THE VIETNAM CEMENT INDUSTRY – COMPETITION AND CONSUMPTION

Historically, in many Vietnamese enterprises, the conventional accounting system has always been considered an effective and essential managerial tool for evaluating and controlling business performance

TABLE OF CONTENT

ACKNOWLEDGEMENT I ABSTRACT II

CHAPTER I INTRODUCTION 1

I RATIONALE 1

II PROBLEM STATEMENT 1

III RESEARCH METHODOLOGY 2

1 Objectives 2

2 Information sources 2

3 Scope 2

4 Presentation of the Research report 2

5 Limitations 3

CHAPTER II CONCEPTUAL FRAMEWORK 4

I VALUE CHAIN CONCEPT AND RELATED ISSUES OF STRATEGIC MANAGEMENT IN MANUFACTURING 4

II THE CEMENT INDUSTRY 11

1 Definition and usage of cement: 11

2 Cement ingredients: 11

3 Characteristics of the industry 12

4 Process of cement production 13

5 Types of cement: 13

CHAPTER III HPCC - COMPANY PROFILE 15

I BACKGROUND 15

II THE VIETNAM CEMENT INDUSTRY – COMPETITION AND CONSUMPTION 15

III BRIEF OF HPCC’S OPERATION 16

1 Material Resources 16

2 Machine – Equipment – Technology: 16

3 Human Resource: 16

4 HPCC’s product range 17

5 Manufacturing process 17

IV THE NEW PLANT PROJECT 17

CHAPTER IV AN ANALYSIS ON THE COMPANY’S CURRENT VALUE CHAIN 18

I SUPPLY 18

II MANUFACTURING 20

III MARKET ANALYSIS 24

1 Geographical markets 24

2 Product Portfolio: 26

3 Customer segmentation and customer policies 27

IV SUMMARY 30

1 Major weaknesses of HPCC: 30

2 Reasons: 31

CHAPTER V THE PROJECT OF THE NEW PLANT IN THUY NGUYEN – TRANG KENH - HAI PHONG 32

I THE NECESSITY OF THE NEW PROJECT 32

1 Natural condition: 32

2 Material condition: 32

3 Socio-economic condition: 32

II THE NEW PLANT’S OPERATION 33

1 Manufacturing 33

2 Control system 33

III MARKET ANALYSIS 34

1 The industry 34

2 The Demand for Cement in Vietnam 34

3 Benchmarking 35

IV INFORMATION FLOW 36

V ORGANIZATIONAL CHANGES 36

CHAPTER VI CONCLUSIONS AND RECOMMENDATIONS 38

I CONCLUSIONS 38

II RECOMMENDATIONS 39

REFERENCES 43

APPENDICES 44

EXHIBIT 6.A HAIPHONG CEMENT COMPANY (OLD STRUCTURE) 46

EXHIBIT 6.B HAIPHONG CEMENT COMPANY (NEW STRUCTURE) 47

EXHIBIT 7.A BALANCE SHEET 48

EXHIBIT 7.B INCOME STATEMENT 49

EXHIBIT 8 GEOGRAPHICAL CONSUMING MARKETS 50

LIST OF TABLES

It has been recognized that the traditional accounting system, with a narrow focus, is nolonger appropriate in the today’s turbulent business environment However, though StrategicCost Management has been increasingly paid attention by economists, a formal adoption ofconcepts like Value Chain Analysis and Activity-Based Costing into enterprises is in fact not

as simple as we initially thought

One of the biggest hindering forces is people’ mindsets How to change their viewpoints ofmanaging, controlling, and operating a business has been still a great question

With Hai Phong Cement Company (HPCC) being a case study, the research attempts toanalyze and identify problems and their reasons, and also opportunities for improvement.Based on the theoretical issues reviewed in Chapter 2, the study is continued in Chapters 3,4,and 5 to consider the possibility to involve these strategic concepts into organizations likeHPCC, which had a long time operating under the old management mechanism

With recommendations given in Chapter 6, it is expected that a selective adoption of thestrategic management approach will benefit not only HPCC but other enterprises in otherindustries as well

CHAPTER I INTRODUCTION

Historically, in many Vietnamese enterprises, the conventional accounting system has alwaysbeen considered an effective and essential managerial tool for evaluating and controllingbusiness performance Companies almost rely on ledgers, which record data of insidetransactions only Costs are calculated based on units of materials purchased, direct laboremployed, and overhead Analyses of financial statements also go around these three mainitems of costs

Such a management mechanism might be appropriate in the past, when there were not manyplayers in the market, and customer requirements were simple At that time, moreover, directlabor was the major force in production and, generally, accounted for a large proportion in themanufacturing cost structure Thus, while it was not very difficult for producers to sell theirproducts, there was also no big concern about the current accounting system

It is, however, not the case of today’s business environment, which is characterized asstrongly competitive with higher and more complicated customer demand Low cost is nolonger the only effective weapon for firms to compete on the market Direct labor is also not areliable variable for determining cost allocations due to the emergence of advancedtechnologies and machinery as a replacement for manual work The current accountingsystem alone serves as a tool just for checking and investigating variances Only littlestrategic insights could be withdrawn from those rigid numbers The rapidly changingbusiness environment, therefore, necessitates a new management approach

The Value Chain Analysis and Activity-Based Costing (ABC) concepts have been introducedsince 1980s They bring in a comprehensive view of analyzing and managing a business’soperation The Value Chain Analysis concept takes into consideration not only internalmanufacturing (operating) processes but also linkages and relationships between the firm withsuppliers and customers, whereas the ABC method studies costs through out the value chainwith activities, not units of items, being the basis

