Improving internal material supply chain of nghi son cement corporation

NATIONAL ECONOMICS UNIVERSITY Advanced Educational Program Draft Topic: Improving internal material supply chain of Nghi Son Cement Corporation Student : Phùng Nhật Huy Class : International business K54 Lecturer : Nguyễn Anh Minh Draft | Student: Phùng Nhật Huy STATUTORY DECLARATION I herewith formally declare that I myself have written the submitted Bachelor’s Thesis independently I did not use any outside support except for the quoted literature and other sources mentioned at the end of this paper Hanoi, / / 2016 Signature Draft | Student: Phùng Nhật Huy Tablet of Content Draft | Student: Phùng Nhật Huy List of tables List of figures Draft | Student: Phùng Nhật Huy INTRODUCTION Background and statement of problem In the beginning of the 21st century, along with the tendency of globalization, many companies have gained chances to approach the international markets; on the other hand, they have to face the threat of losing their pre-owned market share in Vietnam One of the main factors that decide the fate of these companies is the cost of the products, low cost may help firm to draw the attention of consumer to their products and to maintain those attention, the quality of products must worth the amount that consumer paid out In order to make the product with best cost compare to price, managers have to improve the internal material supply chain of the firm, which is the first step in determining the price of the good they intended to deliver to their consumers The supply chain of material is the process begins from the stage when raw materials leave the warehouse of the supplier and end up in the storage of the manufacturer ready for the main production procedure which converts them in to finished good Since this is an important phase, many researches have been conducted to increase the performance of internal material supply chain but this still have many drawbacks that have bad effects on this process The quality of input material has been improved but not even, this is cause by the mistake in quality control Another problem that is worth consideration is the timeliness in deliver the good to consumer which require a stable inflow of material In reality, a company has to face many problems beside two typical example mentioned above Nghi Son Cement Corporation is a joint venture between Vietnam Cement Industry Corporation (VICEM) and two Japanese multinational corporations: Taiheiyo Cement (TCC) and Mitsubishi Materials Corporation, the company provides building material to the market With 20 years of operating, the company is familiar with Vietnam market and they have built up nearly complete supply chain Still, I realize there are still drawbacks in internal material supply chain such Draft | Student: Phùng Nhật Huy as inflexibility in supply, fraud risk of company staff and high inventory waste ratio Therefore, in order to compete with current and potential rival in the market and for a long-term plan to extend the market to other country, Nghi Son Cement Corporation should improve its supply chain system It the reason for me to choose the topic: “Improving the internal material supply chain of Nghi Son Cement Corporation” Purpose and requirements for the thesis The purpose for this thesis is to state out the limitations that remain in the internal material supply chain of Nghi Son Cement Corporation and furthermore, analyze the company current condition to find out hidden potential that can be used to improve the performance of internal material supply chain in the foreseeable future There are requirements for the thesis: - Develop theoretic framework about internal material supply chain and its role in the business process of the company - Analyze the efficiency of internal material supply chain in Nghi Son Cement Corporation - Propose solutions to improve the performance of internal material supply chain in Nghi Son Cement Corporation in the future Object and scope of the thesis 3.1 Object of the thesis The thesis focuses on the internal material supply chain of Nghi Son Cement Corporation and solutions to improve it in the future 3.2 Scope of the thesis The thesis uses the data from the accounting and logistic department of Nghi Son Cement Corporation from 2011 to 2015 The solutions are intended to take effects in the 5-year period that ends in 2020 Draft | Student: Phùng Nhật Huy Research structure Apart from the introduction, conclusion, references and appendixes, this thesis consists of three chapters: - Chapter provides the key definition and base framework that is used to evaluate the efficiency of internal material supply chain - Chapter analyzes the state of internal material supply chain of Nghi Son Cement Corporation base on the framework during 2011-2015 - Chapter propose solution to improve Nghi Son Cement Corporation internal material supply chain Draft | Student: Phùng Nhật Huy CHAPTER 1: THE THEORETICAL FRAMEWORK OF SUPPLY CHAIN AND INTERNAL MATERIAL SUPPLY CHAIN 1.1 Overview of supply chain 1.1.1 Definition of supply chain Supply chain refers to all networks of relevant organizations, through the forward and backward relationship, in different processes and activities create value in form of products and services that are delivered