDE OIL REFINING IN NIGERIA 2. 1OVERVIEW

The petroleum products consumed in Nigeria had been imported from refineries abroad; this continued even a couple of years after the discovery of crude oil in a commercial quantity in the country. However, as the demand for the products increased and with the availability of the feedstock, the two Multinationals operating in the country then saw it as a viable business to establish refinery that would serve the domestic demand. This lead to the 50/50 joint venture refining company between Shell Darcy Petroleum Company and British Petroleum called the Nigerian Petroleum Refining Company (NPRC) in 1960.

The construction of the refinery took two years to complete; by 1965 it commenced operation at an installed refining capacity of 38,000 bpsd[3] to refine local crude into five petroleum products. It was located at Alesa–Eleme, near Port Harcourt, some kilometres away from the crude oil production location. In order to meet the ever increasing demand for the products, the refinery was de–bottlenecked to increase its production capacity from the initial 38,000 bpsd to 60,000 bpsd. Running as a private entity, the company was able to run efficiently, profitably and met the omestic product consumption demand. In 1970, the Federal acquired and paid for a 60 percent equity share in all private international companies working in the Upstream and Downstream sectors of the Petroleum Industry in the country[4], NPRC inclusive. Despite been the major shareholder, the Federal Government allowed NPRC to operate without interference. It was only represented by its own corporation, the Nigerian National Oil Corporation (NNOC), on which the shares were invested on to represent it at the board meetings of NPRC.

Hence, the company was commercially profitable, well maintained and ran very efficiently. A decree in 1977 gave birth to the Nigerian National Petroleum Corporation (NNPC), which was later to appoint the Chairman of NPRC, and then acquired the remaining 40 percent stake in NPRC. This in effect made the NPRC a full Government entity under the Refinery Division of the NNPC, headed by a general manager. The name was changed to NNPC Refinery, Alesa–Eleme, now headed by a managing director and having a new management structure.

It was under the general manager of NNPC Refinery Division at the headquarters. A wholly Government built Refinery commenced operation in 1978, after a 30–month construction. It was located at Warri, and had an installed refining capacity of 100,000 b/d. But was de – bottlenecked in 1985 to have a total capacity of125, 000 b/d. The Warri Refinery was essentially built to process crude oil products and to add value to some of the refinery by-products such as propylene rich stock and decant oil[5]. Soon after, in 1980, another refinery, the Kaduna Refinery came on stream.

It was meant to cope with the ever growing demand for petroleum products, especially in the Northern axis of the country. The refinery consisted of two streams, 50, 000 b/d fuel units and 50, 000 b/d lubes, Asphalt plants. It was designed to produce 3,857mt/d of Premium Motor Spirit (PMS), 1,686mt/d of Kerosene, 3,000mt/d of Automotive Gas Oil (AGO), 1,796mt/d of Asphalt, 91mt/d of LAB, 657mt/d of Base Oils, 620mt/d of Liquefied Petroleum Gas (LPG), 2,100mt/d of Fuel Oil. The existing products pipeline linking Warri Refinery to Kaduna was converted to pump crude oils for supply to the new Kaduna Refinery.

Again, like the previous refineries, the fuel section of Kaduna Refinery was de-bottlenecked from the 50, 000 b/d to 60, 000 b/d. This brought the Kaduna Refinery to overall 110, 000 b/d capacity[6]. The fourth and final refinery was a new grassroots refinery, adjacent to the existing Port Harcourt Refinery, with an install capacity of 150, 000 bpsd. With this, Nigeria total installed refining capacity is 445, 000b/d, which was originally built to serve both the domestic and international petroleum product demand.

Unfortunately, the purpose for these refineries were short-lived, serving only for a couple of years before each began to experience various man-made challenges that made them cost centres instead of the originally intended commercially profitable centres. The ever growing domestic product demands were no more met, as acute scarcity became a normal phenomenon. This led, unfortunately to the return of high propensity of petroleum product importation in order to meet the energy need of the nation. 2. 2 CHALLENGES OF PETROLEUM PRODUCT REFINING IN NIGERIA

The Nigerian state-owned four refineries have undergone, and still undergo several man-made challenges that have made it more of a liability to the country than an asset. One of the issues that reduced the refineries to cost centres is bureaucracy. Immediately NNPC took over the running of the first refinery, bureaucracy silenced the commercial cultures that make a business thrive. Tens of signatures would have to be appended on a letter seeking to fix or procure working materials. These unnecessarily delay maintenance and impact the efficient running of the refineries.

Also, being fully under the control of Government, all the funds for running the refineries would have to come from Government coffers. This occasioned delays and outright insufficient funding. Working capital especially meant to procure the needed spare parts, chemicals and all other necessary items for operations was not forthcoming, hence leading to the continues breakdown often experienced in the various refineries. The recommended 24-36 months normal industry Turnaround Maintenance (TAM) was hardly done[7].

It took years, far above the recommended time in between for TAM at the various refineries. The results were failures, wear and tear of the equipment, frequent shutdowns and complete non operations. Efficiency of the refining industry is such that needs well trained manpower. However, most of the refinery staff like any other state- ran enterprise were employed or appointed on ethnic or political sentiment. In such case, proper management and efficiency is thrown to the wind. Dedication and commitment to duty is hardly there, and the consequence is obvious. The big one is corruption.

