Improving production costs of shampoo in Unilever Vietnam

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

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

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

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

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

2.2.1 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

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

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

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

GLOSSARY AND DEFINITION

FDI foreign direct investment

CoB codes of business

goods

CPG consumer packaged goods

COGS cost of goods sold

EBIT earning before income tax

TVC total variable cost

AFC average fixed cost

ATC average total cost

STC short run total cost

LAC long run average cost

LMC long run marginal cost

SMC short run marginal cost

APICS American Production and

Inventory Control Society

ERP enterprise resource planning

SCOR supply chain operations

ref-erence GSV gross sales value TTS trade terms structure

CHAPTER I: INTRODUCTION

1.1 Problem statement

Any manufacturing unit would have a production facility where goods are duced Especially, fast moving consumer goods (FMCG) – or consumer-packaged goods (CPG) – are products that people sell out quickly and at rela-tively low cost In those kinds of the FMCG (or CPG) companies, product sup-ply – called production or manufacturing – is much more important In almost of the cases, production comprises of labours, machines, and materials Proper al-location of jobs, layout, and material … results in cost efficient production All businesses should try to operate efficiently However, this is particularly im-portant for a growing business In many markets, a business needs to be at least

pro-as efficient pro-as its main competitors are in order to be able to compete and vive in the long-term A more efficient business will produce lower cost goods than competitors and may generate more profit possibly at lower prices Increas-ing efficiency will also boost the capacity of a business, assuming there is no change in the number of inputs employed The capacity of a firm refers to how much a business can produce during a specific period Apart from profits men-tioned if, they can reduce the production cost; it can help much in budget alloca-tion to the other activities in the business, such as marketing activity or sale ac-tivity With the reasons above, improving production costs in the business is al-ways 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 others

sur-Reducing manufacturing costs increases profitability by making more with what they have or the same with less It sounds very simple but many companies

underdeveloped countries have put cost pressures on many manufacturers To deal with this, a periodic assessment of manufacturing costs is necessary be-cause 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 means that the study will fo-cus on relationship between the production structure and the loss structure The study can help to support management team of production in finding some ways

to reduce the losses and improve the costs accordingly

The study mainly focuses on one of the category in Unilever Vietnam However, they can apply for the others This study is also a great opportunity for the other firms in the same industry to do self-assessment and establish cost reduction programs

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 this company

Specific objectives

 To describe cost factors of production costs

 To identify the losses and analyse their impacts to the costs

 To compare Unilever Vietnam’s production costs with companies’ production costs in the other countries

 To find the gaps and recommend how to improve to the business

1.3 Research methodology

When studying and analysing the production costs; people generally ommend using both secondary data and case study research methods, comparison as well as simulation approaches combined

1.4 Significance and limitation of the study

Reducing manufacturing costs (or production costs) increases profitability by making more with what people have or the same with less It sounds quite sim-ple but many companies struggle with this Many companies seem to believe that sending out a memo to all employees ordering the cost cuts is all it takes to reduce expenses Unfortunately, such an approach usually causes a lot of inter-nal harm in terms of lowered employee morale Employees are left feeling that their efforts are unappreciated and their work too costly for the product pro-duced This kind of approach can seriously harm a company’s ability to continue producing quality products or services When you cut too deeply in areas direct-

ly related to the company product, quality is bound to decline

An effective cost reduction program should result from management planning, a thorough understanding of company expenses, a vision of the future, and the de-sire to continue to satisfy customers The process of reducing costs is not about making journal entries in the accounting system It should be the implementation

of a thoughtful action plan with 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 cuses on production cost only In the chapter IV, it will show cost structure It is

fo-a kind of the COGS, which people uses in the fo-accounting fo-and finfo-ance However,

it does not have any meaning to compare the material costs, so in Unilever etnam, production does not consist of the costs of the materials

Vi-The reason is that Unilever worldwide is targeting to become one of the best Supply chain companies in the industry (Supply chain will appear clearly in the chapter II – Literature review). With the way of working, they will centrally supply

by a group based in a certain country For instance, Singapore office is ble for sourcing and making a big contract for the whole region By doing it, the suppliers can offer the lowest price to Unilever In the other words, countries in the same region should use materials with the same source, the same price 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, produc-tion costs and logistic costs

responsi-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

Production cost, finally, is remainder of the cost of goods sold excluded material

and logistic costs The study will define clearly its elements However, it should

mainly consist of:

 Labour costs (wages and allowances)

 Equipment by means of depreciation expenses

 Consumptions: water, electricity, fuel, etc

 Indirect consumables

 Maintenance and repair

In summary, this study does not focus on the others of the COGS, but it will

study production costs only

1.5 Organization of the research study

The first chapter explains the background and introduction to the study

Fol-lowed by the literature review, the most relevant theories of production, cost and

production management There are some Unilever company overviews in next

chapter Then, the study will describe deep analysis the production costs in

Uni-lever Vietnam will in the next chapter based on the UVN data and in the region

There are also some simulations to make this study sturdier Finally, the study

also mentions the findings, conclusion and recommendation

CHAPTER II: LITERATURE REVIEW

Production cost reduction is not only the top schedule in Unilever Vietnam, but

it is also in the other companies in the same industry in the recent decade The aim of this literature review is to outline the most relevant to the main area cov-ered 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 duction 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 competi-tive market depends on their ability to produce at a competitive cost

pro-In their efforts to minimize the cost of production, the fundamental questions that the management are facing with, are:

 How does the Production and Costs relate?

 Does substitution between the factors affect to the Cost of Production?

 How does the technology factors combined reduce the cost of tion?

produc- How can the firm achieve the least cost combination of inputs?

 What happens to rate of return when the firm adds more plants?

 What are the factors that create economies and diseconomies for the firm?

The theory of production provides the answers to these questions by providing tools and techniques to analyze the production conditions and to provide solu-tion to the practical business problems “I know that even as a student I was drawn to the theory of production rather than to the formally almost identical theory of consumer choice It seemed more down to earth.” (Robert, 1987)

In the other words, production is defined as “the step – by conversion of one form of material into another form through chemical or mechanical process to create or enhance the utility of the product to the user” Thus, production is a value addition process At each stage of processing, there will be value addition (William, 1995)

Production management

Following the definition of production, production/operations management is

al-so the process, which combines and transforms various real-sources used in the production/ operations subsystem of the organization into value added prod-uct/services in a controlled manner as per the policies of the organization

Therefore, it is that part of an organization, which is concerned with the formation of a range of inputs into the required (product/services) having the requisite quality level (William, 1995)

trans-Factors of Production

According to Besanko (2011), the productive resources, such as labor and tal equipment, that a firm uses to manufacture goods and services are called in-puts or factors of production, and the amount of goods or services produced is the firm’s outputs

capi-Normally, inputs of the firms are land, labour, capital, management,

entrepre-neur and technology

Production Function

Production function is a mathematical representation of the various cal recipes from which a firm can choose to configure its production process In the other words, production function is a technological relationship between in-puts and output in physical terms It specifies the maximum quantity of a com-modity that can be produced per unit of time with given quantities of inputs and technology A production function may take the form of a schedule, a graphical line or curve, an algebraic equation or a mathematical model

technologi-Production function is part of an organization, which is concerned with the transformation of a range of inputs into the required outputs (products) having the requisite quality level

The production function transforms inputs like land, labor, capital and neurship into output The box in the diagram embodies the existing state of technological knowledge Because knowledge has been accumulating over time,

entrepre-we get more output from a given combination of inputs today than would have gotten in the past

Figure 2.2 – The production function

Source: Robert (2008)

Following concepts of Paul and Robin (2009) and The general form a tion function may be algebraically expressed as:

produc-Total Product ( Q ) = f ( L, K, T )  Very Long Run

Total Product ( Q ) = f ( L, K )  Long Run

Total Product ( Q ) = f ( L )  Short Run

Where Q = the quantity of output produced per time unit

Production function depends on:

 Quantities of recourses used

 State of technical knowledge

Technically efficient

Q =

employs At points A and B, the firm is technically inefficient It is not getting

as much output as it could with its labour, Besanko (2011)

Because the production function tells us the maximum attainable output from given combination of inputs, we will sometimes write Q < f (L, K) to emphasize that the firm could, in theory, produce a quantity of output that is less than the

maximum level attainable given the quantities of inputs it employs

Variable inputs – Management has to control over variable inputs such as rate of fertilization, feed rate, etc What we do not control called fixed input: unchang- ing during length of trial (harvesting pump; feed silos, vehicles, land) Random

inputs – associated with nature or economics beyond

Short Run and Long Run

The short run is a period of time when there is at least one fixed (or inelastic) factor input This is usually the capital input such as plant and machinery and the stock of buildings and technology In the short run, the output of a business ex-pands when it is more variable factors of production (e.g labour raw materials and components employed)