final consumers There are many different definition of the supply chain According to Lee & Billington (1995), the supply chain is a network of facilities for purchasing raw materials, transform them into intermediate products, then to the final product and that product will be delivered to customer by the distribution system By this concept, the supply chain is shown in the following diagram: Figure 1.1: Supply chain of Lee & Billington Draft | Student: Phùng Nhật Huy In addition, there are many more different conceptions about the supply chain: Supply chain is the alignment of companies to bring products and services to market (Michael hugos) Supply chain includes all direct or in direct related activities performed to satisfy customer needs Supply chain includes not only manufacturers and suppliers, but also have the transportation, warehouse storage systems, retailers and customers (Chopra & Meindl) Supply chain is a network of facilities and distribution options how to perform the function of purchasing raw materials, convert them into intermediate products and final products, distribution of the final product to customers (Ganeshan & Harrison) Supply chain is the stage where product lines, services, information transfer from the first supplier to the end customer and vice versa (David Sharpe) According to Christopher (1998), supply chain is a network of organizations involved directly and indirectly to various processes and activities in order to deliver the value of products and services to end customers In “The practice of supply chain management: where theory and application converge”, author Terry P Harrison defined as follow: “Supply chain is the creation of value chain through the connections from the company's suppliers to the company's customers Base operations of the supply chain represents: Receiving input from suppliers → create value → distribute products and services to customers” Supply chain includes all businesses involved, either directly or indirectly to meeting customer needs (curriculum administrator supply chain According to the thesis’s approach, the supply chain is defined as all activities from the stage of raw material extraction, processing until the finished good produced by that raw materials are delivered to the hands of consumers These Draft | Student: Phùng Nhật Huy activities are divided into two main channels: supplier network (purchasing) and distribution network as be shown in figure 1.2 In conclusion, the supply chain is a complex system, but tightly linked between the members in the process of creating and distributing finished products to meet the needs of customers Therefore, it becomes the key to differentiate the products in order to increase competitiveness 1.1.2 Definition of internal material supply chain Internal material supply belong to the first stage of supply chain process – Supply and logistic Internal material supply chain only considers internal business environment without considering its extension This oppose to external mateial supply chain, which is consist of a group of independent entities operating as the business’s supplier Early definition of the material supply chain limited to the operation of the enterprise, mainly referring to manufacturing enterprises that receive goods from external procurement of raw materials and parts after the production, the good received then store and prepare for processing With the development of economics condition, many firms have started to build up strategy for having their own source of supply These firms may have different approaches to accomplish this: some companies invest heavily to build up their own source of supply while others just use backward integration strategy This creates a situation that many firm not have buy goods from external supplier anymore, give out the classification of internal and external material supply chain In this thesis, the concept of internal material supply chain is in the production and product flow, the process of raw material suppliers, manufacturers, storage, transportation, composed of networks of supply and demand Internal material supply chain concept refer to single entity, where the stages from raw material extraction, transport, storing and prepare for processing are perform internally between departments of the company 10 Draft | Student: Phùng Nhật Huy 2.2.2.3 Transportation of material: Besides storing the materials, the transport activity is also extremely important The company focused on this activity because quick transportation will help the company reduce operating time and avoid operating disruption due to lack of raw material At Nghi Son Cement Corporation, main materials are transported by conveyor system Good quality limestone from Hoang Mai A mines after exploiting will be transported to the plant by conveyor system length of 10.5 km runs through tunnel in the mountains Figure 2.3: Nghi Son Cement Corporation conveyor system For secondary material such as clay, after exploiting, they are transported to the warehouse by truck for storing 27 Draft | Student: Phùng Nhật Huy Figure 2.4: Clay mine of Nghi Son Cement Corporation Other material such as package, fuels…are delivered to Nghi Son Cement Corporation by trucks from suppliers 2.2.2.4 Plan supply goal: Basis for