The refineries have over the years become conduit pipes of siphoning tax payer’s money. Some individuals in Government seem to have become rich by the comatose state of these refineries, hence would do everything within their powers to make them remain so. These challenges have rendered the refineries helpless and never operating at the capacity utilization. Because of these, the country never really enjoyed product sufficiency with its vast reserve and refineries it ordinarily should have. Hence, Nigeria has always been a net importer of petroleum products. 3.

CRUDE OIL REFINING AND PETROLEUM PRODUCT ECONOMICS 3. 1CRUDE OIL REFINING ECONOMICS The overall economics or viability of a refinery depends on the interaction of three key elements: the choice of crude oil used (crude slate), the complexity of the refining equipment (refinery configuration) and the desired type and quality of products produced (product slate). Refinery operating cost, utilization rate and environmental considerations also influence refinery economics[8]. The type of crude used would determine whether there would be investment in the upgrading processes of the refinery.

Light, sweet crude require less upgrading, heavy crude do need more upgrading. Also, the product demand in the market determines the configuration of the refinery. For instance, the U. S. refineries are configured to process a large percentage of heavy, high sulphur crude and to produce large quantities of gasoline and low amounts of heavy fuel oil. The Canadian refineries are configured for light, sweet crude, hence would upgrading to process heavy crude. Most of the European refinery configuration favours the production of diesel; gasoline accounts only 20% production[9].

Obviously, the Nigeria refineries were configured for the light crude the country produces and produces a wide range of products meant for her market and other markets. The refinery utilization rate is a very critical component of refining economics. High percentage capacity utilization is needed for a refinery to increase operating efficiency and reduce costs per unit of output. A utilization rate of about 95% is considered optimum as it allows for normal shutdown required for maintenance and seasonal adjustments. The operable capacity of Nigerian refineries has on average 0 – 15% utilization, which make them grossly under utilized.

High utilization capacity is one of the things that make for profit margin scenario for refineries. The refinery industry has historically been a high- volume, low- margin industry, characterised by low return on investments and volatile profits. Profitability is measured by return on investment, defined as the net income contributed by refining/marketing as a percentage of net fixed assets (net property, plant, and equipment plus investments and advances)[10]. One way to represent the economics of a refinery is to calculate its Refinery Gross Margin[11].

For example, if a refinery receives $80 from the sale of the products refined from a barrel of crude oil that costs $70/bbl, then the Refinery Gross Margin is $10/bbl. The Net or Cash Margin is equal to the gross margin minus the operating costs (excluding income taxes, depreciation and financial charge. If a refinery experiences operating costs of $2 per barrel, then the Net Margin is $8/bbl[12]. The refinery margins are normally set on a competitive market, where the market is open. The contrary is the case in the Nigerian environment, the refineries are not working, and whenever they do, profit is never the aim. 3. PETROLEUM PRODUCT ECONOMICS Refined products market is different from crude oil market in a number of ways, owing to the scale of operation ( much smaller for refined products: a typical crude oil transaction involves 500,000 or even one million barrels of oil, while a typical refined products sale may involve only 5,000 to 10,000 bbls), quality considerations, price differentials and market size. In a competitive market, refined product prices are determined by supply, demand and inventory conditions at a given location and time[13]. International (border) price comes to play in the economics of refined products.

The exchange rate used to convert the dollar value of imports into the domestic currency is the interbank exchange market rate, which is market determined. A freight charge (including insurance margin) is added to the value to get the landed cost. Import duty, domestic distribution, storage, marketing, and transportation margins are then added to obtain the order price at retail level[14]. Imported petroleum products also has additional cost like; Port charges, taxes and export duties at source country, insurance costs for transportation and brokerage costs for agents.

The obvious reality is that there exists a wide range of domestic prices for petroleum products, determined mainly by the market and subject only to taxes and special charges in the developed countries. However, in developing countries like Nigeria, the prices are fixed by the government. Hence, the products are bought at the international price with a very high interbank exchange rate, and sold at a heavily subsidized, domestic rate, which has serious implications to the economy. 4. CRUDE OIL REFINING, PETROLEUM PRODUCTS IMPORTATION AND THE NIGERIAN ECONOMY. For a start, the estimated daily crisis-free demand for petroleum products in Nigeria today, are 30 million litres of petrol (PMS), 12 million litres of kerosene (DPK), 18 million litres of diesel oil (AGO), and 780 metric tons (1. 4 million litres) of cooking gas (LPG)…. ”(Braide, 2003)[15]. Nigeria with a population of 158. 2 million (UN, 2010) and increment to workers salary in the recent years, which have empowered quite a number of people to acquire some petroleum products demanding appliances, is much more pent-up now than in the last ten years.

This makes it more challenging to satisfy. Government have obviously chosen a very hard alternative, importation, to have the demand met. With a weak currency (of N153 = $1), at a current price of crude on the international market and heavily subsidized domestic price of petroleum products. For instance, PMS have been at N65 ($42 cents)/litre in Nigeria for a couple of years now, as against the expected open market price of N131. 32 ($84 cents)/litre[16]. Importation, though the only alternative to the non-functional refineries, is economically catastrophic.

