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Sharp Corporation is a Japanese electronics giant that manufactures electronic products. The Company was founded in Tokyo in the year 1912 by Tokuji Hayakawa. Behind Samsung, LG, Sony and Panasonic, Sharp Corporation is the world’s fifth largest television manufacturer in the world (Reuters, 2013).
In the fiscal year 2013, which ended in March, Sharp Corporation reported a record loss for the second year running. The 376 billion yen (US$ 4.7 billion) record net loss in 2012, and the company’s100 year anniversary, was surpassed in 2013 with a reported net loss of 545.4 billion yen (US$5.3 billion). After two successive fiscal years of record losses the company has decided to reshuffle its management (New York Times, 2013).
One of the main reasons for successive heavy losses is due to the fact that the company has struggled to reshape its business processes and cut costs. Sharp had invested heavily in new production plants in Japan, which are manufacturing panels for TV devices and mobile devices. However due to the decreasing price in products as well as the ever growing competition, Sharp has been unable to achieve net profits to pay back liabilities which financed their new production plants.
Along with reshuffling its management, which included a change in the top position, Sharp Corporation also worked hard to create distinctive products that meet their customer’s needs. The measures that were taken to meet Sharps customers’ needs includes: reinforcing their massproduction of their IGZO LCD’s (Liquid Crystal Display), reacting to the global demand of LCD touch screens and also launching their own Smartphones and tablet manufacturing plants (Sharp Annual Report, 2013).
Management Accounting 1 Group 6
This report is going to examine the high fixed cost problem of Sharp and offer possible solutions. Besides, some related decisions made by Sharp are discussed using management accounting knowledge.
Fixed Cost Problem
In the Sharps Company Annual Report 2013 the management introduced a growth and recovery plan to its shareholders and the wider public. The growth and recovery plan is part of the company’s Medium Term Management Plan for the fiscal years 2013-2015, in which the company aims to fulfill their targeted recovery and growth in five strategic measures. (Sharp Annual Report, 2013)
Sharp’s new strategy named “Improving our Financial Position”, is one of the five strategic measures in which the company aims to optimize its inventory levels, among other actions, to reduce its overall fixed costs.
According to Sharp Corporation annual report the company had inventories amounted to ¥527.4 billion, for an inventory ratio against monthly turnover of 2.58 months. (Annual Report, 2013). These values represent a rather high level of inventory. A high inventory level can at times indicate better liquidity but are usually unhealthy because they represent an investment with zero rate of return. Also it means that if prices of certain products or materials begin to fall the company can suffer heavy losses. Sharp Corporation increased their efforts to optimize their inventory levels for the fiscal year 2012 and further lower them. In the year-end 2012 inventories fell to ¥310.7 billion, for an inventory ratio against 1.50 monthly turnover. (Annual Report, 2013) The inventory level is representation of the company’s holding costs – hence the cost of storing inventory.
Management Accounting 1 Group 6
products as well as the materials have a longer storage time in one of the company warehouses. Minimizing the inventory levels means reducing the overhead costs and therefore improves the profitability performance of the company.
According to the Sharp’s Annual Report the company is further aiming to reduce its inventory levels in 2013 which would set them on course to optimizing their inventory levels and improving their overall financial position. (Annual Report, 2013).
Table 1: Sharp Co. Annual Report 2013
What Sharp should aim to do is not only reduce it’s inventory levels, so it can be more flexible and work towards customers need, the company also should focus on increasing their inventory turnover ratio. The inventory turnover ratio shows the number of the times the company’s inventory is sold and replaced over a certain period of time. Having a high turnover ratio can imply that the company has strong sales and is able to compete with its competitors.
strategies to lower inventory levels can include better forecasting of customers needs and desires and buying stock according to it. This step includes working together with the management and being able to react quickly to consumer trends.