Nghi Son Cement Corporation is planned annual supply of materials: • Based on the documents issued to set supplies consumption level for each producing process • Based on the results of the previous year consumption • Based on the production plan of the planning year • Based on technology of manufacturing processes currently in use and the annual plan Logistic department plans set supplies consumption level for each kind of product This was based on the planned output of each product and norms to determine demand for materials for production in the period 28 Draft | Student: Phùng Nhật Huy Nghi Son Cement Corporation is a mass production manufacturer, producing different kind of product Thus there are products manufactured by many different types of materials and each material can be used to manufacture various types of products The process of identifying materials demand in the planning period of the business depends on many factors: • The report on the market condition • The analysis and forecast of the market research agency • Production and business results of the business over time • Material consumption level in previous periods • Tracking tag orders • Shipment Nevertheless, this is strongly base on the actual situation of previous period consumption to determine material requirements and optimal reserves during the plan period On the other hand it depends on the result of a compromise between administrative departments in the enterprise  Calculation method for supplies demand of Nghi Son Cement Corporation: • The formula for calculating the amount of raw materials A to produce products B: QAB = ∑[(DAB * QB) * (1 + TB) In which:  QAB : The total amount of raw material A needed to produce product B in planning period  DAB : The consumption norm of material A to produce product B  QB : The amount of product B planned to produce  TB : Waste ratio of production • The cost of raw material A needed to produce product B is calculated as follow: CAB = QAB * PA In which:  CAB : The cost of raw material A needed to produce product B  PA : Cost of one unit of material A 29 Draft | Student: Phùng Nhật Huy After identifying the demand for supplies in the planning period, the logistic department creates a report on supplies then submits to the director The approved report then will be send to the relevant departments of the company (Extraction team of logistic department is responsible for extracting raw material from mine while purchasing department sign contract with vendors and contractors to buy the support good and store in the warehouse if needed) Material exploited or delivered by supplier then checked for warehousing procedures After having decided to receive the goods, the logistic department conducted test operations before storing materials The examination is done by Testing Board Testing board conduct examination in terms of quantity and specifications of the material; then recorded in the minutes of acceptance Based on the bill, Office supplies make up copies of receipt and delivery to warehousekeepers as a source for entering data Based on the receipt, warehousekeepers conducting material receiving check, recording the amount actually imported into the receipt and the delivery person to sign the receipts When checking, if the warehousekeepers specifications and qualities detecting indicated on errors, invoices incorrect and quantity, vouchers, the warehousekeeper must immediately notify the logistic department to make a record settlement After finishing storing, receipt is assigned to the payment accountant to make payment to the supplier, receipt is assigned to purchasing accountant for bookkeeping 30 Draft | Student: Phùng Nhật Huy 2.2.2.5 Actual situation of material supply • By amount In order to maintain production and business operations continuously, the amount of supply should be adequate This means that if goods is provided more than actual need, the excess will cause stagnation and lead to inefficient use of capital In vice versa, if the supply is less than actual demand, the continuity of operation cannot be guaranteed, which lead to the incompletion of operating plan At Nghi Son Cement Corporation, plans for supplies are built up annually on the basis of the production plan to ensure the active management on supplies At the end of each year, the logistic department forms up a report on actual consumption to submit to the board of manager and relevant departments • By quality To produce various kinds of cement products, the company needed raw materials are limestone and clay Nghi Son Cement Corporation has always considered quality as leading indicators So the Company has specialized quality control department to checks the quality of inputs and products produced by the company Only if the input satisfied the requirements, the company will accept these materials and products With good raw materials, the products can have high quality but without the filler material, the product cannot become a finished product Secondary materials are not directly participated in constituting the product but its contribution is to add value and quality for the main raw materials and products Therefore the supplier of supporting materials for the business are long-term parties with high reputation on the market, these supplier has always provided the best material, design, packaging, labeling with consistent quality to consumers 31 Draft | Student: Phùng Nhật Huy • By type Currently at Nghi Son Cement Corporation, there are various kind of material, including categories such as limestone, clay, chemicals, petroleum and other materials serving for the preservation, packaging Among them there are some material that can be replace with substitute, some are not Materials that can be replaced are materials such as packaging accessories, labeling products and other materials serve for the packaging, storage and fuels Currently, the material is now used as a packaged product which is very appropriate for the storage of cement, the amount is enough to provide for the production process when operating at maximum capacity But on the surface of the packaging, labels are not highlighting the quality of each product that lead to not attract the attention of consumers, this need to change in order to gain higher sale revenue Materials that can not be replaced such as limestone clay Because limestone is the raw material directly involved in the production process to make up the entity's main product Therefore, this cannot be replaced with any other material, the company can only change the material supply But the current supply of limestone is mine Hoang Mai A has the best raw materials, there is no need to change the source of this material • Synchrony To produce a product, the company needs many different kinds of materials according to a certain proportion On the other hand, these materials can not be replaced by other substitutes Therefore, it is essential that the supply of raw materials must ensure synchronous in production, this help the production plan to be completed With the current business condition, Nghi Son Cement Corporation can ensure synchronous due to several reasons: o The company is operating at high capacity o The company can actively manage the supply of raw material since they exploited the material directly o The company has a team of highly skilled engineer 32 Draft | Student: Phùng Nhật Huy • Timeliness Base on the production plan and the reserve status in the period, Nghi Son Cement Corporation ensures to deliver material in a timely manner to support for the production process By checking the inventory regularly, every month the warehouse keepers check the remaining inventory then reconcile with accounting records to verify the exact amount of material remaining, then based on adjusted data, the company build up additional supply plan for supporting goods In 2015, Nghi Son Cement Corporation produced without any disruption due to lack of material • Progress After getting approval for the supply plan by the managers, Logistic department plan to set up material supply schedule, material supply schedule is established based on the types of materials need supply, the amount of supplies needed supply and average daily consumption By analyzing the material supply of the company in 2015 we see: the management of the supply of raw materials is very complex task and requires the manager to have qualifications and practical experience in the profession The supply of raw materials mút be sufficient in quantity and quality to ensure the development of production and improve product quality for the company This help the company gain higher revenue, ensure the long-term survival of the business in the future Nghi Son Cement Corporation has done a very job and provide inputs for production 2.3 Evaluation Base on the analytical data given above, I give out the evaluation on internal material supply chain of Nghi Son Cement Corporation as follow 33 Draft | Student: Phùng Nhật Huy 2.3.1 Strength of Nghi Son Cement Corporation’s internal material supply chain • Ownership of main material supply source: With the ownership of mines, Nghi Son Cement Corporation can extract limestone and clay – the main material for producing cement at their own will, reduce the risk of material scarcity The company can manage extraction activity so that the material flow of limestone and clay can match with the flow of other supply This allowed the firm to minimized cost of storing inventory • The source of supply near the manufacturing plan: the distant between the mines and the factory is just about 10 kilometer, which allow the firm to save time collecting the raw material and reduce cost from transporting • Good and long-term relationship with supplier: Nghi Son Cement Corporation has maintained good relationship with their traditional supplier This provides the company advantages of sustainable sourcing, buying with large discount and better quality control on the item received • Effective warehouse system: With a large system of warehouse and transparent management method, Nghi Son Cement Corporation has abled to control the flow of good effectively, reduce the operating cost due to waste, storing and ineffective use of material 2.3.2 Limitation of Nghi Son Cement Corporation’s internal material supply chain • Inflexibility in internal supply chain: The sustainable long-term source of supply also has its drawback, with all main raw materials are self-provided, Nghi Son Cement Corporation has the risk when decide to expand the business because it will take so much time