Challenge in purchasing in saigon commercial bank master final project

CHALLENGE IN PURCHASING IN SAIGON COMMERCIAL BANK Tram Nguyen HO CHI MINH OPEN UNIVERSITY UNIVERSITE LIBRE DE BRUXELLES SOLVAY BRUSSELS SCHOOL OF ECONOMICS AND MANAGEMENT MBQPM6 TRAM NGUYEN CHALLENGE IN PURCHASING IN SAIGON COMMERCIAL BANK MASTER FINAL PROJECT MASTER IN BUSINESS QUALITY AND PERFORMANCE MANAGEMENT Ho Chi Minh City (2018) HO CHI MINH OPEN UNIVERSITY UNIVERSITE LIBRE DE BRUXELLES SOLVAY BRUSSELS SCHOOL OF ECONOMICS AND MANAGEMENT MBQPM6 CHALLENGE IN PURCHASING IN SAIGON COMMERCIAL BANK MASTER FINAL PROJECT MASTER IN BUSINESS QUALITY AND PERFORMANCE MANAGEMENT Tutor: Jacques Martin Class : MBQPM6 Full Name : Tram Nguyen Ho Chi Minh City (2018) This report has been written from November 2017 to March 2018 under supervision of Mr Jacques Martin I am thankful for Mr Jacques for his monitoring and constant feedback that helps to achieve more than I thought I would be Having the great opportunity to study master in business quality and performance management course at Solvay Brussels School of Economics and Management, I have to appreciate Solvay Administration Staff for accepting my transfer application from Master Computer Science in Belgium program and the support from my manager – director at P.O Dept and colleagues at SCB for work support as well as providing information and knowledge so this final report can be done closely to my chosen topic As a Challenge in Purchasing in Saigon Commercial Bank in Purchasing Order Department, I find working for this final project to analyze challenge in purchasing in SCB is extremely helpful for me to have an exact view of how the whole purchasing system is operating not only in Ho Chi Minh area but to all units those involving purchase activities Through the research, output leads to application ideas to improve purchasing operation to benefit all the stake holders in terms of time consuming, cost consuming for other departments, thus, achieving strategic goals of SCB in several years to come Sincerely, Tram Nguyen INTRODUCTION: BACKGROUND CHALENGE IN PURCHASING IN BANKING Purchasing in almost any operation in the economic world is covers the same areas of IT and data; HR; Marketing, communication and PR; Buildings, operations and maintenance; Canteen and Catering; Business trips and meetings; Other services; and Office and Branch equipment Most major companies and even some government organizations have a purchasing or procurement department as part of everyday operations These departments provide a service that is the backbone of many manufacturing, retail, military and other industrial organizations Many individuals, even some who work for these companies, are unaware of what the purchasing department does, why it exists or what purposes it serves To understand better what the role of the purchasing department is, consider some functions it performs However, banking industry is quite different in terms of equipment and security demand involve in this operation Thus, the value and number of transactions if relatively larger than majorities of industries with the charter capital for whole Vietnam system in August 2017 was VND505.258 trillion or approximately USD 21.96 billion.1 In more details, the areas of purchasing varied as following table which has some relatively common areas as other with higher level of security and transaction value: ● IT and data; o Copiers o Computers State Bank of Viet Nam (June 2018) "Performance of Credit Institutions" Available at: https://www.sbv.gov.vn/webcenter/portal/en/home/sbv/statistic/ooci/ksr?_afrLoop=34113460433630 00#%40%3F_afrLoop%3D3411346043363000%26centerWidth%3D80%2525%26leftWidth%3D20 %2525%26rightWidth%3D0%2525%26showFooter%3Dfalse%26showHeader%3Dfalse%26_adf.ctr l-state%3D92shnoih8_9 ● ● ● ● ● ● ● o Fax machines o Networking equipment o Servers o Surveillance equipment HR; o Recruit agency o Training Marketing, communications and PR; o Advertising agency Buildings, operations and maintenance; o Building services (mep engineers, cleaners, etc.) o Automobiles o Artwork o Furniture; o General construction; o Housekeeping; Canteens and Catering; Business trips and meetings; o Meeting venue o Accommodation o Traveling Other Services; o Armored carriers o Audiovisual services o Equipment maintenance o Temporary staffing o Trash removal o Uniform and linen services Office and branch equipment As per SCB’s operation license and business Certificate, SCB providing all the financial and