Introduction :

In the past, due to modified contract finalisation processes, freight cost had reduced for the organisation. However, there were difficulties in obtaining vehicles for despatches. This had severely impacted the sale performance. This happened as several contractors backed out of the agreements citing losses. The reasons were :

1. Only lowest rates were considered for finalisation of contracts.

2. Parties’ goodwill, reputation and capacities were not verified.

It was decided that in order to ensure that financially and operationally strong parties are contracted, the following may be obtained from them :

1. Copy of the latest financial statements.

2. Details of transporter’s own vehicles — Number of trucks with the copies of RTO Books.

3. List of customers — If possible take the feedback from such corporates.

4. Copy of the standard contract signed with other customers.

5. His duration in the transport business and whether the contractor has other businesses.

The contract Rates for Transport contracts were finalised on the basis of tenders. Rates used for negotiation were exactly based on past contract rates. The contracts were finalised with escalation clause (clause 19 in Outward freight contract and clause 15 in Inward freight contract) for changes in diesel rates. The benchmark for diesel rate was the rate at which diesel is available in Mumbai.

Further, at times, the diesel rates prevalent at Navi Mumbai were also considered.

Escalation Clause for hike in fuel rates :

Escalation clause was normally invoked only if the hike in fuel rates is above 5% increase or decrease.

Method 1 (New Method) : Out of total per ton freight charge, 35% is of fuel consumption and freight charge increases as increase in percentage of fuel rate to fuel consumption only.

Example : Average fuel rate reference (Mumbai Rate) on October 1, 2004 was Rs.30.31.

Method 2 (Old Method) : Company used the following formula to increase the freight charges. The result of using the formula was an increase in the rate per Ton as compared to Method 1.

The transporter was not ready to adopt the 1st method as the consideration of fuel consumption in freight charges per Tonne was at the rate of 35%. As per industry norms, consumption of diesel is near to 50%-60%. (Although Raj was clear that 35- 40% is reasonable, the Purchase Department were unwilling to buy his view and the management also preferred to take one thing at a time. So in the larger interest of goods movement he considered 50%-60% for the working). The internal audit department analysed the total freight cost as per the old method and new method with changed percentages of 50% and 60%. Detailed working is given in Exhibits 1, 2, 3, 4.

Cost Savings could be achieved by realistically considering the diesel component at 50% as shown in Exhibit 1 which was worked out for New Delhi where the road distance was 1407 kms. Refer the illustrative example in Exhibits 1,2,3 and 4 for New Delhi when the hikes in diesel rates are considered by 10.50%, 8.31% & 7.22%.

Delhi :

As per Exhibit 1 — Hike 1 — @ 10.5%

As per Exhibit 1 — Hike II — @ 8.31%

Delhi :

As per Exhibit 1– Hike III - @ 7.22%

For escalation clause in contract method 1 with a percentage of 50% was to be used in preference to method 2 which was being currently considered.

Delivery within committed schedule time not monitored :

Truck was required to reach the destination within specified time periods as mentioned in the contract and for verification, date as mentioned in the transporter’s Delivery Slip/Challan was to be considered. In case there were delays, penalty was chargeable @1% of the freight bill per day upto 5%. But as observed the date is not mentioned in the delivery slip. Thus effectively payments are made without ensuring compliance to this clause. Complaints of non delivery within reasonable time were received intermittently but in the absence of specific data, customer service was not monitored.

It was directed that all dealers should mention the date and time of delivery on the Delivery Challans.

Increased Credit Notes for breakages/claims :

Material was being sent covered with tarpaulins. While there was transit insurance for damage or loss of material, there was a limit below which claims were not to be raised. The cases of such below limit claims were increasing. While these were being recovered from transporters, there were instances where this was also not done.

In order to improve control over material, a practice of fixing a metal seal to the tarpaulin cover after loading the truck was introduced. Strict instructions of not tampering this seal till unloading were given. In case of any tampering, penalty was to be charged if there was any loss of material.

It was also made obligatory on transporter to take in writing from customer that the metal seal was broken only in his presence in the prescribed form which gave both the time and date of delivery.

Clause no. 12 : Normally truck was expected to be made available within 24 hours after placing the order. However, in the contract no penalty was prescribed for delay.

Detention charges :

An increasing trend in detention charges on a yearly basis was seen :

Given general nature of reasons like 1. Due to the Logistics and 2. System failure, it was not possible to identify specifically the controllable aspects of the problem.

Detention charges in financial year 2005-2006 are lower than in previous year. Reasons for the low detention charges was mainly due to low dispatches due to production stoppage.

Instructions were given to prepare a Monthly MIS for detention charges giving specific reasons to be reviewed in operations meeting.

Inward and Outward of materials for same and nearby locations :

Quite a few instances were observed where materials were received from and sent to the same or nearby location.

It was decided to finalise the contract with transporter in cases where the transporter was assured of business from both sides.

Conclusion :

As a result of the elaborate exercise in the area, which was more in the nature of a consulting assignment, Raj was able to emphasise the ‘Add Value’ and ‘Consulting’ roles of an Internal Auditor as per the definition of Internal Auditing by Institute of Internal Auditors, Florida. The Management while appreciating the efforts also asked Raj to come up with a comprehensive programme for Audit Improvement in line with the latest global standards of Internal Auditing and also Quality Assurance. He was also sanctioned an increased budget for his department. He was further asked to submit an audit plan for the next year along with man-power required and cost of technology to be acquired for enhancing the contribution of his Department.

EXHIBIT 1

Analysis of hike in freight charges by different alternatives — Delhi 1407 kms

EXHIBIT 2 — Statement showing the calculation of freight charges considering the effect of 5% Fuel Consumption — 50%

EXHIBIT 3 — Statement showing the calculation of freight charges considering the effect of 5% Fuel Consumption — 60%

EXHIBIT 4 — Statement showing the calculation of freight charges as per Formula (Old) Delhi — 1407 Kms