These concepts are, indeed, rather new in Vietnam, both intellectually as well as practically.The research is, therefore, aimed to get an understanding of the importance and necessity ofadapting a new management approach Considerations and judgements of whether it isfeasible to apply the whole concept into any business are also needed, since not all enterprisesand their own business environments are the same

Relying on the current accounting system, many companies could not recognize that they,while reporting profit, are in fact not profitable at all

Through a Value Chain analysis, weaknesses are likely to be revealed more convincingly.With Hai Phong Cement Company being an example, the study is expected to prove whysome Vietnamese companies, particularly State-owned enterprises fail to manage costs andsales effectively and, as a result, lose their competitive position in the market Findingpossible roots of such incompetence and determining whether it could be improved are theissues raised for the research

One of the biggest problems for any enterprise is how to change the management’s mindsets

of adopting and involving the new concepts into the organization The author has no ambitionthat a new accounting system will immediately replace the traditional one Although the

results of many researchers have favored Strategic Management with Value Chain Analysisand ABC System as the central elements, it does not mean that problems will surely be solvedall at a time Success or failure also depends on characteristics of the industry and of thecompany itself In fact, applications of the new approach should be acknowledged as supportfor, not an elimination of, the current accounting system.

In the case of Hai Phong Cement Company, which is now under pressures of the market withstrong competition from other cement producers, recognition of weaknesses is not easy, buthow to deal with these in a tough condition of limited capital, time and other resources is aneven more difficult task This issue should be taken into account by the decision makers

1 Objectives

The study is to:

- First, get general ideas about the necessity to adopt Strategic Management, with ValueChain Analysis and ABC system as central elements, into the corporate strategy

- Second, examine the current situation of management in the reality as well as thepossibility for these concepts to be implemented in Vietnamsese enterprises (in this case,Hai Phong Cement Company)

- Finally, realize what further adjustments are needed for such an application of theconcepts, and where and how to start

2 Information sources

For an in-depth understanding about the nature of the industry in which the studied companyoperates, i.e cement manufacturing, secondary information is crucial:

- Articles on Strategic Cost Management: to have basic ideas of the concepts

- Industry Books: to get better understandings of the manufacturing processes so as to know

what, who, and how to add value as well as where possible for cost savings

- The Internet: information about famous companies producing cement is searched for as a

source for learning and benchmarking For example, Lafarge Corporation of England isconsidered a good illustration

- Newspapers: news about the cement market, including the demand, the production

capacity and, if possible, the operating situation of some domestic cement producers likeHoang Thach, Chin Fon, and so on

The most important source of information is from visiting the company Observations, direct

questions with accountants and employees, together with collection of financial statements arethe focus of the research This approach is expected to help our understandings of thecompany with real and valuable information, through which a comprehensive analysis could

be achieved

3 Scope

The study is expected to collect cost-related information as much as possible, but it did not go

in details into ABC calculations Instead, it concentrates on, along the value chain, findings ofimportant items ignored by the management, which have been obviously the roots of thecompany’s ineffectiveness

4 Presentation of the Research report

The report is presented as follows:

Chapter 1: Introduction

Chapter 2: Conceptual framework

Chapter 3: Hai Phong Cement Company Profile

Chapter 4: An analysis of the current value chain at Hai Phong Cement Company

Chapter 5: The project of a new plant in Trang Kenh – Thuy Nguyen – Hai Phong

Chapter 6: Conclusions and recommendations

5 Limitations

The study was conducted at the end of the financial year, 2000 In addition, Hai PhongCement Company is now carrying out its project of moving the current factory to the suburb,and building a new clean-technology plant instead Therefore, there were some difficulties incollecting sufficient needed information since the people were busy accomplishing theirurgent mission and responsibilities

Moreover, the ability to get exact costs and expenses for each specific activity, as required bythe ABC concept, was limited due to the fact that the company is still relying on theconventional accounting system, which focuses only on examining items purchased andemployed

CHAPTER II CONCEPTUAL FRAMEWORK

I VALUE CHAIN CONCEPT AND RELATED ISSUES OF STRATEGIC

MANAGEMENT IN MANUFACTURING

1 What does Value Chain Analysis say?

The Value Chain framework is a method for breaking down the chain, from basic rawmaterials to end-use customers, into strategically relevant activities in order to understand thebehavior of costs and the sources of differentiation (See Exhibit 1)

EXHIBIT 1 Value Activities within a Firm

2 Traditional Accounting vs Value Chain Concept

It has been recognized that the traditional accounting system is no longer appropriate for acomprehensive evaluation of an enterprise’s performance It has increasingly revealeddisadvantages, particularly in the today’s highly changing business environment

Exhibit 2 clarifies and compares the scope covered by the Traditional Management systemand the Value Chain Analysis approach The former is characterized as internally oriented,while with the latter, up- and down-stream linkages are both scrutinized

EXHIBIT 2 Traditional vs Value Chain Management

Let’s consider the overhead cost, which has been usually inaccurately calculated in financialreports of companies The traditional cost accounting method allocates most overhead costs

on the basis of either direct labor or direct materials When the product line becomes morecomplex, however, those costs traced to individual product are more inaccurate, especially foroverhead costs Thus, distortions may occur if we calculate overhead using direct labor ormachine hour rules

For example, while allocating overhead based on direct labor, the system suggests overheadwould decrease with decreasing direct labor It is, in fact, not always true Overhead, onceincreased, is difficult to reduce when sales figures decrease, especially as the decrease in saleswill occur sometime before you can reduce overhead, thereby causing the overheadpercentage to go up for the period of reduced sales.

Moreover, there is a tendency for overheads to climb in the high performance divisions Whensales decline, overheads do not decline in direct proportion to sales, because management has

a tendency to hold on employees and inventories in the hope of recovery in the near future.Under the stress, companies start using crisis or pressure methods such as: temporary layoffs;firing deadwood from indirect personnel without a thorough analysis; cutbacks on preventivemaintenance; and slowdown of R&D These actions may have initial success; however, thegains from the programs are always short-lived and are accompanied by costly negativeeffects such as lower quality of products, reduced services, increased absenteeism, and lowerproductivity

The traditional accounting system may contain the total cost of each value-creating process,but may not reveal the causes or factors for the significant individual costs Using singleoutput or volume measures to assign costs is often misleading Causality is very difficult todetermine because unfavorable variance may have multiple causes With numberssummarized on an aggregate level, it becomes difficult to allocate individual responsibility forvariances

The traditional management accounting focuses on internal information It places excessive

emphasis on manufacturing costs It also assumes that cost reduction must be found in thevalue-added process, i.e selling price less the cost of raw materials It considers this process

as the only area in which a firm can influence costs There is misleading here since there arealso other purchased inputs such as engineering, maintenance, distribution, and service.According to this system’s principles, we have limited choices: raising the selling price, orreducing costs

The first option of increasing the price is really unfeasible today, especially it seems to beimpossible when the firm has no predominantly competitive advantage

The second option, i.e reductions in production costs, could be carried out as follows:

+ Reduce cost of raw materials: buying cheap materials at high volume while compromising

quality, raising inventories and thus raising costs for warehousing and handling In fact, manycompanies often “forward buy” to take advantages of lower prices As a result, shipments aretypically made in large volume, requiring minimal packaging and special handling, leading tohigher unnecessary costs for quality control and storage

+ Reduce cost of direct labor: lowering the wage will negatively affect employees’ morale

and productivity In the reality, downsizing and reorganizing the operation is usually thepreferable solution of companies

+ Reduce cost of overhead: the question for almost all enterprises is always how to start,

through layoffs, firing, or cutbacks on maintenance Overheads are not merely tools, trucks,and furniture as many people think There are a large number of overhead functions whichremain in the ‘back offices” and are not associated with any single department

Looking at items in financial reports, if we want to improve profitability by reducing costs,

we find it difficult to determine where to start with, and how, because each item consists ofmultiple activities Moreover, there are other non-value-creating activities that could havebeen eliminated, but they seem to be invisible and not presented in the report paper As aresult, these non-value-creating activities still exist and continue contributing to the burden ofcosts

The Value Chain Analysis, on the contrary, covers both external and internal data It usesappropriate cost drivers for all major value-creating processes It exploits linkages throughoutthe value chain and provides continuous monitoring

The Value Chain concept defines four areas for improvement:

- Linkages with suppliers:

Supplier development may be an example of this linkage A firm’s ability to produce a qualityproduct at a reasonable cost, and in a timely manner, is heavily influenced by supplier’scapabilities Consequently, without a competent supplier network, a firm’s ability to compete

on the market can be significantly hampered

- Linkages with customers:

The principle for success in the market is that doing business should not be one-time It wasadmitted that customer returns help save many costs of advertising and attracting newcustomers Therefore, customers should be cared for even after they have purchased and leftthe firm

- Process linkages with the value chain of a business unit:

Cooperation among sub-units in the production line as well as communication between themwith other departments, particularly those responsible for material purchasing, transportationand sales should be ensured to save costs of waste (time, materials and money), and costs forwarehousing and handling (when excessive inventories)

- Linkages across business unit value chains within the firm:

For instance, share in distribution with other business units Transport is a highly visible andexpensive part of distribution, especially for heavy industrial products Therefore, suchcooperation with (an) other business units may help all the parties benefit from reducedtransport costs

As mentioned earlier, the conventional management accounting approach tends to emphasizeacross-the-board cost reductions, whereas Value Chain Analysis recognizes inter-linkages andadmits the possibility that deliberately in increasing costs in one value activity can bring about

a reduction in the total cost For example, purchasing higher-quality, higher-priced rawmaterials could reduce scrap significantly and thus lower the total cost

3 Activity-Based Costing

The concept of Value Chain Analysis is normally studied in connection with an ABC system.The ABC system, while using multiple, not single, cost drivers, helps to identify causes toactivities By applying Pareto’s rules, companies are also able to identify non-added valueactivities

An ABC system, as contrast to the conventional accounting numbers, focuses on activitiesrequired to produce each product In an ABC system, costs are organized into two categories:

material costs and activity costs.

Material costs are non-payroll costs that are obviously related and conveniently traceable to a

specific product They have been traditionally treated as direct costs

Activity costs are the conversion costs involved in performing or supporting the activities that

take place within the organization, except for any non-payroll costs They include all laborand fringe benefit costs and manufacturing overhead

EXHIBIT 3 Value Chain Activities and Possible Cost Drivers

Types of activities Possible cost drivers

Structural activities:

Manage complexity of products: e.g reducing

Manage institutional structure: managing debt

Integrate vertically: going up- or down-stream

from the core business

Number of industry segments in which thecompany is present

Integrate horizontally: control market size,

market share, and range of geographic influence

Sales volume in units or dollars, number ofdifferent customers

Gain experience, learn, and manage skill sets Cumulative number of units sold,

cumulative number of individual sales

Procedural activities:

Provide quality: quality management training,

quality standards, employee empowerment

Employee training level, return merchandiserates, customer satisfaction ratings

Manage employees: Degree of centralization of

authority, size of work unit, number of work

units

Employee turnover rates, span of command

of production or service facilities

production, R&D cost compared tocompetitor

separate operations, flexibility of theproduction process

one product/service to another

Operational activities:

While the traditional accounting system just focuses on operational reports with items of costlike direct materials, direct labor, overhead, and so on, the Value Chain and ABC conceptsstudy all aspects of the chain, accompanied by possible cost drivers They are structuralactivities, procedural activities, and also operational activities (Refer to Exhibit 3).

In the ABC approach, an activity hierarchy is established It includes the following activities:

Process activities: these activities are classified into two levels The unit level includes direct

materials-related activities, varying proportionately with production and sales The other one

is batch level, e.g setting up a machine, which is performed for each batch produced butindependent of number of units in the batch

Process-support activities: they provide support to other major activities within the

organization, but do not relate directly to the organization’s products E.g.: equipmentmaintenance, production control, and scheduling

Organization and facility-support activities: these include general supervision, planning, and

security

Customer of market-related activities: they are sales administration’s tasks to deal with

customer inquiries, orders or customer order changes

Product or product line-related activities: e.g market research, process experimentation, and

technological application studies.)

Such a classification is aimed to avoid the situation that some important activities areoverlooked While covering the whole chain in a systematic manner, the ABC method alsohelps to identify interrelationships among activities and determine responsibility centers

4 Financial vs Non-financial measures

It is not always easy to obtain sufficient financial data on these activities With only financialnumbers, moreover, it is not reliable enough for a comprehensive evaluation of a business’soperation An ABC system, therefore, needs not only financial numbers but non-financialmeasures as well

Financial measures reflect the results of past decisions, not the actionable steps needed forsurviving in today’s competitive environment In fact, some companies make extensive use ofnon-financial measures to evaluate factory performance The reason is that if managementaccounting system measures only costs, employees tend to focus on costs exclusively

Non-financial performance measures, meanwhile, are recognized another key to strategicallyadapted cost management It was documented that each company, in its non-financial process,usually goes through the six major steps:

- A shock to its operating environment

- The old control system was found inadequate

- Defining key success factors

- Finding objective, quantifiable performance measures

- Evaluating the new control system

Normally, in many cases, the most important non-financial measures are:

- Reliability: e.g on-time delivery

- Responsiveness: e.g lead-time required to fill an order

- Quality: e.g outgoing quality rate, customer returns

Ferolows et al.(1986) presented a step-by-step generic guide that any manufacturing change

should follow:

- First, high quality must be ensured.

- Then, delivery reliability must be achieved.

- Then, production costs must be lowered.

- Then, production flexibility must increase.

Even more important are questions of whose responsibility these measures belong to and how

to deal with such commitments Improvement in competitive areas will certainly take a period

of time, rather than as a result of any quick fixed cost cutting solutions In somemanufacturing firms, cost reductions are done by firing or downsizing, while direct labor costaccounts for only a little proportion of production costs As a result, cost distortions happenwhile nothing has been really improved

5 What does WASTE mean in an organization?

It was recognized that there are seven common accepted wastes in organizations, including:

- Over production: excessive lead time and storage times, excessive work-in-progress

stocks

- Waiting: when goods are not moving, goods and workers are affected There should be no

waiting time with a consequent faster flow of goods Also, waiting time for workersshould be used for training, maintenance and should not result in overproduction

- Transportation: double handling and excessive movements are likely to cause damage and

deterioration

- Inappropriate processing: overly complex solutions instead of simple procedures, large

inflexible machines instead of small flexible ones, thus encouraging employees tooverproduce to recover the large investment in complex machines

- Unnecessary inventory: costs are likely to double for maintaining, storing, and handling

activities

- Unnecessary motion: involves the ergonomics of production where operators have to

stretch, bend and pick up when this could be avoided

- Defects: time, money, and labor are obviously wasted while the firm still incurs costs.

There are three types of operations that are undertaken, according to Yasuhiro Monden

(Monden, 1993) These can be categorized into value adding (NVA), necessary but

non-value adding (NNVA), and non-value adding (VA).

- NVA: they are pure waste and unnecessary actions which should be eliminatedcompletely For example: waiting time, stacking intermediate products, and doublehandling

- NNVA: these activities are wasteful, but may be necessary under the current operatingprocedures For example: walking along distances to pick up parts, unpacking deliveries,and transferring a tool from one hand to another

In order to eliminate these activities, it would be necessary to make major changes to theoperating system, such as creating a new layout or arranging for suppliers in deliveringunpacked goods

- VA: activities that involve the conversion or processing of raw materials or semi-finishedproducts through the use of manual labors They include sub-assembly of parts, andforging raw materials

6 Low cost vs Differentiation – Focus vs Diversification

The studied company is a manufacturer of cement, which is usually considered a commodityproduct Therefore, it may be useful for us to take a look at the two strategic choices: being

low cost through concentration, or differentiated through product diversification

Low-cost business units typically tend to have narrow product lines in order to minimizeinventory carry costs as well as to benefit from scale economies Low-cost production shouldnot be dependent on large volume Low-cost manufacturing through scale economies is seen a

narrow view Key attributes are flexibility, innovation, and delivery speed and reliability.

(Steven Brown, 1996)

The problem for a number of companies is that their strategy is to concentrate on high volumewith large market segments They neglect smaller but possibly profitable segments This isalso the case of our researched company, HPCC

Analysts suggest that a firm should focus, rather than be pulled in different directions.According to them, a company can be unfocused in two ways:

- Competing in markets without undertaking a manufacturing audit to see whether or notthe firm’s technology, skills, and resources match the targeted market

- Investing in activities which fall outside of the firm’s core competence, meaning activitiesthat the company might have no expertise

7 Post mass-production school of thought

We have here “post mass-production” school of thought as guidelines summarized forenterprises to consider:

- The need to reduce the administration hierarchy that supports the business (Kanter, 1989;Keuning and Opheij, 1994)

Lorsch, 1967)

(Womack and Jones, 1996)

- The development of the supply and value chain concepts (Porter, 1980)

- The increasing sophistication and demands of customers and consumers (Stalk and Hout,1990)

- The need to compete on the basis of “time” compression in addition to the other elements

of the customer “utility” equation (Stalk and Hout, 1990)

- The need to redefine and remove bureaucracy from the administrative procedures withinthe factory (Hammer and Champy, 1993) Functional organization should become a flatterand more responsive organizational structure

For cement manufacturing, though it is not exactly a mass-production industry in the today’sbusiness environment, the value of these schools of thought still remains These issues aregoing to be discussed in the next chapters, which are related to our case study – HPCC

8 Challenges of adopting the new concepts in reality

While highly recommending Value Chain Analysis and ABC system, we still have to admitthat there are inevitable limitations and difficulties in applying these concepts into practice

We should not admire them as if they are extremely ideal tools for all kinds of enterprises Incase of a one-product firm, for example, it may be argued that cost data would not besubstantially improved with an ABC system To this firm, ABC is quite complicated

However, there are still benefits from doing activity-based analysis since it helps to identifynon-value-added activities.

In the reality, some companies considered adopting ABC but finally rejected it, because itlooked a little complicated for their needs, while they had little control over what required bythe concept

In adopting the ABC approach, the formidable task is to collect sufficient information tospecify activities and assign costs to those activities ABC systems require more detailedinformation than traditional cost system In addition, Pareto’s rules, though quite useful inidentifying the most value-creating activities, also require an already effective design of anABC system

In effect, what many firms need is a performance indicator system that focuses externally on the business environment and its changing demands, on markets/customers and competitors, and internally on key non-financial indicators (such as market penetration, customer

satisfaction, quality, delivery, and flexibility) as well as more typical financial measures (salesgrowth, profit, return on investment, and cash flow) The system must be oriented toward information that can help managers make better decisions as contrasted to just reporting historical results

II THE CEMENT INDUSTRY

1 Definition and usage of cement:

Cement is a hydraulically active binder manufactured from natural raw materials such aslimestone and marl Other hydraulic materials, such as fly ash and slag, are inter-ground toproduce blended cements

As another definition, cement is a finely ground, manufactured mineral product that, whencombined with water, sand, gravel and other materials, forms concrete which is the mostwidely used construction material in the world Cement is the glue that holds together thesand and gravel to make concrete Over 90% of the cement consumed have no substitute forits use

of the final strength

The chemical composition of cement influences the characteristics of cement Specificationsfor cement contain different requirements of chemical and physical properties: alkalis, loss inignition, insoluble residue, fineness, soundness, autoclave expansion, compressive strength,and initial and final setting If these principles are well understood, it is possible to producedifferent types of cement to satisfy different using purposes of consumers For example,regarding resistance to sulfur attack and reaction with water leading to expansion, there may

be “non-shrink” cement which is used for floor slabs, chemical containment structures,packing desks, where shrinkage cracking must be minimized and durability maximized.

3 Characteristics of the industry

- Relationship with industries: The cement industry is closely connected with

construction-related industries Unlike many other goods, cement is not the final product but anintermediate input for the construction industry The cement industry is, therefore, considered

a material manufacturing industry

Such a close relationship with construction–related industries means that the cement industry

is significantly affected by the space of construction projects In another word, synchronouscooperation with industries having demand for construction is a vital mission for the cementproducers in order to solve their output issue

- Technology: Cement manufacturing requires modern technology Technologies for

producing cement are complicated, requiring huge initial capital investments in addition toinfrastructures needed for transportation, and expenditures on transport means

Technically, in producing cement, it is the kiln for clinker heating which determines theproduct quality and cost This necessitates an investment in improving and upgrading clinkerkilns Regarding technology, there are two methods of producing cement, i.e wet processingand dry processing The difference between the two methods is that the wet processingconsumes much more fuel and takes more time for heating than the dry method All processesrequire an intimate mixture of the raw materials because a part of the reactions in the kilnmust take place by diffusion in solid materials, and a uniform distribution of materials isessential to ensure a uniform product Except when the raw materials necessitates the use ofthe wet process, dry processing is used nowadays in order to minimize the energy required forburning Typically, the burning process represents 40 to 60% of the production cost, while theextraction of raw materials for the manufacture of cement represents only 10% of the totalcost of cement

- Invested capital: Cement manufacturing is characterized as a heavy industry with complex

production techniques It, therefore, requires a huge amount of investment capital (USD

150-300 million for each project; or USD 150 for each ton of cement produced) The payback time

is rather long, about 8-10 years after an average of 4-year construction

- Seasonal factor: The cement industry typically depends on seasonal factors, because it is a

product of the construction industry In the rainy season, limited demand for constructionleads to lower consumption capacity of cement and, thus, stagnation of the product As aresult, during this period of time the capital turnover is slowed down while warehousing andhandling expenses increase On the contrary, construction is rather comfortable in the dryseason, facilitating higher cement consumption This information implies the need for carefulinvestment plans in addition to plans for production, particularly when an investment isdivided into different stages

- Product handling: Moreover, there is another feature of cement involving the business

effectiveness Cement handling is rather costly in terms of money and people For powdercement, the handling is carried out simply just by putting cement into silos Building thesesilos, however, requires lots of money For packaged cement, the requirement is only for drywarehouses, but packages must be moved around every 15 days to avoid solidity Otherwise,cement becomes useless

- Material source: Materials for producing cement have no substitute: limestone and clay are

strictly required for creating cement Therefore, the manufacturing must be connected tomaterial areas such as limestone quarry, coal mines, and electricity supply plants so as tomake use of available resources If the manufacturing is performed far from the material

source, transportation will be certainly complicated and costly, affecting lead time, productioncosts and then, the price.

4 Process of cement production

The followings are major steps in producing cement (See Exhibit 4):

EXHIBIT 4 – Cement production process flow

[1] Raw materials are exploited from the quarry The most common material used for cement

is limestone because it is rich in calcium It is blasted from its rockbed and then crushed toform smaller pieces Other materials include clay, chalk (for wet processing); and shale (fordry processing)

[2] Stone from the crusher is then pre-homogenized by blending it with other materials (sand,mill scale) to achieve the right quantities of calcium, silica, aluminum and iron

[3] The crushed limestone and other additives are ground further in the raw feed mill beforebeing cooked in the kiln

[4] The feed is then homogenized through a separator that strains particles that are too coarsefor the kiln Fine materials pass through the separator while coarse materials are returned tothe mill for further grinding

[5] Some cement plants have a preheating tower that preheats or precalcines the feed beforegoing into the kiln which increases production and reduces heat consumption of the kiln.[6] The feed then goes into the kiln where it is heated At this stage, clinker compounds form,which are later cooled and ground into a fine cement powder in the cement mill

[7] Some cements receive additives such as fly ash, gypsum or silica fume depending on theproperties desired from the final product If the final product is concrete, the cement then isshipped out and, eventually, mixed with water and aggregates to form ready-mixed concrete.[8] If the final product is purely cement, not concrete, the powder is then moved to cementsilos that, in turn, transfer it to packing plants or for bulk transport

5 Types of cement:

There are a variety of cement categories, of which characteristics depend on each particularproject regarding the weather, environment, and location It is recognized that cementcategories are distinguished based on differences in additive ingredients The below areseveral popular types of cement:

+ Puzerland Cement: mixed with additional 20-40% of puzerli additive It is used forhydraulic projects

Quarry Raw materials

crushing

Pre-homogenization (Blending)

Homogenization

additives

Finished product

Raw feed mill

Raw feed mill

Raw feed mill

Raw feed mill

Raw Feed Mill

Mill

+ Plastic Cement: Added by chemically plastic, making it better in anti-absorption It is used

in projects for building roads and airports, and in hydraulics

+ Water-counteraction Cement: added by water-counteraction additives It can be stored in alittle bit longer time in condition of wet air

+ Early-strength Cement: added by 10% of mineral and 15% of slag additives; used instructures that require quick strength of concrete to ensure the planned pace of construction.+ White Cement: white color, processed from special materials containing little coloredoxides, used for decoration works

+ Swelling Cement: added by swelling additive, used for hydraulic construction applications.The above information is expected to provide us basic understandings about the strategic role

of this industry in the national economy, requirements in the manufacturing of cement, andpossibilities for cement producers to gain profits

CHAPTER III HPCC - COMPANY PROFILE

Hai Phong Cement Company (HPCC), the cradle of Vietnam cement industry, was earlyfounded in 1899 Over 100 years of its growth and development, HPCC with two famoustrademarks of Red Dragon and Blue Dragon made its presence in Liege Exhibition Fair,France in 1904; and several thousands tons of Hai Phong cement were consumed in themarket of Far Eastern countries, China, and Singapore

During the war against America, when the whole country was separated, HPCC was the onlyproducer of cement in Vietnam, dominating the domestic cement market Then, Vietnamcement industry also took over Ha Tien, Bim Son, and Hoang Thach factories

HPCC, together with these cement producers, became members of the Union of VietnamCement Enterprises in 1979, which was then turned into Vietnam National CementCorporation (VNCC) in 1994

The current company’s address is No 4 – Hanoi Road – Hong Bang – Hai Phong City Itsituates along the Cam River

At the time of its establishment, this area was still the suburb with low density of population.Today, the city is being expanded Thus, the operation of such a big manufacturing plantinside the city has caused significant air pollution, affecting the living condition of thesurrounding residence

II THE VIETNAM CEMENT INDUSTRY – COMPETITION AND

CONSUMPTION

Prior to 1995, the Vietnam cement industry had only two kinds of cement manufacturingmodels, The first one were high-volume-rotary kilns (HPCC, Hoang Thach, Ha Tien I) whichaffiliated to VNCC The second one included 30 vertical-kiln factories in local provinces.During this period of time VNCC played a primary role, dominating the whole market forhigh-quality cement That was due to relative disadvantages of the vertical kilns in terms ofboth quality and quantity

Since 1995, new joint ventures were founded and then came into operation, makingremarkable changes on the domestic cement market

There are now more or less than 10 cement manufacturers, both State-owned and jointventures, operating in Vietnam, including:

In the North : Hoang Thach, HPCC, Chinfon (JV with a Taiwanese enterprise)

In the Middle : Bim Son, Hai Van, Nghi Son (JV with Japan), But Son, Van Xa

In the South : Ha Tien I, Ha Tien II, Sao Mai, Hoang Mai (JV with Switzerland)

Among those joint ventures, Chinfon, Sao Mai, and Van Xa all operate on high scales Thus,the cement market has become increasingly competitive with the emergence of those who arereally advantageous of both capital and technology VNCC, Chinfon, and Sao Mai have theirown distribution network The competition has been primarily based on the selling price, withdiscounts and free-of-charge transports as the main tools

The competition now becomes much stronger since the regional monetary crisis took place in

1997, which resulted in lower demand for cement than estimated The industry’s productioncapacity is now beginning to exceed the consumers’ demand Moreover, it is also placed

under pressure of imported cement which is even cheaper than the domestic factories’production costs The competition between VNCC with these joint ventures will surely bestronger, since for the time being the number of new factories will increase while not manycement producers are closed or shifted to another field due to very high switching costs.

At the moment, about 55% market share belongs to VNCC, while joint ventures occupy 25%, and small vertical-kiln cement producers in local provinces presents the rest Thetechnology used in these small factories was bought from China in 1980s, and the pricecharged is usually lower in order to serve the local customers

20-It is estimated that the demand for cement will be 23 million tons in 2010 (currently, theindustry’s production capacity is approximately 12 million tons) Therefore, in-depthinvestments in technology and people are crucial requirements to the Vietnam cementindustry It should be well prepared and more active in serving the market for the years tocome

Thus, there is no exception for HPCC in such a highly competitive situation Obviously,HPCC is now facing a lot of challenges and difficulties

III BRIEF OF HPCC’S OPERATION

1 Material Resources

Major materials (limestone and clay) are exploited by the company itself at Trang Kenhquarry, which is 20 kilometers from the current manufacturing plant

2 Machine – Equipment – Technology:

Most of HPCC’s machinery and equipment have been bought and used for decades They arenow too obsolescent and nearly 100% depreciated after some big repairing and maintenanceworks This has hindered the company’s capability to increase and improve its productioncapacity and product’s quality The cement at HPCC is produced in wet process Within theindustry as a whole, only HPCC and Bim Son are using wet processing method in production,while the others produce in dry process Wet processing consumes much more fuel and takesmore time for heating clinker, leading to higher cost

The production line being operated at HPCC is semi-automated Manual workers (about 800people) account for one forth of the company’s labor force Since it has a plan of moving thecurrent factory to the new plant in Trang Kenh, there have not been any investments in newequipment, except for big repairing works on the currently obsolescent machines

3 Human Resource:

The number of HPCC’s total employees is approximately 3200 people, including one largecompany with 3 affiliated units, i.e Trang Kenh Stone Exploiting Enterprise, Transportationand Repairing Enterprise, and Cement Package Manufacturing Enterprise

More than 3000 employees is actually a great number in comparison with other cementproducers in the industry Of these 3200 employees, female represents one third Thisproportion is not reasonable, and it needs to be adjusted since the women have had toundertake very hard work with threats of pollution

Wages are paid based on amount of outputs made, i.e the volume of limestone, or mud, orclinker exploited and produced At first, VNCC issues the basic level of wage for each unit ofproduct (ton) Then, at the corporate level the company sets up wages according to specificmanufacturing process, basing on:

- The general unit wage level issued by VNCC

- Qualification and managerial title/position of the employee in the company

4 HPCC’s product range

Currently, the company produces and consumes over 350,000 tons of cement per year,including sorts of PC30, PC40, sulfur long-lasting Portland cement and white cement labeledBlue Dragon It also undertakes transporting raw materials used for cement and othereconomic sectors and repairing engines In addition, the company also produces cementpackage with output reaching 25 million pieces per year

5 Manufacturing process

The manufacturing process of cement consists of a variety of activities, of which 4 majorprocesses are:

- Fuel (coal) grinding

These processes can be briefly described as follows:

Firstly, at the material crushing unit, materials are exploited or purchased and then transported

to the manufacturing plant Here, limestone, together with clay and slag, is blended into amixture, which is then put into the crushing mill for creating pate mud Through a pipeline,the mud is transferred to the kiln

Secondly, at the fuel-grinding unit, coal, after being grinned, is also transferred to the kiln

through a throwing pipeline

Thirdly, at the kiln, the mud created is heated by the coal, and clinker is the product of this

step

Fourthly, at the cement grinding unit, the heated- and gloomy-already clinker (for about 5 or 6

days) becomes powder At this point, small portion of gypsum is added to the clinker thusgenerating cement

IV THE NEW PLANT PROJECT

The current plant, which is located inside the city, has caused a huge amount of dusteveryday, making the air significantly polluted It was, therefore, decided by the Government

to move the factory to Trang Kenh – Thuy Nguyen – Hai Phong, which is 20 kilometers farfrom the current plant in the North The capital needed for the project is approximately 300million US dollars

It is expected that the construction of the project will be accomplished and the new factory,put into operation, by 2002 What consideration really needed now is what must be changed,and how to change them, in terms of not only the labor force but management approach,business strategy, and value chain reconfiguration as well

CHAPTER IV AN ANALYSIS ON THE COMPANY’S CURRENT

- Additional materials (sub-materials) include:

+ Balls and bullets, which are bought from domestic construction engineering enterprises

in Hai Duong, Vinh Phu – Northern provinces of Vietnam

+ Refractory bricks: bought from Cau Duong Brick Factory

+ Substitute tools and components: from construction engineering enterprises

+ Lubricants: bought from Petroleum Corporation

- Fuel: coal dust is purchased from Vietnam General Coal Corporation, Quang Ninhprovince

The advantage of HPCC with regard to these material sources is its long-standing relationshipwith suppliers, meaning stable supply capability

However, there are also many disadvantages The first problem has arisen in transportingmaterials, especially limestone, from the quarry in Trang Kenh, which is 20 kilometers farfrom the manufacturing plant Costs incurred include not only transportation cost but also cost

of time, damage and losses during the transporting period

Moreover, the price HPCC had to pay to its suppliers has continued to rise since 1996,strongly affecting its expenditure plans This is also a problem facing other domestic cementproducers Now we take a look at increases in the inputs’ prices:

Transportation (Costs)Selling expensesPromotion programCustomer segmentationProduct portfolioLinkage with customers/consumers

TABLE 1 – Increases in Material Inputs Price and Their Influence on Costs

$2.5 million per year

For a clearer view of the supply situation at HPCC, we are now looking at some other cementproducers to see how they operate as compared to HPCC

Nghi Son is a joint venture between VNCC and a Japanese Cement Producer One of its

advantages is its comfortable location The plant situates near a limestone pit with potentiallygreat exploitable volume Hoang Thach Cement Company also enjoys the similar advantage

of a favorable location

La Hien, a small cement manufacturer, is located in Vo Nhai province (Thai Nguyen) where

there is a clinker pit with high quality and quantity Moreover, La Hien imported uniformequipment and machine, including the vertical kiln from China, thus able to reduce expensesfor repairing work

Talking about HPCC and its relationship with its suppliers, we recognize that it lacks anintegration of the suppliers into a network This, in addition to the disadvantage of being farfrom the suppliers, is one reason for the company’s high material inventory The followingpresents the proportion of material inventory in the total current assets (in value):

TABLE 2 - Proportion of Material Inventory to Current Assets

Although the number seemed to decrease over the last three years, it still occupies more thanone half of the current assets This indicates inefficiency in integrating the company’snetwork, resulting in higher costs for warehousing and handling which should have beenspent for other profitable investments (Refer to Exhibit 7.A for more details)

TABLE 3 – Comparisons of Productivity and Capacity

(Source: Vietnam National Cement Corporation - 1999)

The main force behind the low capacity of HPCC is its quite obsolescent technologycompared to the others that are invested with advanced machines and equipment The lack ofeffectiveness and efficiency is, moreover, due to the cumbersome and inflexibleorganizational structure, a consequence of the old management mechanism

Regarding cost management, it is true that HPCC, like most State-owned enterprises, has beenrelying on the traditional accounting system for years In its plans and reports, strategic issues

on the value chain, for example, are not paid enough attention Only numbers are mentioned,and what they reveal are only the result, making it very difficult for management to determinethe root causes and take actions for remedy

Production costs are controlled and divided into 3 main items: Direct materials, direct labor,and manufacturing overhead Then corporate overhead and selling expenses are added fordetermining the price (Refer to Table 4)

TABLE 4 - Components of Product Cost

Now we examine each item in the production costs.

Direct materials ($32) include:

- Explosion materials and additives cost of $1

- Major materials: $13, of which materials for producing cement package accounts fornearly 50% ($6) Gypsum and balls account equally for 15% ($2 per ton for each type)

- Power and fuel: coal occupies more than one half of the expenses for fuel ($10), whileelectricity costs $7 per ton, accounting for about 40%

One thing should be mentioned here is that the cement package, if produced by the companyitself, costs $28 for every 100 pieces Otherwise, the price is only $24 if the packages arebought from specialized package producers HPCC, in order to make use of its idle laborforce, accepts higher cost to produce the package instead of buying from outside Moreover,the Cement Package Unit was just started in August 1999 Therefore, the company’s policy ofsuch a vertical integration was still approved, and it is expected that the unit’s efficiency will

be improved as experiences are accumulated and technology, renovated

Direct labor ($7)

Of the 3200 employees at HPCC, 440 people are managerial staff Together with 800 manualworkers, this indicates a complicated and inflexible organization This has obviously been aweakness of HPCC in the increasingly competitive environment

The production line of cement consists of many sub-processes Therefore, wages are paid bythe piece for each specific product of each process The wage level is determined based on:

- The unit wage decided by the General Cement Corporation (VNCC)

- Labor consuming standard applied for each particular job

- Qualification and managerial title

Manufacturing Overhead ($6/ton):

In this cost item, typically, expenses for great repairings and maintenance account for 40%,due to the company’s obsolescent and outdated machines and equipment Here is the structure

of the manufacturing overhead at HPCC:

- Big repairings and maintenance : 40%

We are now going to examine a basic cost structure which is broken into major activities

(Table 5)

TABLE 5 - Cost Structure of Major Activities

Major Activities Cost (USD/ton of

The high costs of storing and handling the product indicate ineffectiveness in organizing.Obviously, this area of the value chain has not received adequate attention from themanagement

Meanwhile, marketing activities have been undervalued They account for only 6% of thetotal costs Marketing should have been appropriately invested particularly when the businessenvironment has become strongly competitive

One more notable thing that should be emphasized here is the company’s inventory situation.(Refer to Table 6)

TABLE 6 - Proportion of Inventories to Current Assets’ Value

(Source: HPCC report – 1999)