Improving production costs of shampoo in Unilever Vietnam

 TRNG I HC M TP.HCM UNIVERSITÉLIBREDEBRUXELLES  HOCHIMINHCITYOPENUNIVERSITY SOLVAYBUSINESSSCHOOL MBAVB2  HUYNHQUOCDAN Improving Production Costs of Shampoo In Unilever Vietnam  MASTERPROJECT MASTERINBUSINESSADMINISTRATION (PARTTIME)  Hochiminh city (2012) i  FinalprojectMBAVB  DECLARATION I, Huynh Quoc Dan, declare that the work presented in this final project is, to the best of my knowledge and belief, original, except as acknowledged in the text, and that I has not submitted the material, either in whole or in part, for the award of any other academic degree or diploma. Except where otherwise I indicate, this report is my own work. I certify that I have complied with the rules, requirements, procedures and policy of the Ho Chi Minh City Open University and the Solvay Business School, Université Libre De Bruxelles. I also certify that I have complied with the Unilever CoB – Codes of Business. What I have mentioned in the report do not make harmful for the business, people as well as the company’s reputation. Print Name: HUYNH QUOC DAN Signature: Date: March 2012 ii  FinalprojectMBAVB  ACKNOWLEDGEMENTS Developing a project involves the considerable support and encouragement from a very wide range of people. It is both a journey of self-discovery and a demand on those people closest to me. First of all, I would like to express my deep gratitude to Nguyen Manh Ha, Ph.D. who enthusiastically support and avise me to complete this project. He has taught me, both consciously and unconsciously, how good report is done. I apprecate highly all his contributions of time, ideas to instruct and correct my report meticulously before and during Tet holiday. It is not only his physical supports, but it is also his working attitude – how serious he is! Finally, I would send to him a special thank for accepting me to present this time. I am also thankful Ms. Le Thi Thu Ha who assists me in administration. Thank you to my line manager in Unilever Vietnam – Mr. Nguyen Vinh Long, Rudy.Brigianto and Mr. Pham Manh Tri who so willingly gave their time to share me the issue on the current process as well as their expectation to this research. By their agreement, I can able to access to the UVN profile as well as pick up some data. Finally, I would like to send my acknowledgement to my friends and other people whom I do not mention above. Their contribution is highly appreciated. iv  FinalprojectMBAVB  EXECUTIVE SUMMARY All businesses should try to operate efficiently. This is particularly important for a growing business. In many markets, a business needs to be at least as efficient as the main competitors are in order to be able to compete and survive in the long-term. A more efficient business will produce lower cost goods than competitors and may generate more profit possibly at lower prices. One of the approaches is to reduce the manufacturing (production) costs. Reducing manufacturing costs increases profita- bility by making more with what you have or the same with less. Production cost reduction - There can be a lot of discussion within a company about what they should do to implement a cost reduction program, yet what they should discuss is what they should not do. In other words, the company management ex- pect a cost reduction program to achieve results that flow to the bottom line of the financial statement without causing damage to the organization itself. A good cost reduction program is as much about damage control as it is about cutting costs, in- cluding cutting non-benefit items, cutting wastes, cutting high costly but less benefit activities, etc. Finding the alternative ways instead of the traditional ways will also help to improve the costs in production. This report is a result case study, and it covers the main parts below:  Study the current production cost elements and costs reduction practices in Unilever Vietnam where manufacturing is one of the key activities. produc- tion cost reduction is also their top priority schedule  Recommend to the company the ideas for cost reduction This study does not completely drive to reduce the production costs. However, it is an approach to the production costs deeply to show people how to improve it. v  FinalprojectMBAVB  TABLE OF CONTENTS Declaration i Acknowledgements ii Tutor’s certification iii Executive summary iv Table of contents v List of figures viii List of table ix Glossary and definition x Chapter I: INTRODUCTION 1.1. Problem statement 1 1.2. Objectives of the study 2 1.3. Research methodology 3 1.3.1. Secondary data 3 1.3.2. Case study 3 1.4. Significance and limitation of the study 3 1.4.1. Significance 3 1.4.2. Limitation 4 1.5. Organization of the research study 5 Chapter II: LITERATURE REVIEW 2.1. Theory of production and costs 6 2.1.1. Definitions 7 2.1.2. Cost in the short run 15 2.1.3. Cost in the long run 16 2.1.4. Relationship between long run and short run costs 17 2.1.5. Cost minimization and profit maximization 18 2.2. Production management theory 20 vi  FinalprojectMBAVB  2.2.1. Supply chain 20 2.2.2. Supply chain management 21 2.2.3. Supply chain stages 22 2.3. Summary 23 Chapter III: UNILEVER VIETNAM’S INTRODUCTION 3.1. Unilever group worldwide 24 3.1.1. Vision 24 3.1.2. Mission 25 3.1.3. Values 25 3.2. Company history 26 3.3. Unilever Vietnam 27 3.3.1. Legal, vision, and mission 27 3.3.2. Overview of manufacturing Unilever Vietnam 28 3.3.3. Manufacturing targets 29 3.3.4. Summary 30 Chapter IV: PRODUCTION COST ANALYSIS 4.1. Introduction 31 4.1.1. Supply chain model in Unilever 31 4.1.2. Cost structure in Unilever Vietnam 33 4.2. Cost structure in Unilever 33 4.2.1. Cost structure 33 4.2.2. Concepts of the cost in UVN 34 4.2.3. Production cost structure in Unilever Vietnam 37 4.2.4. Shampoo cost figure in Unilever Vietnam 40 4.2.5. Benchmarking 41 4.3. Comparison the production costs among companies in other countries 43 4.3.1. Direct labour 43 vii  FinalprojectMBAVB  4.3.2. Indirect labour 45 4.3.3. Depreciation 45 4.3.4. Repair and maintenance 47 4.3.5. Utility consumption 48 4.3.6. Indirect consumables 49 4.3.7. Summary 50 4.4. Production cost elements 50 4.5. Cost simulation 51 4.5.1. Volume increased 10% 52 4.5.2. Electricity consumption reduction by 10% 53 4.6. Findings from the case study 54 4.6.1. Production cost reduction practices 54 4.6.2. Summary 56 Chapter V: CONCLUSION AND RECOMMENDATION 5.1. Conclusion 58 5.2. Recommendation 58 5.2.1. Improvement area 58 5.2.2. Recommendation for implementation 59 5.2.3. Production cost reduction opportunities 59 REFERENCES 61 APPENDIXES Appendix 1: Benchmark of production costs Unilever Asia 63 Appendix 2: OEE chart 64 Appendix 3: Shampoo making process diagram – Unilever 65 Appendix 4: Energy saving application photos 66 viii  FinalprojectMBAVB  LIST OF FIGURES Figure 2.1 Schematic production system 7 Figure 2.2 The production function 9 Figure 2.3 Technical efficiency and inefficiency – labor 10 Figure 2.4 A specific short-run production function 11 Figure 2.5 Relationship between inputs, outputs and costs 12 Figure 2.6 Production function and total cost curve 13 Figure 2.7 Short run cost curve 15 Figure 2.8 The family of cost curves associated with a U-shaped LAC 17 Figure 2.9 Short run profit maximization 19 Figure 2.10 Supply, production and distribution system 22 Figure 3.1 Unilever global structure 24 Figure 3.2 Mission and vision – Unilever Vietnam 28 Figure 3.3 Unilever Vietnam manufacturing 29 Figure 4.1 Three physical phases of the supply chain 32 Figure 4.2 Supply chain circulation 36 Figure 4.3 Chart of typical production cost structure 38 Figure 4.4 Detail production cost chart 39 Figure 4.5 Shampoo production cost chart 41 Figure 4.6 Chart of the production cost in the cluster 43 Figure 4.7 Direct labor comparison 44 Figure 4.8 Indirect labor chart 45 Figure 4.9 Depreciation chart 46 Figure 4.10 Repair and maintenance (R&M) chart 47 Figure 4.11 Utility consumption chart 48 Figure 4.12 Indirect consumable chart 49 ix  FinalprojectMBAVB  LIST OF TABLES 4.1. Table 4.1 Typical production cost structure 37 4.2. Table 4.2 Hair (shampoo) production cost figure 40 4.3. Table 4.3 Production cost benchmark in the cluster 42 4.4. Table 4.4 Production cost elements in haircare 51 4.5. Table 4.5 Detail production costs in haircare liquid 52 4.6. Table 4.6 Production costs reduced when volume increased by 10% 54 4.7. Table 4.7 Extraction of the saving project list 55 x  FinalprojectMBAVB  GLOSSARY AND DEFINITION UVN Unilever Vietnam FDI foreign direct investment CoB codes of business FMCG fast moving consumer goods CPG consumer packaged goods COGS cost of goods sold EBIT earning before income tax TC total cost TFC total fixed cost TVC total variable cost AFC average fixed cost ATC average total cost MC marginal cost VC variable cost FC fixed cost STC short run total cost LAC long run average cost LMC long run marginal cost SMC short run marginal cost SC supply chain SCM supply chain management APICS American Production and Inventory Control Society VSM viable system mode ERP enterprise resource planning CEO chief executive officer JV joint venture SCOR supply chain operations ref- erence GSV gross sales value TTS trade terms structure TO turn over SCC supply chain cost GP gross profit A&P advertising and promotions PBI profit before indirect Ind. Indirect TR trading results FiC financing charge TrC trading contribution P&L profit and loss R&M repair and maintenance DO diesel oil FO fuel oil OEE overall equipment efficien- cy [...]