For instance, Government spent $1. 34billion[17] from January to March, 2011 to import petroleum products to the country. In a year, this will amount to $5. 36 billion for importation alone, this excludes importations from marketing companies in Nigeria, tax waivers, demurrage and other implied costs that makes the total amount of importing the commodities extremely high. Government Petroleum Support Fund (PSF), which was established to disburse funds to the importing companies and the NNPC have between January, 2006 and July 2008 spent US$ 9. 2 billion[18] for subsidy alone.

The fund also spent over US$ 3 billion from 2009 to the first quarter of 2010[19] for subsidising the importation of PMS and HHK within the period. The Year-on-year importation of petroleum products keep depleting the country’s external reserve, thereby putting the economy in bad standing. On the other hand, the KRPC, WRPC and PHRC (new) were built with lump sums of $525 million, $478 million, and $850 million respectively[20]. Unfortunately, with the poor management, the refineries from every statistics available have become liabilities to the country.

With ultra low capacity utilization, a huge staff, high operating cost, no profit from NNPC year-on-year accounts[21], the refineries at present state are not economical. The implication of these is that the cost of crude oil, refining, importation, and distribution of the products are borne by the country’s treasury. A private sector run refinery industry is the only answer for meeting domestic demand at a very huge economic gain and energy security to the country.

This will also revive the ailing petrochemical industry, which has a massive ripple effect on job creation, directly and through other dependent industries like Paint and Plastic industries. But before this can be realised the unavoidable deregulation has to take place. Little wonder why the over 18 private licensed refinery companies are yet to mobilise to site. Therefore, Government should revisit the issue of deregulation, and then privatise the state-run refineries. This massive importation does no good at all to the country, and should be reduced to near zero minimum. 5.

CONCLUSION Government should be commended for taking up the challenge of building the capital intensive refineries, being beyond the ability of any local company at the time. It created energy security, jobs, averted looming crisis arising from massive shortage of supply of petroleum products and saved so much cost. But its continual running of the refineries is, to say the least wasteful and harmful to the economy. Refineries are commercial ventures, with huge financial implications, and do not provide much employment opportunities to warrant such protectionism by Government[22].

Obviously, it is only a few that benefits in a State-run refinery at the expense of many. Privatisation of the refineries holds more prospects economically to the country than what obtains. At the time being, the unenviable net importer position of the country is no more sustainable. Less Importation would save so much cost and the Nigerian economy shielded from the unstable, volatile international petroleum price. Subsidy has caused considerable loss of revenue and a rapid growth in domestic oil consumption as low price does not reflect real cost for consumption.