banking services that are allowed According to SCB official homepage, the bank provides banking services including mobilizing and receiving short, medium and long-term deposits from organizations and individuals; providing short, medium and long-term loans to organizations and individuals based on the Bank’s nature and capability of the capital resources; conducting foreign currency transactions; providing international trade finance services; discounting of commercial notes, bonds and valuable papers; providing settlement services; participating in currency market; conducting consultancy work in finance and banking; purchasing of government bonds, corporate bonds; gold trading; cash management services, asset preservation; cabinets and safety deposit boxes for rent services; insurance agents; currency brokerage service and other banking services as allowed by the SBV Among its competitor, SCB has high chartered capital and wide network of office and branches which majority are in Ho Chi Minh City However, there several areas of operations that SCB is not as good at such are high operating expense, low brand awareness in other areas of Vietnam, high level of human resource management demand for its wide network, and demand for high-tech skills in human resource demand to operate continuously upgrading system The banking business environment introduced a new law amendment to allow bank to declare bankruptcy which will leave less players in the market In addition, thanks to technical development in recent years that some of transactions can be done in distance which require less physical operations This report discusses about the purchase problems in SCB by stating the problem and investigating the root causes After reviewing Vietnam banking industry and SCB performance in the market, the problems are identified as budget corruption phenomenon, collusion between buyers and suppliers, loss control of purchasing quality, and frequently delay in delivering All of those are the main reason for establishing central procurement department at SCB head quarter In the next part, major root causes are listed out as corruption on buying price, monopolism in decentralize purchasing, management problems that cause inappropriate product certification, and laziness of buyer staff After analyzing purchasing problem, the report solving the problem and suggested improvement practices for improvement Firstly, to solve the problem from high-level management, a centralized procurement department in head quarter is essential for whole group procurement Suggested organizational chart for this department and human resource allocation is provided to have clear view on the importance of this arrangement In addition, performance improvement requires few more further steps such are clarify purchasing structure now that we have centralized procurement department Further analysis of pros and cons of this arrangement is provided together with improved purchasing process and standardize it Purchasing efficiency is also a part of this report which discusses the procurement methodology for ATM machines with or without of purchasing center control Finally, there is reference list that summary all the reference used in this report and annexes for SCB network distribution 1 CHAPTER 1.1 STATEMENT OF PROBLEM Overview Banking Sector in Vietnam And Sai Gon Commercial Bank 1.1.1 Overview of Viet Nam economies: 1.1.2 Overview of Vietnam banking sector: 1.1.3 About the Saigon Commercial Bank (SCB) : General Information SWOT Analysis Strategic Goals for Fiscal Year 2018 1.2 15 In Purchasing 15 In Payment 15 In Quality Control 15 Balance Score Card 16 In Purchasing 16 In Payment 16 In Quality Control 17 Frequently exceeded budget estimates - Corruption phenomenon 17 1.3 Collusion between buyers and suppliers (Raise prices and requirements for commission) 18 1.4 Loss of control over the quality of the purchased product 20 1.5 Frequently overdue for the timely delivery of products for the operation of branches throughout the country 22 1.6 Why need Establishment of a centralized procurement center in SCB 22 CHAPTER 2.1 INVESTIGATION OF THE PROBLEM (ROOT CAUSE) The increase price from the buyer staff to profit – Corruption 2.2 Exclusive offer of products offered by familiar companies - no competition 24 24 25 2.3 Poor management leads to the passage of products without certification of origin and quality 25 2.4 The laziness of the person in charge - the supply delay 25 2.5 The vast network of operations