Figure 2.4 - A specific Short-run production function

Where:

 Panel (a) shows the production function, Q = 2KL, with K is fixed at Ko = 1

 Panel (b) shows how the short-run production function shifts when K is creased from Ko to K = 2

in-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 in-troducing new technology into their operations In the other words, long run re-fers to a period in which the supply of all the inputs is elastic or variable

The length of time between the short and the long run will vary from industry to industry For example, how long would it take a newly created business deliver-ing sandwiches around a local town to move from the short to the long run? Let

us assume that the business starts up with leased premises to make the wiches; two leased vehicles for deliveries and five full-time and part-time staff

sand-Source: developed for this study

Figure 2.5 - Relationship between Inputs, Outputs and Costs

Production and Costs

INPUTS

COSTS

OUTPUTS

(Physical ucts)

Prod-In the short run, they can increase production by using more raw materials and

by bringing in extra staff as required But if demand grows, it will not take the business long to perhaps lease another larger building, buy in some more capital equipment and also lease some extra delivery vans – by the time it has done this,

it has already moved into the long run

The point is that for some businesses the long run can be a matter of weeks! Whereas for industries that requires very expensive capital equipment that may take several months or perhaps years to become available, then the long run can

be a sizeable period of time

Costs of production

Costs are defined as those expenses faced by a business when producing a good

or service for a market

The figure 2.6 – production function and total cost curve

Source: Mankiw (2010)

Production function and Total cost curves

The chart shows the curves of the production function and the total costs of the, for instance, cookie factory It is a simple illustration that it does not mind detail

By Gregory Mankiw (2010), these costs relate do not vary directly with the level

of output Examples of fixed costs include:

 Rent paid on buildings and business rates charged by local authorities

 The depreciation in the value of capital equipment due to age

 Insurance charges

 The costs of staff salaries e.g for people employed on permanent contracts

 Interest charges on borrowed money

 The costs of purchasing new capital equipment

 Marketing and advertising costs

Variable Costs

Variable costs vary directly with output i.e as production rises, a firm will face higher total variable costs because it needs to purchase extra resources to achieve an expansion of supply Examples of variable costs for a business in-clude the costs of raw materials, labour costs and other consumables and com-ponents used directly in the production process (Mankiw 2010)

Total Cost

It is the total amount of factor payments for all the factors of production used at

a time period in production

Total Cost ( TC ) = Total Fixed Cost ( TFC ) + Total Variable Cost ( TVC )

We can illustrate the concept of fixed cost curves using the table below The greater the total volume of units produced, the lower will be the fixed cost per unit as the fixed costs are spread over a higher number of units This is one rea-son why mass-production can bring down significantly the unit costs for con-sumers – because the fixed costs are being reduced continuously as output ex-pands (Mankiw, 2010)

Average Total Cost (ATC)

ATC is the cost per unit of output produced ATC = TC divided by output

Marginal cost (MC)

MC – this theory defines as the change in total costs resulting from the tion of one extra unit of output In other words, it is the cost of expanding pro-duction by a very small amount

produc-2.1.2 Cost in the short run

Short run – a period of time sufficiently short that at least some of the firm’s tors of production are fixed, (Frank, 2009)

fac-Source: Besanko (2011)

Figure 2.7 - Short-run Total cost curve The short run total cost curve STC(Q) is the sum of the total variable cost curve TVC(Q) and the total fixed cost curve TFC Total fixed cost is equal

to the cost rK of the fixed capital services

Short-run total cost curve

Total cost (TC) = VC + FC It means in the short run, the cost consists of both

fixed and variable costs In this case, the variable cost is often considered labour;

and sometimes materials whilst the fixed cost can be plant and equipment Most firms can hire more labours and purchase more raw materials within a few weeks or less However, at many firms, some inputs take longer to adjust It may take a year or longer to install more equipment line or acquire additional factory space

The fixed cost curve is a horizontal line, because they do not vary with quantity

of output Variable cost has a positive slope, because it varies with the output Notice that the total cost curve has the same slope as the variable cost curve, but

it is above the variable cost curve by a distance equal to the amount of the fixed cost