... employees involved in the process Apart from gaining more profit in general, reducing production costs can also supports the other activities in the business by its saving amounts Moreover, the proper production cost reduction activities make improved employees’ mindset by embedding in people memory not cutting, but saving 1.4.2 Limitation The study of Improving Production Costs of Shampoo in Unilever Vietnam. .. In Unilever Vietnam, cost reduction becomes production people’s mindset However, it requires more and more proactive in these activities to win in the market Improving Production Costs of Shampoo category is a main topic of this study 1.2 Objectives of the study This study is mainly to analyse the production costs of Shampoo in UVN and to suggest implication policies to improve production costs of. .. Hence, the production does not include the material costs In term of accounting, cost of goods sold (COGS) consists of three main items: material costs, production costs and logistic costs In the next chapter, this study will show more detail what people call cost of goods sold – COGS in theory It looks like Supply chain costs in the company where is applying Supply chain model 5 Production cost, finally,... the main area covered in this study The literature review has been divided into two sections, viz production and costs, production management 2.1 Theory of Production and Costs Whatever the objective of business firms: achieving optimum efficiency in production or minimizing the cost of production is one of the prime concerns of management board today In fact, the every survival of the firms in a competitive... production cost only In the chapter IV, it will show cost structure It is a kind of the COGS, which people uses in the accounting and finance However, it does not have any meaning to compare the material costs, so in Unilever Vietnam, production does not consist of the costs of the materials The reason is that Unilever worldwide is targeting to become one of the best Supply chain companies in the industry... theory of production, cost of production, introduction of the supply chain, which they are applying in the multi-company nowadays Cost minimization and profit maximization that they discuss and schedule in those companies Theory of the production costs in Unilever as this study will describe in the chapter IV right after company overview in the next chapter 24 CHAPTER III: UNILEVER VIETNAM S INTRODUCTION... necessary because changes can occur in supply costs, labor costs, and the prices consumers are willing to pay for manufactured products Reducing the production costs but maintaining the goods quality and sustaining in environment is a big question for the business management One of the main issues in the rationale of this study is the opportunity to study the nature of production and loss factors related It... combined 1.3.1 Secondary data Secondary data for this study come from internal manufacturing Unilever Vietnam and the other countries in the same cluster (Cluster: a group of countries in the same region) 1.3.2 Case study The case study method often involves simply observing what happens to, of a single participant or group of individuals (Hayes, 2000) By analysing in depth the companies’ data in the... reduce the production cost; it can help much in budget allocation to the other activities in the business, such as marketing activity or sale activity With the reasons above, improving production costs in the business is always one of the top plan and challenging schedule In Vietnam nowadays, it does not be only applied in the FDI firms – where cost saving is very important –, but it also happens in the... short-run production function shifts when K is increased from Ko to K = 2 In the long run, all of the factors of production can change giving the business opportunities to increase the scale of its operations For example, the business may grow by adding extra labour and capital to the production process and introducing new technology into their operations In the other words, long run refers to a period in . study of Improving Production Costs of Shampoo in Unilever Vietnam fo- cuses on production cost only. In the chapter IV, it will show cost structure. It is a kind of the COGS, which people uses in. HOCHIMINHCITYOPENUNIVERSITY SOLVAYBUSINESSSCHOOL MBAVB2  HUYNHQUOCDAN Improving Production Costs of Shampoo In Unilever Vietnam  MASTERPROJECT MASTER IN BUSINESSADMINISTRATION (PARTTIME)  . proactive in these activities to win in the market. Improving Production Costs of Shampoo category is a main topic of this study. 1.2. Objectives of the study This study is mainly to analyse