at SCB - difficult to manage closely 26 27 CHAPTER CENTER ESTABLISHMENT OF A CENTRALIZED PROCUREMENT 28 1.1 Organization of the centralized purchasing 28 1.2 Human resources 31 CHAPTER PERFORMANCE IMPROVEMENT 33 33 2.1 Purchasing Structures 2.2 Advantages and disadvantages of centralized procurement department 35 2.3 Purchasing processes 36 2.4 Standardization of processes 37 2.5 Purchasing efficiency 38 2.5.1 Purchasing a ATM machine without the controlling of P.O center 39 2.5.2 Purchasing a ATM machine under the controlling of P.O center 41 42 44 45 ANNEXES - SCB'S NETWORK DISTRIBUTION as on SCB's Annual Report in 2016 46 ANNEX - Vietnam Joint Stock Commercial Bank List as of June 2017 by State Bank of Viet Nam 47 The department director can be named differently basing on company policy, here the position will be kept as purchasing director The position in charge of daily operation of the department and its performance More than that, Director is responsible for reporting to the CEO and the person directly undertaking the contract of commercial which are authorized by the Director General and Law Department of the bank Deputy Director Responsivity of Deputy Director is slightly lower than Director which mostly to review work for lower level colleagues and helping daily operation of the department Supervisor Buyer The representative and oficcially authorized representative of the deputy director or director in the event that these positions are absent or missing in the structure of the Purchasing Order Departement Responsible for full control of reported cases from seniors buyers from all various parts Senior Buyers Basing on database and his/her experience, senior buyers control and balance inventory as compared to actual demand This help to balance purchasing budget and processing time to avoid delay in whole group operation Senior buyers of each department report to the supervisor buyer Assistant Buyers Assistant buyers work directly with senior buyers while maintaining their own responsibility for updating trend of internal demand and external supply sources Assistant buyers evaluates supplier, sourcing the most, suitable, reliable and profitable suppliers Support Staff Tram Nguyen Page 34 Although each team member has their own specific tasks, it is crucial to have team-work spirit toward common goals Therefore, decision should be made as a whole group Support staff execute administrative tasks by handling numerous tasks at the same time to help facilitating the department work At certain point, when a support staff gets enough experience, he/she can be promoted to buyer’s position Transaction value for each level of responsibility level The responsibility of these two leaders may be varied or sharing common tasks, and splitting approval authority in transaction value of below VND billion for Deputy Director to approve and above the value for Purchasing Director Down to groups of purchasing expertise, each one will have a group leader and one or more, depends on the workload, assistant buyer Again, approval for Senior buyer will be for under VND 500 million transaction value Procurement method also apply basing on transaction value as below: ● Under VND 500 million applying competitive price bidding gathering or suppliers bid basing on info from purchasing order and choosing the lowest price bid ● From VND 500 million below VND billion applying sealed bidding where each supplier can only submit for bid and don’t have information on the bidder list ● More than VND billion value of transaction will open bid that has no limit on number of bidders, request for proposal will be public on media This method has less corruption risk 2.2 Advantages and disadvantages of centralized purchase order department Advantage of centralizing procurement is the bargain power over supplier base on value and quantity of purchasing demand which targeting lower price, higher value, more focus in customer services and after-sell services As a result, low transportation cost per unit in transporting from Tram Nguyen Page 35 supplier to buyer, all will be delivered in bulk It will also eliminate the duplication of tasks for common goods Procurement staffs should be more skillful for diverse experience Purchasing process for special services and products will be handle with ease by having specialist evaluating The disadvantage firstly come from transporting inventory cost from central warehouse to local office or branch Even if transporting will be handle by supplier as