and financial resource to increase the capacity of its internal source of supply As a result, it is hard to change to adapt the innovation of economics condition • Fraud risk: Since Nghi Son Cement Corporation main material are internally provided, the control risk can become greater than when it has independent external suppliers, there may be the risk that the employees in the logistic department will cooperate with the staff of accounting department to smuggle the goods for 34 Draft | Student: Phùng Nhật Huy individual interest And since there is no external supplier, there is no source to reconcile and reconfirm what reported by the staffs of those departments • In the previous period, the inventory waste ratio of Nghi Son Cement Corporation is about 12%, which I believe there are still aperture in managerial and quality control activities that can be improved to reduce the cost Nghi Son Cement Corporation has to bear and increase company profitability 35 Draft | Student: Phùng Nhật Huy CHAPTER – SOLUTION FOR IMPROVING THE INTERNAL MATERIAL SUPPLY CHAIN AT NGHI SON CEMENT CORPORATION 3.1 Development orientation of Nghi Son Cement Corporation • General target: In order to adapt to the new economics environment with the present of many new competitor from other country, Nghi Son Cement Corporation has invested greatly in upgrading production line with new technology to increase the efficient use of material On the other hand, Nghi Son Cement Corporation also focuses on developing human resource, restructure the organization, and strengthen management activities; as a result, the production cost will be lower which lead to lower price, this enhanced competitiveness of the company and the quality of product will be improved due to effective management control The company is currently implementing investment projects to renovated production line, increasing the capacity to produce cement, this is the stage of production of Nghi Son Cement Corporation When this project completed, it will increase the total production of cement by the Company to million tons / year, contributing to meet the domestic demand and expand to foreign market • Business target of Nghi Son Cement Corporation to 2020: o Promote the brand of Nghi Son product in consumer market and industrial market o Compete to earn marketshare by improving the quality of product as well as expand the distribution network o Improve the relationship with traditional supplier along with finding new potential supplier o Build up young Vietnamese work force to inherit the work from foreign employees 36 Draft | Student: Phùng Nhật Huy 3.2 Solution for improving the internal material supply chain of Nghi Son Cement Corporation 3.2.1 Ensure material flow Material is one of the key factors determining the operation of the entire supply chain, material flow creates the flow of products that generate financial flows and information flow that related to the product If the supply of material can meet the market demand and remain sustainable, the production flow will become stronger and vice versa, if there is no sustainable source of material, the supply chain will be disrupted easily With the advantage of being a leading firm in the industry, Nghi Son Cement Corporation can still dominate the market by expanding the scale of company, creating more product lines; improve the quality of traditional products… Moreover, Nghi Son Cement Corporation can open up new factories in order to reach economy of scale, where it can gain maximized profit Strategies for building new production line of Nghi Son Cement Corporation have been set up with the aim: to take advantage of market opportunities and to continue to develop on the basis of investment The company has decided to invest in a new production line to increase the capacity of the company from 4.3 million tonnes / year to million tons / year in 2020 The new factory will be used to produce new kinds of cement that used in complex building structure For this project to be success, the directors of Nghi Son Cement Corporation will have to find new supplier that’s provide specific kind of material 3.2.2 Improve the process of product management To improve the process of production management, company needs to perform some of the following: • Set up materials norms for production To control the rate of defects and material wastage during production process and business activities, the company 37 Draft | Student: Phùng Nhật Huy needs to set up the norm of specific materials for each product, each step, and each stage of production, based on that norm to determine the material amount that enough to compensate for the loss The determination of compensation for loss is to set target to stabilize the quality, reduce waste, thereby saving costs and increasing the profits of the company • Establish internal policy relate to the change in employee benefit base on the overall quality of the product Cost structure of raw materials in the product cost of the company is generally accounted for about 55% - 65%, labor cost is accounted for 10% - 15%, and the remains are other costs Thus, if material quality is not controlled, there will be wastage during production process and those materials will be wasted, which increase the cost the company has to bear Therefore, by using all possible method, company has to increase supervision of using material from the beginning to the end of the production process Base on the norm set, the company will assign specific consumption level that is allowed for each workshop, if workshop exceed the objective cost, the company will deducted money from the income of the head of the workshop at a specified rate In contrary, if the workshops are able to save cost of production for the company, the company should have policies to reward and encourage the employees of those workshops At the end of each period, logistic department, factories and accounting department should work on a report of material consumption and submit to the directors This is a new application form needs to be taken seriously to encourage employees save material, on the other hand to ensure the responsibility of every individual involved in quality management 3.2.3 Improve the quality of supply stage Whether products of the company are good or not depend highly on the quality of raw materials used to produce them and the quality of the supply of inputs The objective of improving the quality of supply stage is to provide good at high quality, right type, right time and place that ensure the continuality of operation at lowest cost To meet the objectives, company should choose the supplier capable of satisfied the demands of materials quality, agreed on company’s methods of examination, and take 38 Draft | Student: Phùng Nhật Huy full responsibility for the goods they provided Therefore, the company should build up good relationship with long-term supplier to ensure there will be a sustainable source of material for the company to operate efficiently 3.3 Recommendation for the authority: - Improving the law and policy system of the State, to create a legal framework strict enough but open for businesses to operate efficiently - The state should establish appropriate tax rate - The state should improve the system of economic information and market forecasts to help enterprise on giving out business decision As well as creating a stable market for corporate to develop sustainably - To support marketing activities, especially television advertising • For the People's Committee of Thanh Hoa province The support from the People's Committee of Thanh Hoa province to Nghi Son Cement Corporation is very important, the province should invests in infrastructure, promote training activities, and especially the support for the company in the clearance when the company expanded production scale in the near future • For tax authority Tax authority should regularly hold meeting to guide the company about how to apply new policies when there is a change in the tax regime, enabling the company to avoid mistake and errors in the declaration, payment and settlement, thereby contributing to the financial operations of the company while also contributing to increasing revenues for the state budget • For resources and environment department: The department should help the company in assessing the impact of the manufacturing process on the environment, typically the assessment of issues such as waste, noise, dust, , so that the company can create solutions to minimize environmental pollution that affecting the health, life and workers, staffs and people in the region 39 Draft | Student: Phùng Nhật Huy CONCLUSION After more than 20 years of development, Nghi Son Cement Corporation has overcome many difficulties and challenges, strive to achieve the growth and mature as today During its operation, the company continuously promotes its image, constantly improve the efficiency of supply chain compared to other businesses Through some time to learn about the activities of Nghi Son Cement Corporation, especially to learn about the internal material supply chain of cement, thesis gives some conclusions: • Internal material supply chain plays an important role in the business, it can determine greatly the business result of the company • Supply development strategy must be flexible, combine between internal resource and external rÐource • Logistic department must cooperate tightly with other department such as accounting for better control • The quality control on input material is very important, it can both allow the company to produce better goods and reduce maintenance cost for the company Due to the changing condition of market, Nghi Son Cement Corporation should improve its internal material supply chain beside continue to develop the internal supply chain in order to compete with foreign competitor in the domestic market and abroad 40 Draft | Student: Phùng Nhật Huy REFFERENCE Nghi Son Cement Corporation, Financial statement 2014,2015 Nghi Son Cement Corporation, Business plan statement Nghi Son Cement Corporation, Report of logistic department Tomas Hult, David Closs, David Frayer (2013), Global supply chain management, McGraw-Hill Education David Blanchard (2006), Supply chain management best practice, John Wiley & Sons Ltd Robert M Monczka, Purchasing and Supply Chain Management, Cengage Learning Đinh Thị Lan Phương (2011), Các giải pháp tang cường quản trị chuỗi cung ứng phân đạm công ty TNHH Một thành viên Phân đạm hóa chất Hà Bắc, Luận văn thạc sĩ quản trị kinh doanh, Đại học Nông nghiệp, Hà Nội 41