Reason for belonging to fixed cost
Wages and salary cost can be either fixed cost or variable cost. Different countries have different identification on the behavior of wage and salary cost, which may depends on labor regulation, labor contracts, and custom. In Japan, management has little flexibility in adjusting the size of the labor force, thus labor cost tend to be fixed in nature. (Ray, Eric, Peter, et al., 2013) Reason for high labor cost in Sharp
Sharp, as a Japanese multinational corporation that designs and manufactures electronic products, is undoubted that they have strong workforce on manufacturing factory. Therefore, the labor cost will be a huge burden for Sharp. Hugh Hendry, the hedge fund manager, writes, “Corporate Japan, along with much of the rest of Asia, is guilty of paying too many redundant quasi state employees anything at all. It is a ruinous policy, symptomatic of a failure to face tough decisions, and it is slowly but surely eliminating all of the residual equity value in far too many businesses.” (France-Presse,2012). This can be shown in Sharp’s financial statement. From March 2008 to March 2012, the company’s revenues decreased by 28 percent. Yet its workforce increased by 5.7 percent to 56,756 employees. (Sharp annual report, 2008-2012) This implies that Sharp bears unnecessary labor expense. To tackle the high fixed labor cost, Sharp needs to adopt several policies to cut down it so as to lower the fixed cost. Policies suggested for Sharp
1. Lay off part of the factory labor
This is the direct way to do so and the effect of decreasing the fixed cost can be shown immediately in short-term. By the lay-off of labor, the wages and salary will decrease as Sharp pays less. Therefore, the fixed cost will be decreased. The lay-off of labor not only lowers the salaries and wages, part of the labor fringe benefits can also be decreased such as the medical care, insurance program. Nevertheless, there may be risk in long-term. When the Sharp is getting better in future, the demand for the product may be increased. Then labor shortage may occur. 2. Cut down the wages and bonus
This policy may not as obvious in decrease the fixed cost as lay-off. However, part of the wages and salaries can be avoided. This policy has one significant risk implied. That is lowering the motivation of the labor. Labor has little incentive to produce in high quality. Thus lowering the production, which is not beneficial for Sharp, especially that Sharp products are losing the market.
3. Introduce voluntary retirement plans
As we mentioned above, Sharp labor supply is greater than the labor demand, thus huge redundant quasi state employee in the company. By introducing this policy, the labor force will be decrease year by year. Sharp can control its workforce in a reasonable level, thus the wages and salary cost can be control in a reasonable level, lowering the fixed cost in both long run and short-run.
There is still another way to reduce the fixed cost, which is dealing with unproductive assets. Unproductive assets are the assets that can’t ensure the economic benefit inflow and the production may not have good result. It is a burden more than a benefit (Norman and Bullington, 2013). Because of losing significant value and profitability, Sharp indeed has some trouble with unproductive asset.
The home appliance market is declining these years. The profit gain from home appliance including LCD TV is getting much lower. And the demand of larger screen TV, one of the main products of Sharp, keeps falling. But Sharp wrongly estimated the future situation and increased production efforts of larger screen TV, which results in large amount of unmarketable product and oversupply. So some factories make little profit or even no profit at all, and they may even shut down production for several months. At the same time, the fixed cost incurred from plant would not stop, like depreciation of plant and machinery, the rental fee and the daily maintenance fee. And some ministration building may not that necessary to exist, because it consumes much administrative expense. All of these unproductive assets lead to Sharp’s high fixed cost, which makes it difficult to gain profit from their business (Valentin, 2012). Solutions
1. Sell the unproductive asset
In order to reduce the overall fixed cost, Sharp should deal with these unproductive assets properly. The most direct method is to sell them. As the current supply is enough for the market demand, and the unmarketable product would results in increasing inventory which also incur high fixed cost, so close down the factory could be a wise decision. Actually, Sharp has planned to sell some of its asset already to rescue its financial problem, and get rid of the burden. Those plants include plants in Nanjing, Mexico and Malaysia, after selling them, 5000 workers will be fired and the labor cost will decrease at the same time(). As Sharp’s sale scale in Europe is only 1,000,000 for LCD TV, we think that the number of factories in Europe like Poland should be cut down, it would incur large sum of money but get little return (Kyodo, 2013). 2. Shut down some production lines
Sharp’s LCD screen seemed as the best in the world, but Sharp’s TV is not that good as the screen. Therefore, Sharp can choose to shut down the production lines of some other TV 6 components, and buy them directly from other companies or find subcontractors to make cooperation.
Risks and benefit
After dealing with the unproductive assets, the fixed cost of Sharp will decrease a lot, and gain large amount of money from the disposal to remedy the cash flow crisis. Refer to the costvolume-profit analysis, reduce fixed cost can lower the break-even point, so that Sharp can earn profit easier. The low fixed cost structure is proper to be used under bad economic situation, but there are still some risks to settle these unproductive assets. If Sharp expands its products to other areas and achieves big success, it will be difficult to make large production scale, and the income will be lower due to lower proportion of fixed cost.
But all in all, dealing with the unproductive asset is appropriate for the current situation, which can help Sharp to recover and gain money soon.