a part of bulk selling contract, there will be need for more effort to management from central procurement center In addition, delay in receiving material occurs It also will not be convenient for local office to order small quantity of supplies or specialized goods applying for minor offices Manager of local office or branch control of its operation loss control of this operation and be lack of flexibility 2.3 Purchasing processes Figure - Proposed purchasing process Tram Nguyen Page 36 As mentioned in Point 1.1 Organization of the centralized purchasing, Chapter 1, Part 2, all request for orders come from other departments, offices or branches will first go through Knowledge Center for sorting purchases by time and value, suggesting vendors, and recommend purchasing criteris using existing database, to suggest for arrangement to Procurement Operation function which works under Purchasing Director Knowledge Center may be operating by Assistant Buyers Basing suggestions made by Knowledge center, Director and Deputy Director will then allocate works to related teams Senior buyers will be in charge of the purchasing team and facilitate the purchasing activities After delivering purchase order to the requester, Director will send input made by the team to Knowledge center to store and analyze purchasing data Also, internal payment requests for purchased goods or services will be approved by Director and send to related parties 2.4 Standardization of processes To establish a procedure that adapt most of demand of SCB organization, a standard of procurement should be established and complied No matter if SCB decide to work internally to establish this standard or using a professional consultant, according to the Productivity Press Development Team (2002) there are steps that need to be followed: ● Setting the Standard: Setting standard helps to create framework for the department to follow and avoid confusing related staff in transferring process ● Reporting the Standard: as each organization is unique and business environment is changing from time to time, it is crucial to have reporting as a part of standardization process to have it most effectively operating ● Establishing adherence to the Standard: after reporting, lesson learnt will be saved and improvement can be applied Tram Nguyen Page 37 ● Encouraging the continuous improvement of the standard: staff should be aware that improvement is welcome so they may put full effort to work for the tasks and to reach common goals Applying the Business Process Standardization, we can expect the main results as follows: ● Loss reductions: better inventory control should be one of the major improvement for standardization ● Company training culture: establishing culture of continuous training among departments ● Increased transparency and loss corruptions as identify earlier in this report ● Variability reduction to better plan for further procurement with less complexity 2.5 Purchasing efficiency Cost of purchasing affect bottom line profit of an organization, conducting efficiency purchasing is helping the organization to strength its market position This related on how well the procurement center manage to work within approved budget or even cut cost while still maintaining operation target This condition considered in the case that budget is realistically set Measuring performance of central procurement office is essential to have knowledge of how the system work and better understanding and communicate with stakeholders There are six keys areas to be measure according to Center for Advanced Purchasing Studies prepared a study, spearheaded by Fearon and Bales (1997)22: 22 Purchasing Efficiency vs Effectiveness: Millennial Thoughts and Strategic Implications https://www.instituteforsupplymanagement.org/pubs/Proceedings/confproceedingsdetail.cfm?ItemN umber=11567&SSO=1 Tram Nguyen Page 38  Purchase Cost Savings / Avoidance (includes: dollar cost savings resulting from price negotiations, outsourcing, use of EDI, and risk sharing strategies, etc.)  Managing Supplier Base (includes: time to market, supplier satisfaction, minority-/women-owned suppliers, partnerships, etc.)  Internal Customer Satisfaction (includes: customer satisfaction survey results, customer complaint resolution, cycle time, etc.)  Purchasing Cost (includes: purchasing expense as percent of purchased dollars, department budget vs actual expenditures (trend), etc.)  Resource Utilization (includes: purchase dollars spent on term contracts and blanket orders, inventory dollar value, etc.)  