The firm’s average fixed cost (AFC) is its total fixed cost (TFC) divided by the

quantity (Q) of outputs (AFC = TFC/Q)

Average total cost (ATC) is the total cost per unit of output (ATC = TC/Q) Marginal cost (MC) is the change in total cost (TC) divided by the change in

outputs (TC) It tells us how much cost rises per unit increase in output (MC =

TC/Q) (Paul, 2009)

2.1.3 Cost in the long run

In the long run, there are no fixed inputs or fixed costs; all inputs and all costs are variable

Cost rule – to produce any given level of output, the firm will choose the input

mixed with the lowest cost

Cost functions – is similar to the cost in the short run It prefixes “LR” in the

factors

The LAC curve is the “outer envelop” of te ATC curves LMC = SMC at the Q value for which the ATC is tangent to the LAC At the minimum point on the LAC, LMC = SMC = ATC = LAC

2.1.4 Relationship between long run and short run costs

For many firms, the division of total costs between fixed and variable cost pends on the time horizon Consider, for instance, a car manufacturer in a period only a few months, they cannot adjust the number or size of the factories The only way it can produce additional cars is to hire more workers at the factories it already has The cost of several years is, therefore, a fixed cost in the short run

de-By contrast, over a period of several years, they can expand the size of the ries, build new factories, or close old ones Thus, the cost of its factories is a var-iable cost in the long run (Frank, 2008)

facto-Source: Frank, 2008

Long run Average Cost curve

Because many decisions are fixed in the short run but variable in the long run; a firm’s long run cost curves differ from its short run cost curves The figure II.8 presents three short run average total cost curves for a small, medium and large factory It also presents the long run average total cost curve As the firm moves along the long run curve, it is adjusting the size of the factory to the quantity of production

This graph shows how short run and long run costs are related The long run erage total cost curve is a much flatter U-shape than the short run average total cost curve In addition, all the short-run curves lie on or above the long run curve These properties arise because firms have greater flexibility in the long run In essence, in the long run, the firm gets to choose which short run curve it wants to use But in the short run, it has to use whatever short run curve it has chosen in the past

av-How long does it take a firm to get the long run? The answer depends on the firm It can take years for the major industry’s group, but it takes few days to get new equipment, such as coffee shop There is, therefore, no single answer to how long it takes a form to adjust its production facilities (Frank, 2008)

2.1.5 Cost minimization and profit maximization

In studying not only perfect competition, but also a variety of other market structures, economists traditionally assume that the firm’s central objective is to maximise profit Two things must be said about this assumption The first is to clarify just what is meant by the term “profit”, and the second is to explain why

it often makes sense to assume that the firms try to maximize it

Profit – or, more precisely, economic profit – is defined as the different between total revenue and total cost, where the total cost includes all costs – both explicit

(payment to non-owners of a firm for their resources) and implicit (The tunity costs of using resources owned by the firm) – associated with resources

oppor-used by the firm This definition is significantly different from the one oppor-used by

accountants and many other non-economists, which does not subtract

opportuni-ty or implicit costs from total revenue Accounting profit is simply total revenue less all explicit costs incurred (Frank, 2008)

To predict what any entity – a firm, person, committee, or the Government – will do under specific conditions, some sorts of assumption must be made about its goal

Figure 2.9 - Short run profit maximization using the Total Revenue – total cost method for

a perfectly competitive firms

This exhibit shows the profit maximizing level of output choosen by a perfectly competitive firm (for instance Computech) Part (a) shows the relationships between total revenue, total cost, and output, given a market price of $70 per unit The maximum profit is earned by producing 9 units per hour At this level of output, ther vertical distance between the total revenue and the total cost curves

is the greatest At an output level below 3 units per hour, the firm incurs losses

Profit maximization is also shown

in part (b) @ $250/hr corresponds

to the profit maximizing output of

9 units/hr represented in part (a).

Source: Tucker, 2011

In the perfectly competitive, the firm has no control over the price (not price maker), what the firm control? They have to base on inputs and outputs – as in-ternal factors – to maximize profits One of the things is to minimize the costs

2.2 Production management theory

2.2.1 Supply chain

A Supply Chain, boiled down to its basic elements, is the sequence of events and

processes that take a product from dirt to dirt, in some cases literally It passes a series of activities that people have engaged in since the dawn of com-merce Consideration the supply chain, General Mills manages for every box cornflakes It sells a farming plant; a certain number of corn seeds, cultivates and harvest a crop, sells the corn to a processing facility, where it is baked into the cornflakes, then is packaged, warehoused to a distributor; transported to a re-tail store, put on a store shelf, sold to a consumer, and ultimately eaten If the cornflakes are not sold by the expiration date on the box, then they are removed from the retailer’s shelf and disposed of (David, 2010)

encom-A Supply Chain, in other words, extends from the original supplier or source (the

farmer and the seed) to the ultimate customer (the consumer who eats the flakes) So whether you are talking about an Intel semiconductor that begins its life as a grain of sand or a Ford Explorer that ends its life in a junkyard where its remaining usable components (tires, seat belts, bumpers) are sold as parts, eve-rything that happens in between those dirt-to-dirt milestones encompasses some aspects of the supply chain (David, 2010)

corn-In order to speak correctly about SC, let see how the Association for Operations Management in their APICS Dictionary expresses the official definition Supply chain is: “The global network used to deliver products and services from raw materials to end consumers through an engineered flow of information, physical distribution and cash” (John, 2008)

Supply chain management (SCM) is going to be the main management process for production systems in the XXI century This management process will take care of the flow of materials, information, purchased parts, personnel and finan-cial needs supplied from different vendors, sometimes geographically too far from the main production plant The industry of domestic appliances is a good example of the supply chain management Before SCM a production system de-signed their products itself and manufacture all the subassemblies and compo-nents and gave after sale service during and after warranty period After SCM, the new production systems “co-makership” several aspects of the production process, for example hermetic compressors for the fridges, plastic parts and mo-tors for washing machines, electrical components, etc SCM provides different management principles to help in the designed planning and controlling the net-work of suppliers in order to synchronize the variability of the customer’s de-mand with the variability of capacity of suppliers

As APICS dictionary (John, 2008): Supply Chain Management – SCM is “The design, planning, execution, control and monitoring of supply chain activities with the objective of creating net value, building a competitive infrastructure, leveraging world-wide logistics, synchronizing supply with demand, and meas-uring performance globally” The main functions of production systems man-agement as follows: the design of the supply chain when it is going to be a new corporation, the planning of operational and strategic activities, the scheduling and execution of the production planning, the control and solution of conflicts and the monitoring and auditing of the production processes The financial man-agement creates net value to all stakeholders: owners, employers, employees, society and environment In the following section of this chapter, it is going to

be described in more detail each one of the manufacturing functions of Supply Chain (SC), considering a systems approach based on the five components of the Viable System Mode (VSM) by Beer (1985) Supported by the popular business/ industrial information system, they call it Enterprise Resource Planning (ERP)

2.2.3 Supply chain stages

There are three phases to the flow of materials Raw materials flow into a facturing company from a physical supply system, they are processed by manu-facturing and finally finished goods are distributed to end consumers through a physical distribution system

manu-Similarly, one customer may have several suppliers and may in turn supply eral customers As long as there is a chain of supplier/ customer relationships, they are all members of the same supply chain

sev-The figure 2.10 – supply, production and distribution system

The figure shows only supplier and one customer, usually the supply chain sists of several companies linked in a supply/ demand relationship For example, the customer of one supplier buys a product, adds value to it, and supplies yet another customer

con-To get the most profit, a company must have at least four main objectives:

 Provide best customer service

R Physical

supply

Manufacturing, Planning and Control Physical Distribution

DOMINANT FLOW OF PRODUCT AND SERVICES

DOMINANT FLOW OF DEMAND AND DESIGN INFORMATION

 Provide lowest production costs

 Provide lowest inventory investment

 Provide lowest distribution costs

(Arnold, 2008)

2.3 Summary

The above sections are literature review for the study This chapter helps to derstand about theory of production, cost of production, introduction of the sup-ply chain, which they are applying in the multi-company nowadays Cost mini-mization and profit maximization that they discuss and schedule in those com-panies

un-Theory of the production costs in Unilever as this study will describe in the chapter IV right after company overview in the next chapter

CHAPTER III: UNILEVER VIETNAM’S INTRODUCTION

3.1 Unilever group worldwide

The Unilever Group was formed in 1930 from two parent companies – lever NV and Unilever PLC Each parent company had its own Chairman and Chief Executive Officer for over 75 years Following the ‘One Unilever’ initiative, this has recently been remodelled A single Board of Directors now leads the entire business, and the Group Chief Executive Officer is responsi-ble for operations Currently, Unilever presents in 150 countries around the world as it has around 174,000 employees (www.unilever.com). 

Figure 3.1 – Unilever Global structure

Source: Unilever Profiles

They have always believed in the power of their brands to improve the

quali-ty of people’s lives and in doing the right thing As their business grows, so

do their responsibilities They recognise that global challenges such as mate change concern us all Considering the wider impact of their actions is embedded in their values and is a fundamental part of which they are (www.unilever.com)

cli-3.1.2 Mission

Unilever’s corporate mission is to add vitality to life – meet everyday needs

of nutrition, hygiene and personal care with brands that help people feel good, look good and get more out of life

We will inspire people to take small everyday actions that can add up to a big difference for the world

Enthused with Vitality – Vitality is at the heart of everything they do It’s in

their brands, their people and their values Vitality means different things to different people Some see it as energy; others view it more broadly as a healthy state of body and mind – of feeling alive

Health and nutrition – The Vitality mission commits to growing their

busi-ness by addressing health and nutrition issues They focus on priorities cluding children and family nutrition, cardiovascular health and weight man-agement

in-Inside and out – The culture also embodies Vitality Adding Vitality to life

requires the highest standards of behaviour towards everyone they work with, the communities they touch and the environments on which they have

an impact (www.unilever.com)

3.1.3 Values

As a multi-local multinational, they aim to play their part in addressing

glob-al environmentglob-al and sociglob-al concerns through their own actions, and working

in partnership with stakeholders at local, national and international levels

 Purpose and principles

 Nutrition, Hygiene and Personal Care

 Science and Technology

 Environment and Society

In the 1890s, William Hesketh Lever, founder of Lever Bros, wrote down his ideas for Sunlight Soap – his revolutionary new product that helped popular-ise cleanliness and hygiene in Victorian England It was ‘to make cleanliness commonplace; to lessen work for women; to foster health and contribute to personal attractiveness That life may be more enjoyable and rewarding for the people who use our products’

This was long before the phrase ‘Corporate Mission’ had been invented, but these ideas have stayed at the heart of our business Even if their language – and the notion of only women are doing housework – has become outdated

In a history that now crosses three centuries, Unilever’s success has been fluenced by the major events of the day – economic boom, depression, world wars, changing consumer lifestyles and advances in technology And throughout we’ve created products that help people get more out of life –

in-cutting the time spent on household chores, improving nutrition, enabling people to enjoy food and take care of their homes, their clothes and them-selves

Today, Unilever still believes that success means acting with ‘the highest standards of corporate behaviour towards their employees, consumers and the societies and world in which we live’ Over the years, they have launched

or participated in an ever-growing range of initiatives to source sustainable supplies of raw materials, protect environments, support local communities and much more

The decade starts with the launch of Path to Growth, a five-year strategic plan, and in 2004 further sharpens its focus on the needs of 21st century con-sumers with its Vitality mission In 2009, Unilever announces its new corpo-rate vision – working to create a better future every day with brands that help people look good, feel good and get more out of life (Unilever profile and www.unilever.com)

3.3 Unilever Vietnam

3.3.1 Legal, mission and vision

Legal – before July 2009, The Unilever Vietnam consists of two companies

– Unilever Vietnam JV (joint venture from its local partner Vietnam National

Chemical Corporation – VinaChem) and Unilever Vietnam Limited

Unilever and VinaChem have reached an agreement to restructure the ization in March 2009 With this change, Unilever Vietnam Joint Venture

organ-Co has become 100% foreign-owned after Unilever’s acquisition of 33.33%

of the shares in the joint venture (UVN profile)

Mission – alignment with the Company mission, Unilever has own mission

That is ‘Make every Vietnamese life better through health, hygiene and tion’

nutri-Vision – before 1995, Unilever had no business in Vietnam They got started

in 1995 and leapt to become one of the best companies in Unilever Group worldwide in term of growth They set a goal to ‘become a Global Citadel’ in

2013

Citadel – is one of the key markets who can be in making decision group In

order to be the citadel, the company in the country has to reach xxx (1) in sales Based on market size, they will set the number accordingly (UVN pro-file)

3.3.2 Overview of manufacturing Unilever Vietnam

Figure 3.2 – Mission and Vision

Source: UVN profile