It has contributed to the collapse of local refineries, as price of fuel do not show cost of supply. Reluctance of private players to invest in refineries, persistent fuel shortages at filling stations, dilapidated supply and distribution infrastructures, smuggling, and product adulteration, all of which impact substantially on the economy are the consequences of the continues subsidy regime in place. Everything should be done to encourage a functional refinery industry to check the crippling importations. An efficient refinery industry in Nigeria would have massive market both within the country and in the neighbouring ountries, and this brings immeasurable economic gains that are able to change the economic outlook of the country. BIBLIOGRAPHY PRIMARY SOURCES NATIONAL LEGISLATIONS The Nigerian National Petroleum Corporation Act, 1977 The Petroleum Products Pricing Regulatory Act, 2003, No 8, Laws of the Federal Republic of Nigeria SECONDARY SOURCES BOOKS Gary, J. H. , Handwerk, G. E. , Kaiser, M. J. , Petroleum Refining Technology and Economics, (5th Edition) (United States of America, Florida, CRC Press, 2007). OTHERS INTERNET SOURCES Braide, K. M. The Mechanics of Fuel Scarcity in Nigeria, http://www. nigerdeltacongress. com/marticles/mechanics_dynamics_fuel_scarc. htm. (assessed 13/04/2011). CBN, http://www. cenbank. org/Out/2011/pressrelease/gvd/CommuniqueforMPCMeetingofMarch 21 22 2011_21st Mar_. pdf (assessed 01/05/2011). CIA, The World Factbook, http://www. cia. gov/library/Publications/the-world-factbook/geos/ni. html (assessed 18/04/2011). Hossain, M. S. , Taxation and Pricing of Petroleum Products in Developing Countries: A Framework for Analysis with Application to Nigeria, http://www. imf. rg/external/Pubs/ft/wp/2003/wp0342. pdf (assessed 20/04/2011). Iba, L. , Fuel Crisis: Still waiting for private refineries, http://64. 182. 172/webpages/news/2010/july/12//busines-12-2010. 001. htm (assessed 09/05/2011). Nigerian Refineries: History, Problems and Possible solutions, http://www. businessdayonline. com/NG/index. php/oil/3256-nigerian-refineries-history-problems-and-possible-solutions-1 (assessed 09/05/2011). NNPC, Annual Statistics Bulletin, http://www. nnpcgroup. com/Portals/0/MonthlyPerformance/2009ABS Web. pdf (assessed 01/05/2011). NNPC, Subsidiaries, http://www. npcgroup. com/NNPCBusiness/Subsidiaries/ (assessed 09/05/2011). PPPRA, Report on the Administration of the Petroleum Support Fund (PSF), http://www. pppra-nigeria. org/briefonadministrationofPSF. pdf (assessed 01/05/2011). Refinery Economics, http://nrcan. gc. ca/eneene/sources/petpet/refraf-eng. php (assessed 19/04/2011). Refining & Product Specifications – Overview, http://www. petroleumonline. com/content/overviemCont. asp? mod=8&ord=10 (assessed 19/04/2011). ———————– [1]CIA-The World Factbook, at http://www. cia. gov/library/Publications/the-world-factbook/geos/ni. tml (assessed 18/04/2011) [2] NNPC 2009 annual report and EIA Nigeria Energy Data, Statistics and Analysis-oil, Gas, Electricity, coal [3] This is the maximum number of barrels of input that a distillation facility can process when running at full capacity under optimal crude and product slate condition with no allowance for downtime. [4] Nigerian Refineries: History, Problems and Possible solutions, at http://www. businessdayonline. com/NG/index. php/oil/3256-nigerian-refineries-history-problems-and-possible-solutions-1 (assessed 09/05/2011) [5] Ibid [6] Ibid [7] Ibid [8] Refinery Economics, at http://nrcan. gc. a/eneene/sources/petpet/refraf-eng. php (assessed 19/04/2011) [9] Ibid [10]Ibid [11] The difference in dollars per barrel between its product revenue (sum of barrels of each product multiplied by the price of each product) and the cost of raw materials (primarily crude, but also purchased additives like butane and ethanol) [12] Refining & Product Specifications – Overview, at http://www. petroleumonline. com/content/overviewConti. asp? mod=8&ord=10 (assessed 20/04/2011) [13]Gary, J. H. , Handwerk, G. E. , Kaiser, M. J. , Petroleum Refining Technology and Economics, (5th Edition) (United States of America, Florida: CRC Press, 2007) at 18-19. 14]Hossain, M. S. , Taxation and pricing of Petroleum Products in Developing Countries: A Framework for Analysis with Application to Nigeria, at http://www. imf. org/external/pubs/ft/wp/2003/wp0342. pdf (assessed 20/04/2011) [15] Braide, K. M. , The Mechanics of Fuel Scarcity in Nigeria at http://www. nigedeltacongress. com/martiles/mechanics_dynamics_of_fuel_scarc. htm (assessed 20/04/2011). [16] Ibid [17]CBN, http://www. cenbank. org/Out/2011/pressrelease/gvd/CommuniqueforMPCMeetingofMarch21 22 2011_21stMarch_. pdf (assessed 02/05/2011). [18]PPPRA, Report on the

Office Dakota Products Case Analysis Course: BUSA 5061 Managerial Accounting Students Name: Teresa Willette Professors Name: Dr. Conner/Dr. Pollard Date 3/20/2011 Executive Summary The following analysis is written for Dakota Office Products to evaluate current business operations and recommend future actions necessary to ensure company success. In the analysis of the company we will identify inefficient business practices that have led to the companies first profit loss in its history.

We will evaluate the companys current pricing structure, ordering methods, shipping and delivery process, and deficiencies in cash flows. For Dakota Office Products (DOP), its existing costing system was inadequate because it is incapable of accounting for even all of the known costs such as the desktop delivery service as well as hidden costs such as the ten percent DOP paid to maintain its working capital line of credit for accounts receivable.

Using the Activity Based Costing(ABC) methodology can be utilized to also improve processes and identify opportunities to improve business effectiveness and efficiency by determining the true or real costs of a given product or service. ABC principles are used to focus management’s attention on the total cost to produce a product or service, and as a basis for full cost recovery of a production or service process. Background Information The company under the study, Dakota Office Products, is an established and reputed player under this segment.

They were regional distributors for office supplies and the major clientele served by the company included institutional and commercial clients. It dealt with all kind of office supplies starting from all kinds of writing equipment to papers and other office supplies. The company has been able to carve a good name for itself in the industry. The company had also arranged for several distribution centers where the shipments were required to be unloaded and packed into cartons meant to be delivered to the respective customers.

In order to increase the utility for its customers, the company had introduced the desk top option for its valued customers. Under this option, the company will use its own fleet to directly deliver the goods at the customers premises. The company charged a small additional amount of upto 2% of the marked price for this additional value added service. This decision was made keeping in mind that such a decision could boost the margins of the company. The company had the policy of marking the sales price by 15% over and above the purchase price. This policy was framed o ensure that the overheads and transportation cost of the materials could be made up from the mark up. The company would then add another mark up to ensure coverage of general expenses and contribution of the company. The mark up decision was taken at the beginning of the year based on the projected cost of the different products of the company. Key Issues The management is faced with major pricing and costing issue for its products. The company has been using the traditional costing method to compute the cost of the product provided to the clients.

The company then adds a mark up as per its policy to come up at the selling price of the product. As a result of not following the Activity Based Costing, the company has not been able to cost the products realistically. This has lead to mispricing of the products and resultant overall loss to the company. The fact that an increase in sales has not lead to an increased profits, instead, it has resulted in increased losses has exposed the limitations of the cost accounting system of the company. The company has not been able to increase its profits.