Decision making of Sharp
Add & drop Sharp’s segments
Adding or dropping a segment is one of the most important decisions managers need to make. Examples of segments include products, production process, or stores (Garrison, 2012). As Sharp has reported an extraordinary loss (Cooper, 2012), the company should consider dropping production line which is lowering the profit. Moreover, due to the financial recession of Sharp, it is necessary for the company to create a new profit-earning business model and its introduction to enhance corporate value.
The company should drop the production lines only if its profit would increase (Garrison, 2012). Harner (2012) criticized Sharp that one of its failures was the “decades-old strategy” of producing both liquid crystal panels and televisions. This is a problem of selling or processing and at the moment, Sharp chooses to sell the crystal panels as well as process them further to television. Sharp should consider whether dropping one of these two products in order to concentrate in production. The criteria for Sharp to make the decision is that which of the segment could increase the company’s profit after dropping it and also whether process further would really increase the profit.
Adding of product line
Sharp has already declared about their willingness of stepping into the LCD high value-added business, such as high-end smartphone (Sharp annual report, 2013). The company has decided to convert some of its big-screen LCD production lines into mobile LCDs as it tries to revive its declining display business. This seems to be a rational decision because the original fixed assets used in the production of big-screen LCD can be utilized continuously. This would allocate the fixed cost to the new mobile screen business and increase the profit. In addition, the company is considering engaging in other area such as health and medical care, educational product. Suggestions for Sharp would be constructing budgets for the new product in order to get a good profit planning. This would probably help Sharp to enhance its financial performance if there is a successful budgeting.
“Make or buy” decision
In terms of Sharp whose business is mainly based on manufacturing, vertical integration plays an important role on controlling product quality and cost. Vertically integrated production has helped Sharp to achieve big success in the 1980s and 1990s (New York Times, March 2012). However, with other competitors like Samsung enjoying low-cost production of electronic devices, Sharp is now faced with great barrier to sustain profitability. Therefore, a “make or buy” decision needs considering carefully.
According to Sharp annual report 2013, LCD TV is the lowest profitable segment of Sharp LCD business. The loss is partly due to Sharp’s strategy of optimizing inventory while the major factor is high cost of production which leads to high price and inadequate sale. According to the Nation (2013), currently there exists labor shortage in Japan labor market and the minimum wage has been raised. Hence, direct labor cost and manufacturing overhead are increased. A possible solution to this problem may be outsourcing production of certain components overseas. Although vertical integration enhances quality control, lower cost created by economies of scale is of more help to Sharp now. Besides, since leading high-tech manufacturers like Apple have achieved success by outsourcing production worldwide, quality of components is not a major uncertainty. The outsourcing does have potential risks. For example, the operation of Apple may be affected by a strike of Foxconn, one of Apple’s partners. However, compared with the obvious advantage on cost and considering Sharp’s current situation, the benefit of “buying” outweighs that of “self-making”.
As stated in Sharp annual report 2013, Sharp aims at producing unique product relying on vertical integration of core technologies. Sharp was among the top 100 R&D spenders in a list published by the IEEE Spectrum magazine in 2002. Many headquarters of Sharp R&D have been established in India, China and Europe. In this way, Sharp maintains its competitive advantages in the market. However, “buying” R&D from other companies has been popular among American manufacture industry. Big corporations such as Boeing, Dell and Motorola have outsourced a considerable part of their R&D to Taiwan, India and China (Garrison et al., 2013).
The strategy to reserve core technologies at home is reasonable for Sharp as intellectual property is a key to promoting innovation. But it is also worth considering outsourcing less important field of R&D. Firstly, due to low wage rate and abundant intellectual professionals in India or China, outsourced R&D cuts labor costs and ensures R&D productivity. Secondly, as Sharp’s sale in China has steadily increased during 2009 to 2013 (Sharp Annual Report, 2013), outsourcing R&D to Chinese companies can contribute to accurate orientation to Chinese customer’s need. Potential risks may include insufficient protection of intellectual property in countries where Sharp outsources its R&D. Therefore, it is essential for Sharp to compare relevant cost such as R&D labor salary, cost on R&D equipment and etc. before finally making the “make or buy” decision.
In this report, we examine two aspects of Sharp in terms of management accounting knowledge. Impacts of high-level inventory, labor cost and unproductive assets on Sharp’s fixed cost and decision making concerned with add & drop segments and “make or buy” are discussed. Possible solutions and suggestions are provided. In conclusion, this report presents our managementaccounting view to current performance of Sharp Corporation.
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