Other (includes: number of benchmarking visits, number of benchmarking ideas implemented, materials cost vs sales price of major items, etc.) 2.5.1 Purchasing a ATM machine without the controlling of P.O center Currently, in the market of Vietnam, there are two distributors supply of automatic teller machines (ATMs) for local banks to use That is : Diebold Vietnam Co., Ltd (supply ATM branded Diebold) and Microtec Vietnam Limited (NCR branded ATM) - NCR is headquartered in Duluth, Georgia with over 30,000 employees and does business in 180 countries NCR is a trademark of NCR Corporation in the United States and other countries Tram Nguyen Page 39 Recently 3-4 years ago, automatic teller machines were provided by specialized management - known as the Bank's e-Banking card management department Since only two vendors can view this as a monopoly purchase, and with monopoly supply, the cost of equipment is very high (because it cannot be negotiated) And, when performing a contract with automated teller machines, SCB almost always has to pay a huge amount for buying a new machine In the only two vendors if the one comes with the good commission is offered the easier approval from specialized management In general, when a ATM machine purchasing decision made, it is proposed by technical department or by the local office without clear purchasing criteria and price range The authorized for approval personnel usually does not have enough database and options to choose from Tram Nguyen Page 40 2.5.2 Purchasing a ATM machine under the controlling of P.O center By having control of P.O center, specific technical criteria will be required to suppliers by professional in-house technician to help sourcing for best options even though there are still only suppliers in the market The next advantage of having the center is both suppliers will have to enter competitive bid where they, anyhow, must offer best price buy cutting all commissions and corruption expenses Therefore, SCB will be able to purchase most suitable machines with best price Tram Nguyen Page 41 Considering growing banking market in Viet Nam, SCB operation status and its goals, this report suggests to re-organize purchasing activities management from decentralized management method to centralized management method One of the most important point for SCB to apply centralized its procurement operation is having large network across Viet Nam with 229 transactions office and 230 trading units that requires several common purchasing items and very specified purchasing items which needs to have professional team to execute Besides that, as mentioned in the report, the current act of corruption, collusion, and lack of motivation in local purchasing teams caused delayed in delivering as well as over costing the whole group By operating in centralized purchase order department at head quarter, human resource will be more focus and professional in purchasing activities by sharing lesson learnt continuously There will be also more convenient to organize internal audit between the suggested team organization which will have a department director, a deputy director, and focusing teams Despite the mentioned advantages, there are several disadvantages should be aware of namely transporting inventory cost from central warehouse to local office or branch and decrease flexibility of local office managers Procurement process was clearly identified receiving requests to delivering All information will be stored and analyze by knowledge center and execute by Procurement Operation To have Purchase Order Department to operate smoothly, standard should be applying either by internal management team or by professional consultants with the aims to loss reductions, establish company training culture, increased transparency, and variability reduction Performance of this application will be evaluated by main keys areas: purchase cost savings / Tram Nguyen Page 42 avoidance, managing supplier base, internal customer satisfaction, purchasing cost, resource utilization Lastly, the cases of purchasing ATMs with and without control of P.O center shows, it shows that obviously purchasing a typical product in banking industry with only suppliers in the market, having purchase order department is an optical option to have the most suitable product in terms of technical requirements and in price by cutting all commission and corruption with clear requirement Will all of the above analysis of