This has led the management to believe that the existing cost accounting system has some serious flaws which needs to be rectified on an immediate basis so as to avoid making bad decision leading to losses to the company. The company should now be contemplating the implementation of Activity based costing system so as to ensure proper recording of information which will lead to optimum decision making for the company as a whole thus contributing to the growth of the company through increased profitability. The key issue presented in front of the management is the possible steps to be taken by the management in order to avoid such losses.

Critical Thought The issue addressed by the accounting system of Dakota office products invites our attention to the premise of Activity Based costing methodology. We are certain about the fact that the accounting and reporting system at Dakota Office Product is inappropriate and is leading to the company making wrong decision ultimately leading to losses. This was apparent from the record where the company was able to increase its sales without a corresponding increase in the profits for that particular year.

Activity based costing system is an approach which seeks to allocate the overhead cost to the products on a scientific and realistic basis. The existing system of allocating cost at Dakota Office products were inadequate in so much so that it was following an unreasonable basis for allocating the cost, which were known and visible, such as the desktop delivery cost. The existing system was suffering from oversight of some of the expenses. ABC costing system seeks to overcome the problem of oversight and make a more reasonable allocation of the costs.

The distinctive feature of this method is the fact that the method can provide useful insights to the management as to the activities which are leading to the cost by identifying the cost drivers, rates and the number of activity undertaken. This can also help the management redesign the operational system such that the costs associated with the products are reduced. We must also note that the traditional method of costing adapted by Dakota Office Products are typically designed for companies who are dealing with only a single product, or homogeneous products.

However Dakota Office Products have come to a stage that they are dealing in multiple products such as writing instruments to copier to pages, thus it makes the traditional costing method even more impractical to be followed by the company. This company was dealing in numerous products and was also making strides in adapting varied operational methodologies such as the desktop delivery or the sales through e commerce internet sites. The operations of the company are such that it would be apt for the company to establish a cost driver rates and apply those rates in the products of the company.

The cost driver rates could also be used by the company while applying the cost overheads to some other products that the company may be planning in the future. The existing system of the company involves use of many activities and the company has been able to regularize the operations of the company and is clear about the operational goals that need to be fulfilled by the company. The company is dealing in an industry where the products are quite heterogeneous in nature and once the products are purchased there is very little scope of application of direct materials or labor.

The major cost that is expected to be incurred is the overhead costs which are factual dependent upon the number of activities undertaken to accomplish the task. The cost drivers need to be ascertained before the application of the cost drivers to the number of activities attributable to the product as regards the particular activity. Alternate Solution A noteworthy fact is that the company has posted increased losses in spite of an increase in overall sales of the company. The objective of the exercise is to let the management be aware of the reasons as to why the company has osted losses even after an increase in the sales. Moreover, the management needs to be shown the way by which the company could remedial action so that the managements direction is towards the right direction. The alternate solution available to the company could be enlisted as follows Increase in selling price of the products Review the accounting procedures and implement the change required in accounting procedures Discontinue the product which reports a loss We will make a brief study of the above alternatives before forming an opinion on any of the alternatives.

As the company is operating in a competitive market, so an increase in selling price of the products is expected to have far reaching repercussions in the sense that the company could go on to lose clients and contracts which could lead to even lower sales and higher losses. Moreover, the existing accounting procedure is inappropriate to produce the actual cost of the product. The computation of actual cost of the product is important in the backdrop of the company policy to add a mark up on the cost price of the goods.

If the accounting system is inappropriate to calculate the cost of the cost, then it would be inappropriate to add a mark up on the goods based on the cost as produced by the existing accounting procedure. A review of the accounting procedure is duly called for as the existing accounting procedure is not appropriate. The accounting procedure is not apt for a company having multiple products and multiple processes, and very little expenses on the direct materials and labor. Application and implementation of the ABC system will be able to contribute to the accounting procedure adapted by the company.

A product which is not able to contribute to the overall profits of the company could be considered to be discontinued. However, the decision of the product to be discontinued lies with the management and the accounting system. As mentioned earlier, the accounting system is not fit, so the company should first implement an ABC costing system in order to make proper decision regarding the costing and pricing of various products as well as the costing of servicing various clients.

Implementation Measures and Follow up Dakota was following the traditional method of allocating overheads across the product lines. The overheads were not allocated to the products based on the activity undertaken for the manufacture of the product. This led to mispricing of the product and also led to difficulty in taking optimum decision for the company as a whole. The company had incurred losses in spite of an increase in sales, because the company was selling a product at a loss (which was not detected by the traditional costing system).

We need to identify the activities on which the cost is dependant, in order to calculate the cost driver rate. The following are the activities identified Processing of Cartons (Activity 1) Service Involving Desktop Delivery (Activity 2) Order Handling (Activity 3) Data Processing and Entry (Activity 4) Activity 1 Amount of Expenses = Warehouse Personnel Expense (90%) + Items Purchased = 90%*2400000+35000000 = 2160000 + 35000000 = 37160000. Activity Driver (Processing of Carton) = 80000 Cost Driver Rate for Activity 1 = 37160000 / 80000 = $ 464. 5 per carton.

Activity 2 Amount of Expenses = Warehouse Personnel Expense (10%) + Delivery Truck Expense = 10%*2400000+200000 = 240000 + 200000 = 440000 Activity Driver (Desktop Delivery) = 2000 Cost Driver Rate for Activity 2 = 440000 / 2000 = $ 220 per carton. Activity 3 Amount of Expenses = Warehouse Expense + Freight = 2000000+450000 = 2450000 Activity Driver (Orders) = 16000+8000 = 24000 Cost Driver Rate for Activity 3 = 2450000 / 24000 = $ 102. 083 per order. Activity 4 Amount of Expenses = Order Entry Expenses = 800000 Activity Driver (Orders Line) = 150000 Cost Driver Rate for Activity 4 = 800000 / 150000 = $ 5. 3 per line. The implementation involves computing the profitability of the two clients A Sales Cost Gross Margin No of Cartons Ordered 464. 5 92900 9290 0 B 1040 103000 00 8500 85000 0 1900 18000 0 Desktop Deliveries 220 Order Handling 102. 083 1224. 996 Data Entry 5. 33 Total Cost 319. 8 94444. 8 959. 4 1095 67. 7 5567. 7 1020 8. 3 0 5500 Contribution 8555. 204 The following are the main causes of difference in profitability between the two customers Customer B has a desktop deliver of 25 whereas customer A has none. The number of data entry for customer B is 180 whereas it is about 60 for customer A.

References Michael H. Granof, David E. Plat, Igor Vaysman. (2000). Using Activity-Based Costing to Manage More Effectively. http://costkiller. net/tribune/Tribu-PDF/Using-Activity-BasedCosting-to-Manage-More-Effectively. pdf Rockford Consulting, retrieved March 21, 2011, from http://rockfordconsulting. com/activitybased-costing%20(ABC). htm Value based management, retrievd March 21, 2011, from http://www. valuebasedmanagement. net/methods_abc. html Dakota Products Case Office Analysis Course: BUSA 5061 Managerial Accounting Students Name: Teresa Willette Professors Name: Dr. Conner/Dr. Pollard Date 3/20/2011

Adding a lower-priced item to a line of prestige products to encourage purchases from people who cannot afford the higher-priced product, but want the status.

B. Identify ways in which product lines can be organized. It can be organized by what target market it is marketed for and also organized by what type of product it can be used for.

C. Having different brands for different makers and being able to sell your product to many people.

D. Identify reasons that a business would offer a narrow product mix. Ease of management Cost effective Simplicity Consistency

e. Identify reasons that a business would offer a broad product mix. Reach all markets Competitive advantage

f. Identify reasons that a business would offer a deep product mix. Variety Quantity

g. Identify reasons that a business would offer a shallow product mix. Cost effective Satisfy small markets

h. Explain the importance of a business’s product mix. Businesses must plan their product mix carefully because they cannot offer all the products that customers may want. They should be a profitable market for product offered by a company. Describe advantages of expansion product-mix strategies. Broadens your target market and maybe profit if you get lucky

J. Describe disadvantages of expansion product-mix strategies. You can go out in a crash and burn from not selling any of your product.

K. Describe advantages of contraction product-mix strategies.

L. Describe disadvantages of contraction product-mix strategies.

M. Describe advantages of alteration product-mix strategies. Improve an established product with new design, new package, new uses.

N. Describe disadvantages of alteration product-mix strategies.

O. Describe advantages of trading up product-mix strategies.

Trading up: Adding a higher-priced product to a line to attract a higher-income market and improve the sales of existing lower-priced products

p. Describe disadvantages of trading up product-mix strategies. Can lose lower customers due to prices

q. Describe advantages of trading down product-mix strategies. Trading down: from people who cannot afford the higher-priced product, but want the status.

r. Higher clientele and make them not take you as seriously.

s. Describe advantages of positioning product-mix strategies.

In Relation to a Competitor

In Relation to a Product Class or Attribute In Relation to a Target Market

t. Describe disadvantages of positioning product-mix strategies.

By Price and Quality Difficult to change Sample Activity Product Mix: Access a company’s web site to identify its product lines; for each product line, identify several product items; include the product mix dimensions (narrow/broad, deep/shallow). Company web sites can be accessed directly (ex. Whom. Peg. Com) or via Inference

Print-screen the information obtained, and write a 500-word report about the company’s product ix and its advantages and disadvantages for the company.

*Product mix, also known as product assortment, refers to the total number of product lines that a company offers to its customers.

Summary of product mix, advantages, and disadvantages: The main aim of the company is to enhance the customer experience for driving, thus providing top luxuries vehicles, therefore the products are also developed in the similar manner.

It can be said that Audio’s product are instantly recognizable. Although the prices of the arioso products from Audio are high, but it represents the unique and distinguishing attributes of the product as well. It can be observed that the target market of Audio is the people who are high earners like the executives, sports person and celebrities. Therefore the pricing of the various products from Audio is also high. Audio makes sure that the products are of high quality and that is the reason that an Audio was never ever recalled back from the market unlike Mercedes Benz being called back several times.

Audio also makes sure that it is making the vehicle with new tech features, which could separate the product from others. The different products of Audio can be found across the globe. Even in the developing countries some products of Audio can be seen. However the different parts of Audio products can be difficult to find especially in the underdeveloped regions, but it can be said that the products of the company are available within the reach of its target markets. The management has carefully developed this marketing strategy for the company, which ensures that products are within the reach of the target customers.

This enhances the image of the company. The management of Audio has worked very hard and put efforts in order to promote the product strategy and business across the globe. It can be seen that the company has made sure that its product is being recognized across the globe. Social networking to promote the products in different markets. Since the company tends to support adaptability, aggressive marketing campaigns on social networking as well. The key of Audio marketing strategy, in order to overtake competitors, is that the brand spent enormously on advertising at a same time, while competitors have to cut in economic time.

Audio is one of the greatest market leaders present in the automobile industry. It is suggested to the company that they should also focus upon the less attentive areas to make sure that the company enjoys a long term position in the market.

After viewing Broadcasting international’s advertisement for ‘Typhoo Tea’ the team at Phantom Menace advertising have analysed it thoroughly. We enclose some suggestions for improvement, which we hope, will increase the sales of your product. The advert: At present your advert consists of 24 different camera shots based at a variety of different angles, however at least 6 of these shots are the same the only difference between them is the distance in which they are shot.

Narrative: The narrative of the advert tells the story of the advert. The story of this advert is that if you drink Typhoo Tea you will be refreshed, happy and full of energy. At present this comes across very clearly in the advert, you have old ladies dancing and workmen not complaining about their work, but we feel we could make this known a bit more in the advert. The music: Throughout the advert the disco classic of 1983 ‘fresh’ by kool and the gang is played. The music is very appropriate for this advert and helps the company emphasise that Typhoo Tea is fresh. It clearly tells you through the music and rhythm that Typhoo Tea is designed to refresh you.

The colour scheme: The red and green colour scheme is predominant throughout the advert. The colour scheme originating from the logo. The green representing the colour of the tea leaves and the red representing China where the tea grows. Our eyes are trained to pick out the green and red colour scheme in the advert and the constant reminder of the colours helps the customer to memorise the colours to look out for in the supermarket when buying the product.

The shots: We see various shots of people queuing or waiting for public transport at airports and bus stations as well as factories and workplaces. At present this seems to suggest that Typhoo Tea is only aimed at working people and that it is not for the unemployed or professionals. At the moment the advert gives of an impression that it is only designed for people over the age of 25 and not for youngsters and school leavers. By doing this, your company is missing out on a huge advertising opportunity. Young people get the feeling that the tea is not designed or made for them and therefore think that it’s best not to drink it.

The advert is very busy and is full of timing and movement. It stands out from all the other competing Tea advertisements with its catchy music and bright colour scheme. It is a very happy, smiley, active advertisement Showing people full of energy, with a will to live thanks to having drunk Typhoo Tea. Improvements: We feel as an advertising agency, our company could improve upon the advert made for you by the people at Broadcasting International. We feel as a team we can improve your advert and increase your sales of your product for a reasonable price. In fact we guarantee we will match the price of any other 5 star advertising agency providing of course you have evidence of this. We enclose a detailed story broad of your present advert and some improvements we have come up with.

The advert:

We feel as a company at Phantom Menace advertising we can improve your advert considerably by cutting out some of the repetitive shots. At present it seems that Broadcasting international have cheated on you by charging you for repetitive shots within your advert. We will improve upon this by cutting out some of these shots and replacing them with new more appropriate shots for a small charge.

We feel here at Phantom Menace advertising that it you repeat a shot to many times it discourages the consumer of buying the product. They get so bored of the repetitive shots that they get fed up of supporting the company. As part of the package of improving your advert we will produce you a second shorter advert for no additional charge consisting of only a few of your best shots. This offers a change for the audience of your advert and can be used as a reminder of your product in between showing the larger, fuller advert.

Narrative: We feel the Narrative of your advert is good but we can still see room for improvement. We plan on changing the Narrative slightly so that the advertisement appears to cater for school leavers, sick and unemployed people. We feel we could do some of this by creating scenes from the imagination. For instance we could have a sick woman on crutches hobbling along at a hospital. She has a sip of Typhoo tea and suddenly she’s full of life. She throws down her crutches and starts dancing to the music.

We could have shots of bored looking children in a canteen sitting down with cups of tea, waiting to go home. Then they could take a sip of tea and then get up and start dancing. What we are suggesting is that you show people how they where before they drunk the tea instead of just the after effects of this tea. This emphasises how the tea changes you and the way you act and look at things. The music: We feel the music is retro, fun, catchy and in. It is appropriate for the advert and advertises Typhoo’s trademark, which is the fact that their Tea is fresh. The music is catchy and in our opinion is the whole outlay to the advert, it is what ties the advert together, without this music, the advert would mean nothing to any body or any thing.

Product and service classifications Products and services wide range, whether for personal use or business. Tangible, intangible. Depend on function they serve. Can be raw, unfinished or final goods.

Generally classified depending on domestic use (final) or conducting business (further processes) Organization, person, place and idea (IS) marketing POOP Organization marketing – Activities to sell the org Create, change, maintain the attitudes and behavior s of target consumers toward an organization Business firms sponsor advertising campaigns to improve image or market themselves to publics and stakeholders.

Helps to market for free in media and improve investment confidence and improve sales from getting publicity Person marketing – Used to build reputation of people – recognized/business people. Create, change, maintain attitudes towards specific people. Make use of well- known people to represent products to help them sell. Egg Big razors with Tended Miterwort aka “the Beast” Skillful marketing can turn person’s name into a powerhouse brand.

Egg Donald Trump and his self- titled products. Place marketing – Create, change, maintain attitudes toward specific places from local to international. Places are competing against each other for tourism business. Egg Tomorrow land in Belgium and Pizza in Spain both well- known party places of the world. Ideas marketing and social marketing can be general or specific The diffusion of notions which help market a product or service.

It is more than advertising, it encourages the broad range use of marketing tools = all marketing strategies Like advertising that Colgate toothpaste is number 1 Part of this marketing is social marketing – process of planning campaigns that influence individual’s behavior toward helping a society’s well- being using marketing tools – all marketing tools 1) Benefits they want 2) Reducing barriers they’re concerned about and BY offend BEEPER 3) The use of persuasion to motivate their participation in programmer activities.

Social marketing makes use of campaigns to promote awareness, such as health campaigns for cancer, environmental campaigns for environment protection and others that promote equality and rights. Classified depending on the kind of consumers who use them. The distinction between the two is the purpose for buying the product. If a lawn mower is bought just for home use it is a consumer product. If bought for lawn mowing business it is an industrial product. Part 1 Consumer products are Prod and service bought for final consumption. Classified on how they are bought.

CUSS – buying behavior, compare, cost, distribution, promotion frequency/method. Convenience P&S’s are Bought frequently, immediately with minimal effort and without much pre purchase landing, info gathering or brand comparing. Except popular brand names, well known Egg – sweets, cigarettes, fast food. Are usually low priced, placed in locations that make them easily available when needed. (been in maturity stage for long time) egg coca cola Mass promotion – Low customer involvement Unsought P;S’s Consumer don’t know about or not think of buying or negative interest toward. Most new products on market are unsought.

Egg life insurance or blood donations. Price varies, Distribution varies, Aggressive promoting by producer/reseller Shopping P;S’s are pass Less frequently purchased products and services, higher price that customers compare carefully on price quality, suitability and style. Lots of time spent gathering info/comparing. Products distributed to few outlets, given info for comparison effort Egg Airline services, furniture. Advertising and personalized target selling by producer and reseller. Special itty As are Unique BRAND/characteristics ID = Loyalty. Certain groups willing to make special effort to get. Exclusive distribution and outlets to purchase, High price/low sensitivity cause of this don’t compare; invest only time needed to reach dealers carrying. Role/custom designed clothing. Specific targeting by producer/reseller Part 1 Industrial products are Products purchased for further processing or for use in conducting business Materials and Parts INPUTS/resources Price and service are the major marketing factors. Branding and advertising are less important. Raw materials consist of farm products such as livestock or fruit and Natural products such as wood and iron ore.

Manufactured materials and parts consist of: Component materials like iron and cement and Component parts like motors and trees. Capital items PRODUCTIONS Aid in the buyer’s production or operations, including installations and accessory equipment Installations consists of major purchases like building (factories and offices) and fixed equipment like (generators, large computer systems) Accessory equipment includes Portable factory equipment and tools such as tractors and hand tools Office equipment such as computers and office desks, they have shorter life than installations and aid in the production process.

Supplies and services (business) sups ORBS services Bad m Supplies are the convenience products of the industrial field because purchased with minimum effort or comparison Operating supplies such as coal, paper, pencils Repair and maintenance items such as paint, nails and brooms Business services are services supplied under contract Include Maintenance and repair services such as carpet cleaning or computer repair. Business advisory services such as legal services or advertising.

Chapter 1 – case for critical analysis Question 1: How might top management have done a better job changing Electra Products into a learning organisation? What might they do now to get the empowerment process back on track? Answer: * Harry might talk with the employees. He has very much experience because he worked for 20 years in this company. He knows a lot of behaviours in the company, the good and the bad ones. Harry is able to understand the situation and the problems from the staff more than a newcomer.

Furthermore he can motivate the others in a different, better way because he is in the same situation and they maybe look up to him. * The top management should support the teams with individual trainings for each department. So they can improve their skills to achieve better results in their work area. In addition they get new motivation and they approach their assignments more confident. Possible trainings could be: * Communication skills * Dealing with customers * Teamwork * The company can make individual meetings with the employees to talk about their problems.

In this case the labour has the chance to mention their own opinions and ideas. * An additional proposal to get the empowerment process back on track is to conduct surveys. So they get valuable information from outsider about the popularity of their products. In this way they can go into to the customer’s desires and get new ideas for possible innovations. Surveys are also an excellent opportunity to learn more about the competitors and their products. * To spur the employees they might give salary increases. This avoids that many of the disappointed employees are looking for another job as well.