root causes and improvement that effect directly to the performance of purchase activities, I suggest to re-organize the purchasing operation from decentralized operation to centralize purchasing order department at SCB’s head quarter Tram Nguyen Page 43 In English:  Deloite (Spring 2014) Report on Procurement Fraud in Middle East Point of View  Isabel Reynolds and David Tweed (24 January 2018) “Why a TPP Without the U.S Is Still a Big Deal”  SCB (2016) “Annual Report”  The Asian Banker (2018) “About us”  Trading Economics (2016) “South Asia - Age dependency ratio (% of working-age population)”  Van Thompson (2018) “Examples of Lack of Quality with Outsourcing”  World Bank (2018) “Vietnam country overview”  WorldoMetrers (2017) “Asian Countries by population” In Vietnamese:  Kim Tiền (13 March 2017) “Bảng xếp hạng ngân hàng cổ phần tư nhân lớn nhất” Tri Thức Trẻ  Mai Trinh (12 June 2016) “TPP tác động đến ngành ngân hàng: Rủi ro đến từ dòng vốn ngoại” Nguoi Tieu Dung eNews  Minh Ngô - Ngọc Thảo (21 September 2017) “Câu chuyện mở rộng mạng lưới hội ngành ngân hàng Tri Thức Trẻ  Phùng Bảo Yến (30 Aug 2017) “Ngân hàng thương mại, để thu hút giữ chân khách hàng” Bands Viet Nam  State Bank of Viet Nam (June 2017) “Danh Sách Các Ngân Hàng Tmcp Trong Nước”  Tổng cục thông kê (2016) “Lực lượng lao động từ 15 tuồi trở lên phân theo nhóm tuổi”  Trung tâm WTO (05 March 2018) “Hiệp định TPP -CPTPP”  Tùng Lâm (3 May 2017) “ Hơn 32.000 tỷ đồng vốn điều lệ bơm thêm, hệ thống ngân hàng chứng kiến "sao đổi ngôi" Tri Thức Trẻ  Tùng Lâm (31 October 2016) “Cánh tay” 34 ngân hàng Việt vươn tới đâu? " Tri Thức Trẻ Tram Nguyen Page 44 Tram Nguyen Page 45 ANNEXES - SCB'S NETWORK DISTRIBUTION as on SCB's Annual Report in 2016 Tram Nguyen Page 46 No 10 11 12 13 14 15 16 17 18 ANNEX - Vietnam Joint Stock Commercial Bank List as of June 2017 by State Bank of Viet Nam Chartere Name in No of Name of Banks d Capital Short branches (VND bn) Vietnam Joint Stock Commercial VietinBank 37,234 149 Bank of Industry and Trade Joint Stock Commercial Bank for VCB 35,978 101 Foreign Trade of Vietnam Joint Stock Commercial Bank for Investment and Development of BIDV 34,187 190 Vietnam Saigon Thuong TinCommercial Sacomban 18,852 109 Joint Stock Bank k Military Commercial Joint Stock MB 17,127 71 Bank Sai Gon Commercial Joint Stock SCB 14,295 50 Bank Viet nam Export Import Eximbank 12,356 42 Commercial Joint Stock The Maritime Commercial Joint MSB 11,750 45 Stock Bank Saigon-Hanoi Commercial Joint SHB 11,197 55 Stock Bank Vietnam Commercial Joint Stock VPBank 10,766 50 Bank for Private Enterprise Asia Commercial Joint Stock Bank ACB 10,273 81 PvcomBan Public Vietnam Bank - PvcomBank 9,000 33 k Viet Nam Technological and TECHCO 8,878 62 Commercial Joint Stock Bank MBANK Ho Chi Minh city Development HDBank 8,100 50 Joint Stock Commercial Bank LienViet Commercial Joint Stock Lien Viet 6,460 61 Bank Post Bank TienPhong Commercial Joint Stock TPB 5,842 31 Bank Vietnam International Commercial VIB 5,644 50 Joint Stock Bank Southeast Asia Commercial Joint Seabank 5,466 39 Tram Nguyen Page 47 No 19 20 21 22 23 24 25 26 27 28 29 30 31 Name of Banks Stock Bank An Binh Commercial Joint Stock Bank BAC A Commercial Joint Stock Bank DONG A Commercial Joint Stock Bank Orient Commercial Joint Stock Bank Viet A Commercial Joint Stock Bank Viet Nam Thuong Tin Commercial Joint Stock Bank Bao Viet Joint Stock Commercial Bank Saigon Bank for Industry & Trade Nam A Commercial Joint Stock Bank National Citizen bank Viet Capital Commercial Joint Stock Bank Kien Long Commercial Joint Stock Bank Petrolimex Group Commercial Joint Stock Bank Tram Nguyen Chartere d Capital (VND bn) No of branches ABB 5,320 30 Bac A Bank 5,000 22 EAB 5,000 56 OCB 4,000 34 VIETA Bank 3,500 21 Vietbank 3,249 11 Bao Viet 3,150 12 SGB NAM A BANK NCB Viet Capital Bank 3,080 33 3,021 23 3,010 20 3,000 27 KLB 3,000 28 PGBank 3,000 16 Name in Short Page 48 ... ECONOMICS AND MANAGEMENT MBQPM6 CHALLENGE IN PURCHASING IN SAIGON COMMERCIAL BANK MASTER FINAL PROJECT MASTER IN BUSINESS QUALITY AND PERFORMANCE MANAGEMENT Tutor: Jacques Martin Class : MBQPM6 Full Name... providing information and knowledge so this final report can be done closely to my chosen topic As a Challenge in Purchasing in Saigon Commercial Bank in Purchasing Order Department, I find working... BIDV, Saigon Thuong TinCommercial Joint Stock Bank – Sacombank, Military Commercial Joint Stock Bank – MB, Sai Gon Commercial Joint Stock Bank – SCB, and so on7 ● joint venture commercial banks: