Vietnam’s jewelry manufacturing industry the problem of cost management and profit margin in sakura ltd company

Vietnam’s Jewelry manufacturing industry: the problem of cost management and profit margin in Sakura Ltd.. UNIVERSITY OF ECONOMICS HO CHI MINH CITY INTERNATIONAL SCHOOL OF BUSINESS ISB V

Vietnam’s Jewelry manufacturing industry: the problem of cost management

and profit margin in Sakura Ltd Company

Instructor: Dr Pham Phu Quoc Student: Nguyen Dong Hai MBA Class 5.2

February 06, 2017

UNIVERSITY OF ECONOMICS HO CHI MINH CITY INTERNATIONAL SCHOOL OF BUSINESS (ISB)

Vietnam’s Jewelry manufacturing industry: the problem of cost management

and profit margin in Sakura Ltd Company

Instructor: Dr Pham Phu Quoc Student: Nguyen Dong Hai MBA Class 5.2

February 06, 2017

TABLE OF CONTENT

Introduction 1

Industrial overview and Company background 3

Industrial overview 3

Company background 5

Problem Definition 6

Problems finding process 6

Company’s Symptoms 7

Problem identification 11

Industry and competitors condition 15

Possible reasons of problem 16

Design Solutions and Suggestion 22

Actions Planning 28

Supporting Information 1 Sakura Income Statement of 2013-2014-2015 30

2 PNJ Income Statement 2013-2014-2015 33

3 Data collected from competitors (unofficial) 39

4 a Comparison between Selling Price, Cost of Production and Required Price of some Ring models 40

4 b Comparison between Selling Price, Cost of Production and Required Price of some Earing models 41

4. c Comparison between Selling Price, Cost of Production and Required Price of some Bracelet models 42

4 d Comparison between Selling Price, Cost of Production and Required Price of some

Pendant models 43

5 Interview Framework 44

6 Transcript and Result of interview 46

7 Data collected from 276 products of Sakura Jewelry 48

8 Company Working Card and Suggesting Costing Card 54

9 Collected Precious stone price during May 2016 to December 2016 .57

References

EXECUTIVE INFORMATION

The jewelry division of Sakura Plastic Company specialized in mass manufacturing

high quality golden jewelry based on the combination of high technology machines, saving

material cost by reusing waste material of plastic production Furthermore, the raising

demand of high quality jewelry products since 2013 in Vietnam also flavors the

establishment of this jewelry division The symbol for the success of this division is the

continuously increase in revenue and the product of Sakura Jewelry are highly praised by

many of its customers Ironically, it is turned out that the division suffered permanent loss

since the very first day of business

The problem of this division was revealed as its profit margin usually negative during its lifetime due to the ineffective cost management The reasons are dropped down into three majors: not all cost and expenses were realized and allocated to the responsible department,

in this case the jewelry division; the selling price of each product does not reflecting its cost, that lead to many product were sold at price lower than their actual costs; and finally, the

lacking of time and quality information for the decision making process due to the

incompetent accounting department These problems must be solved quickly as it is indeed

threatening the survival of this division

The first solution is restructuring the company accounting department with more

dedicated accountants Their mission is collecting and accounting (especially allocating) all

the cost, expenses and revenue in the real-time basis and providing all required information

for decision making In the meantime, investing in good Enterprise Resources Planning

(ERP) program is another wise move to simplify the accounting process and uniting all the

company activities with the less effort. Base on the result of the previous steps, the

management team will have all required information for decision making, especially pricing

strategy

This thesis also studies a sample of 276 product models in order to create a method

for quickly estimating cost of production and its price before actual production The method

is based on the famous model: Sell price = Total estimated cost + required profit margin with the allocation of general cost base on the required time of production for each products It

could help the management team realized at least 80% to 90% of the real cost of each product

in order to pursue their pricing and other business strategy Company experts could improve

this by implementing more advance methods like Activities Base Cost (ABC) or Balance

Scorecards.

Introduction

The jewelry manufacturing industry in Vietnam is still considered as “a mystery”,

which the full scale and potential of this industry is only based on from the assumption or

estimation of experts and authorities rather than reliable statistical data The main power of

the market is called “chành”, the middleman who buys jewelry from small manufacturers and resells to other retailers Despite the rapid development of technology, many of Vietnam

jewelry manufacturers are still heavily relied on the manual process and labor intensives In

fact, most of these manufacturers are family based company that heavily related to the major

“chành” of each region However, there are still a few company that strive their best to

implementing high technology to this industry, which the most well-know is Phu Nhuan

Jewelry Company (PNJ)

Sakura Plastic Limited Company (Sakura Ltd ) is a Vietnamese company that

specialized in providing processing services and quality plastic products for high technology companies Realizing the potential contribution of high accuracy plastic to jewelry

production, in 2013, the company has established its Jewelry Division which focuses on mass producing by machines rather than labor intensive as many traditional Vietnamese jewelry

manufacturers The combination of high technology, skillful employees and favorable market condition seems to be a guaranteed success for this division However, it is turned out that the actual production of this division did not meet the expectation The thesis will help this

division by finding the true problem, its possible reason and suggesting solution to boost the

division as it was supported to be

Industry overview and Company background Industry overview

The demand for gold in Vietnam expanded by 31% year-on-years in Q4/2015 (to 3 9

tones), yielding a 25% increase in annual demand (to 15 6 tones) and continue to grow (1)

This is thanked to the steep drop in Vietnam gold price in 2015, combined with lower

inflation and stronger economic growth, improved affordability among the gold-consuming

population, especially in jewelry form * At the moment, there are still not any formal

statistics data of this industry from any authorized agency or the government so the most

reliable is from this World Gold Council

Since 2012, due to the restriction of Vietnamese government, the consumption of gold

has shifted from gold bar and gold plate into jewelry forms (such as ring, bracelet, medal,

small lucky statues…) Collected data from the World Gold Council also revealed that the

demand of gold-jewelry of Vietnam has rapidly risen to 4 7 tones in Q1/2016; take the

second places in Southeast Asia region

Table 1: The gold-jewelry demand of some countries – The World Gold Council Q1 2016 report

Table 1 show that in 2015, Vietnam had become one of the most attractive markets for

golden jewelry products with the consumption of 15.6 tones of gold. This number is greater

than some other traditional markets for jewelry such as Sri Lanka, Malaysia and Thailand

Moreover, in the first Quarter of 2016, the demand continued to increase while other Asia

courtiers were in opposite trend And it is believed that the demand for of Vietnam market

will be continued to expand during 2016

The industry is currently dominant by countless local retail stores and small

manufacturers that operating on family base In fact, this industry also have big players such

as Phu Nhuan Jewelry Joint Stock Company, Doji Jewelry Company or Bao Tin Minh Chau

but the number still just a few As Mr Huynh Trung Khanh, representative of the World

Gold Council in Vietnam, the industry still promising for all company that could quickly

catch up to the raising demand of high quality jewelry

Company Background

Sakura Limited Company is a Vietnamese company that specialized in plastic injection molding services In 2013, the Jewelry division was established in order to seize the

opportunity of the raising demand for jewelry product of Vietnam At this moment, the

division have 102 employees with the ability to provide around 1,700-1,900 tael of gold per

month This is very impressive as the normal company with similar size could produce 1,500 taels per month but the quality could not be compare to Sakura Jewelry

1,300-The tael is the traditional trading unit in Vietnam jewelry market; this is an unfair

system that exists only to create advantage to the middle man One tael equal 37 5 gram of

gold Normally, company price their product based on each individual product like ring,

earrings… but the “chành” also count for how much per tael They do not pay much

attention to the price when they put in order, unless some products have significant higher

price. When the final products were delivered, they recalculated the average price in tael

unit Such as the total package has 100 products with total of VND 60 million and equal 47 5 taels; its average price per tael is VND 1,265,823/taels If the average price per tael seems to

be higher, they desperately negotiate or even return the products This in unofficial but the

collected data show that the average price for highest quality is around VND 1 5-2 million,

and the lowest is around VND 0 8 million per tael, but it is based on the sole decision of

them Finally, they also required tax invoice with the detail of price/tael, not the

price/products The double pricing standard was used only to make confusion and create

better profit of “chành” so they never want to change – This part is the summarize

conclusion of many small manufacturers This is unofficial but during the intake time with

Sakura Jewelry division, I could see this huge effect to this company pricing strategy

From the beginning, there should be question about the reason for a plastic company

investing in jewelry manufacturing In fact, thanked to the specialty of Sakura in plastic, it

helps speed up the manufacturing process of jewelry from 3D modeling-3D printing-

Prototype-Waxing-Plastic molding to casting process In fact, with more precise plastic

molds technology, it allows Sakura reach to higher level of detail and complicated model

Furthermore, unlike others traditional companies, after-casting-product of Sakura required

less manual work, it means less waste of gold and higher production rate

Despite of the success of this company on producing, the financial report tells another

story Company profit still not improves even though 2014 and 2015 seem to be very

successful year for both two main divisions After carefully study the company year-end

report, the co-owner and CFO of this company, Mr Nguyen Thanh Nhan, found that the

reason lie on the Jewelry Division. Unlike the rapidly increase of its revenue, this division

seem still not be able to effectively manage its cost, that heavily affect their ability to

generate profit The thesis will be aim to identify the problems of this division, the

cause-effect relationship and provide some possible solution and suggestion for the start-up

Division

Problem definition Problems finding process

In order to identify these company problems, these following steps will be executed:

- Group meeting with the company to understand the symptoms and possible

problems

- Review the literature related to the symptoms and further study of the company

financial, accounting data and the industry

- Interview all persons in charged for more details: Mr Tran Van Ngoc, director of

the Jewelry Division; Ms Pham Thi Thuy Ngan, chief accountant of Sakura

Company; Mr Nguyen Thanh Nhan, CFO; Mr Nguyen Thanh Danh, CEO More

in-depth on-the-field interview with other related employees also be executed to

fully understand the problem

- Additional intelligent information acquired from customers, competitors for further reference

Company’s Symptoms

After the first meeting with all the responsible members, the symptoms of this division had revealed as following:

- The division’s revenue has rapidly increased from the beginning; however its cost

and expenses also increased in greater pace.

- Lacking of time and quality information for decision making process, this make the company sometime sell product at the price lower than its cost

- The production of Jewelry division did not in synchronization with the accounting

The success of this division is thanked to the ability of catching the raising demand of

Vietnam, according to the claim of Mr Tran Van Ngoc, the director As previous stated on

the industry overview, the traditional love of Vietnamese for gold combined with restriction

of government on gold plate and gold bar helped significantly boost the demand of golden

jewelry In mid of 2013, the Jewelry Division began its operation and quickly introduced its

very first product to the market The positive feedback of the market is encouraged the

development of this division The co-owner and CEO of this company, Mr Nguyen Thanh

Danh, also claimed that the fast growing of this division is amazed by many competitors as

normal new company hardly have any revenue in their first year

For the whole company, operating revenue had rapidly increased from VND 25 35

billion in 2013 to VND 48 19 billion in 2014 and VND 97 09 billion in 2015, equivalent

90 14% and 101 46% - quite high when compare to the average rate of 10 6% the processing and manufacturing industry in these year as published by the General Statistics Office of

Vietnam However, the company saw their cost and expenses have significantly increased

from VND 21 47 billion of cost of goods sold (COGS) and VND 2 9 billion selling general

and administrative expenses in 2013 to VND 40 61 billion and VND 6 62 billion

respectively This lead to the result of operating profit drops 79 59% from VND 0 67 billion

in 2013 to VND 0 14 billion in 2014 In 2015, the situation still not improvement with the

cost of good sold raised to VND 89.13 billion and other cost and expenses rocketed to VND

10 49 billion, reducing the EBIT to only VND 0 263 billion Details could be found on table

2 below.

Items 2013 (billion VND) 2014 (billion VND) Changes (2013-2014) 2015 (billion VND) Changes (2014-2015)

Revenue from sale of

goods and services

7 58

(2 17) 95 79% 279 58%

10 75

(3 31) 41 81% 52 32% Financial Income

0 14

(4 15) -79 59% 129 99%

0 26

(3.82) 92.16% -8.00% Other Income

For the jewelry division, its revenue has quickly raise from VND 5 07 billion in 2013 to VND 17 35 billion in 2014, making it the greatest increasing rate at 242 27% However, in

2015, its revenue could not maintain this amazing rate and only up 31 13% In the mean time, the cost of goods sold has dramatically increased from VND 5 64 billion in 2013 to VND

19 52 billion in 2014 This trend continued in 2015 with the cost of good sold raised to VND

26 06 billion And other expenses from selling, administrating, etc … also rise from VND

1 23 billion in 2013 to VND 1 97 billion

Moreover, the most serious symptom is that the profit margin of this division is on

downward trend, from -11 2% from 2013 to -12 5% in 2014 and -12 7% in 2015

Furthermore, Ms Ngan, the chief accountant, also pointed that the Director of Jewelry

division do not cooperated with accounting department and the division operating on its own

or, by her words “without any financial senses”

During the time of meeting, all the responsible members were unable to provide detail

financial information related to activities of this division Each pieces of financial

information from the management team usually too out-of-date or too general for decision

making process The chief accountant revealed that all these information come from a

services company Indeed, the duty of account department of this company is only collecting and providing the entire accounting document to the services company If the management

team needs any information, they must ask and wait for this company It takes time and

money for them to extract data from the company database and no one could be sure that this information is either correct or useful

As the matter of fact, the management team told that they use the last year information

on their financial report with some estimation. The idea is that with the estimation of cost and

expenses, they know their cost so that they will have the require revenue As long as each

month revenue is higher than its cost, the division should be having enjoyable profit

However, this estimation differs from one to another of the management team, as the

Director, Mr Ngoc estimated around VND 1 4 billion/month, Mr Nhan guested it around

1 4-1 6 billion/month, Mr Danh calculated it should be no more than VND 1 5 billion/month while Ms Ngan, the Chief accountant gave no estimation In fact, the number after we

manually separate are VND 1 79 billion/month for 2014 and VND 2 21 billion/month for

2015 This surprise all the members as it not just higher than their expectation but the most

important is the revenue seem could not be able to cover such cost

Problem identification

Despite of the rapid increase of its revenue since the start of business, the division faces the symptom of reducing profit from 2013- as Mr Nhan pointed out The EBIT (earnings

before interest and taxes) show the downward trend that signal the problem in the way this

company expanding business, especially the Jewelry Division

In fact, due to the financial report of this company was prepared by another accounting services company so that it not clearly separating between plastic and jewelry division

During the time of meeting, Mr Nhan and Ms Ngan agreed to manually separate the data

between plastic and jewelry And the result showed that the doubt of Mr Nhan is reasonable

as the jewelry division is operating in loss In 2013, the Jewelry division contributed 20% of

the company’s revenue, accounted for 28 19% of cost and expenses and created the loss of

VND 1.8 billion. In 2014, with 36% of total revenue and 45.5% of total cost and expenses of the whole company, the Division is accounted for a loss of VND 4.15 billion. The number of

2015 still not shows any brighter sign with jewelry division contributed 23 43% total

revenue, taken 30 19% of the whole costs and accounted for VND 3 82 billion losses Further detail could be found on Supporting Information 1, the collected data from financial report of the company

Moreover, the gross profit margin of the division in 2013 is -11 2%, -12 5% for 2014

and in 2015, it continue to lower to -12 7% As gross profit margin is the quick indicator of

the ability of generate profit from the company main activity (2), it should be a positive

number or at least show the positive improvement trend The negative ratio of the Jewelry

Division and the down trend signals that there is a problem in the basic activity of the

division that the division’s revenue could not cover its operation If this situation continues,

the survival of the Jewelry division indeed is threatened

Weygandt et al (3) stated that for both manufacturing and service providing company,

they must keep track of the cost of its product, service in order to know whether its

generating profit The general formula for calculating profit of a company could be view as:

Net Profit = Total Revenues – Total Cost and Expenses – Taxes Further study of 4,657

companies in emerging market, Li et al (2) suggested Small and Medium enterprise should

use return on sale and profit margin as the key to quickly and timely measure profit For the

market that limited of competitors data, gross profit margin is referred as the quick and useful way to meaningfully compare the company to competitors, to average industry and to its past performance The formula of this ratio is

(Sale Revenue – Cost of Goods Sold)

Gross Profit Margin =

Sale revenue.

Surprisingly, the one who in charged of this division, Mr Ngoc was not impressed by

the finding He claimed that this is not a problem for jewelry division because it is normal for new start-up company and the market is not in favor for the division during such time He

also stated that “The market is not good in such time and not only Sakura suffered” and “the

finding is for the whole year but we should look closer to each month to see the improvement

of this division”

In order to pursue the broad of this company, detail information of Jewelry division

activities based on each month since the very first business day was extracted and presented

in the following table.

Table 3: Monthly financial information of Jewelry Division from 2013 to 2015

Revenue ( in

Million Dong) 1,793.63 1,324.45 1,465.19 1,802.39 1,946.05 1,614.79 2,002.99 2,121.63 1,943.83 2,086.09 2,290.33 2,358.49 22,749.87 Total Quantity sale

(In Tael) 1,371.67 1,068.55 1,155.02 1,453.80 1,354.91 1,354.26 1,499.28 1,566.85 1,698.67 1,697.85 1,760.85 1,828.47 17,810.18 Average

Price/Tael 1.31 1.24 1.27 1.24 1.44 1.19 1.34 1.35 1.14 1.23 1.30 1.29 1.28 Cost and Expenses

(in Million Dong) 2,080.88 1,746.83 1,828.63 2,083.76 1,682.01 1,941.77 2,176.16 2,162.71 2,436.25 2,523.06 2,489.10 2,909.42 26,060.56 Gross Profit

margin -13.80% -24.18% -19.87% -13.50% 15.70% -16.84% -7.96% -1.90% -20.21% -17.32% -7.99% -18.94% -12.70% Revenue ( in

Million Dong) 1,176.29 1,122.05 1,104.95 1,293.13 1,092.32 1,241.25 1,559.62 1,429.75 1,662.05 1,757.52 1,864.89 2,045.70 17,349.52 Total Quantity sale

(In Tael) 991.41 970.22 1,010.64 1,052.75 1,032.31 1,026.62 1,189.91 1,211.49 1,261.13 1,344.93 1,473.97 1,644.34 14,209.70 Average

Price/Tael 1.19 1.16 1.09 1.23 1.06 1.21 1.31 1.18 1.32 1.31 1.27 1.24 1.22 Cost and Expenses

(in Million Dong) 1,409.04 1,458.45 1,369.90 1,561.03 1,260.06 1,454.65 1,630.25 1,620.17 1,825.09 1,890.12 1,864.68 2,179.56 19,523.00 Gross Profit

margin -19.79% -29.98% -23.98% -20.72% -15.36% -17.19% -4.53% -13.32% -9.81% -7.54% 0.01% -6.54% -12.53% Revenue ( in

Million Dong) 43.20 215.92 332.46 587.05 671.88 557.05 1,237.88 1,423.56 5,069.00 Total Quantity sale

(In Tael) 42.21 206.70 294.08 477.92 634.97 660.73 994.44 1,178.24 4,499.29 Average

Price/Tael 1.02 1.04 1.13 1.23 1.06 0.84 1.24 1.21 1.13 Cost and Expenses

(in Million Dong) 54.81 281.20 431.08 511.99 693.31 851.86 1,212.10 1,605.24 5,641.60 Gross Profit

2014

2013

2015

The table showed that there is not any reliable signal or symptom that could support to

the claim of the director that “the division profit is improving” Despite a few months

reducing, the division’s revenue show the trend of continuously increase since 2013 It also

proved that the claim of low market condition is questionable Technically, the table revealed that the loss of this division maybe due to the cost of production and operation increase more than the increase of revenue But to pursue the management team about this problem, further investigation on the competitor, market will be executed

Industry and competitors condition

Unlike Sakura, competitors still enjoy desirable profit rate during this period of time

The first to mention is the giant in Vietnam jewelry manufacturing industry, Phu Nhuan

Jewelry Joint Stock Company or in short PNJ The key financial performance of PNJ show in Table 4 below:

Table 4: Key information of Phu Nhuan Jewelry Company

Table 4 show that PNJ was very good in maintains high revenue during 2013-2015 with little fluctuation. Using revenue of 2013 as base, revenue of 2014 had downed 4.66% and

2015 has increased 3 39% Moreover, they also displayed excellent cost management that

reduces the COGS to Sale ratio from 92% in 2013 to 89 06% in 2014 and 83 35% in 2015

Therefore, comparing to PNJ, the ratio of Sakura is significant higher with 111 24% in 2013

and 112 51% in 2014

The gross profit margin ratio show for each of VND 100 of sale PNJ made in 2013,

they received VND 7 97 as gross profit and it increased toVND10 94 in 2014 and to VND

16 65 in 2015 As the Jewelry division of Sakura, the respective ratio is -11 24% in 2013 and -11 11% in 2014 It is definitely not a good business at all

Comparing between the new start-up as Sakura with “the long time giant” in industry as PNJ may be viewed as inappropriate However, this is the only reliable source as PNJ had

listed in the Hochiminh Stock Exchange and their financial reports are audited regularly We also gathered information from similar size competitors in the market by talking with some in charged-person of this company In fact, the intelligent information is not as reliable as PNJ

but it could be viewed as indicator and reference to further understand the competitors and

market The collected data is summarized in Supporting Information 3

From the data of Supporting Information 3, it could be see that for similar company in the industry, their gross profit margin are ranged from 10% to 20% of sale during this period

of time Combine with the data from the World Gold Council stated that the demand of

golden jewelry of Vietnam has steady increased during 2013-2015, it is proven that the

problem of Sakura is unlikely due to the market condition but the company itself There is

also some company suffered loss and closing out but it is not a common situation of the

whole industry

Possible reasons of problem

After the meeting and in-depth interview with the CEO, CFO, Chief Accountant,

Director of jewelry division, the details result of the interview is summarized in Supporting

Information 6 From that result, the concise cause-effect tree of this division problem is

generated in Figure 1 below:

NEGATIVE

PROFIT

LOW REVENUE

HIGH COST AND EXPENSES

INCREASE PRICE OF MATERIAL

LOW/NEGATIVE PROFIT MARGIN

INCREASE BASE SALARY

CASH INCENTIVES

SEASONAL EFFECT

UNPRODUCTIVE AND OVERTIME

PRODUCT PRICE NOT RELATED TO PRODUCT COST

LOW MARKET DEMAND

UNABLE TO EFFECTIVELY MANAGE COST

HIGH DISCOUNT

(5%-15%)

Figure 1 CAUSE-EFFECT TREE

OPERATION WITHOUT ACCOUNTING AND FINANCIAL INFORMATION

Base on theory and data collected from competitors, the main problem of Sakura’

Jewelry division is they do not have effective cost management method that lead to operation with negative profit margin. This is caused by three main problems:

1 The division was unable to effectively manage its cost: that is some cost and

expenses related to this division operation, such as depreciation of machine, location fee,

transportation, delivery… are not realized by the responsible person In this case, the man in

charge of this division, Mr Ngoc does not realize the existence of these costs of his division

The accountant, Ms Ngan, know all these cost but ask she said “Mr Ngoc is supposed to

know all of these” and “my job is help the whole company, each division should know their

problem well” The two owners of this company, Mr Danh and Mr Nhan also have no ideas why there is unmanaged cost

Hansen et al (4) define, a cost management system provide information for three

important objectives: Costing of products, services; Planning and Control; and Decision

making Unable to identify the product and operation cost could cause management to make

significant decision error, as the case of Sakura Jewelry Division There is a point that

suggests the true problem of the company is as their Chief accountant mentioned, they do not allocate cost to each specific division or department In other word, there no one responsible

to control and manage to cost and expenses of the company It means the Division has failed all three important objectives as defined by Hansen

As Tiwari et al (5) pointed out, cost and quality are influential factors of success in the

service industry In his book, Hansen et al (4) stated that for pricing decision, product

decision and strategic profitability analysis, all traceable cost need to be assigning to the

product This mean the cost is not just only the manufacturing cost but also the

non-production cost that related to the products such as: Research and Development cost,

Administrative cost, selling cost, etc Atkinson et al (6) suggested manufacturing division

could be considering as a cost center, in order to be concentrated on its cost Furthermore, the second problem also related to this misunderstanding

the meaning of its cost That lead to the problem as they may sell some product that its price

could not cover all of its cost The most terrible thing is that they do not know which product

is their “cash cow” or which are “financial sink-holes”

In order to confirm this is the true problem of the company, we try to investigate

further the revenue, cost and gross profit margin since the time the Jewelry division

established The information was collected manually and presented in Supporting

Information 4 It shows that the division has their good sell right at the month it start doing

business They have good sale team that help to quickly raise the sale revenue each month

form the low of VND 43 2 million on May 2013 to VND 2,045 52 million on December,

2014 The average sale price for each tael of product also pointed out that the increase in

revenue is thanked to the increase quantity of sale

However, the table also shows the problem that their cost increasing with higher speed

than their revenue or cost of each month usually over the revenue As we suspected, the claim

of Mr Ngoc, Director of Jewelry Division, that “the cost was significant high during the end

of year” and “other months the division is doing fine” was proven not correct It is easy to see that for every month the division doing business; its gross profit margin is usually negative

Bulak et al (7) stated that for manufacturing company, cost advantage is one of two

sustainable advantages the company could maintain over the rival However, for Sakura, the

cost is their disadvantage when compared to the rival

the financial data: This company hires a services company to do all the accounting and tax

reporting The services company could not able to provide them all the requirement data for

decision making effectively As the mention in the previous part, in this industry, there is a

double pricing standard that was making to create confusion and inequality It means the

management team negotiate price without the knowledge of their true cost and usually

overwhelmed by “chành”

A small sample of 276 jewelry models has been studied in order to fully understand this serious problem. Data of this sample could be found on Table 5 below.

Table 5: Summarized Cost of Production – Price and Profit Margin of 276 models

The main product of this company is using 14K gold and 18K gold Due to the hardness

of material, the price of 18K jewelry higher than 14K around VND 10,000 to VND 15,000

/pcs Furthermore, each design comes with several colors of master stone to suit all

requirement of customer It is including: white, red-ruby, light-red, pink, orange, green, moss

Row Labels Average of

Normal Stone

Average of Master Stone

Average of Time to Finish

Average of Fixed Cost&Expens

es allocated

Average of Cost of Production

Average of Discounted Price (assume 5%)

Average of Loss/Profit Margin (VND/pcs) Bracelet 13,014.29 163,770.08 14.75 290,491.86 467,276.23 434,511.90 (32,764.32) 14K 13,014.29 163,829.94 14.75 284,771.60 461,615.82 427,386.90 (34,228.92)

Blue Topaz 13,014.29 181,001.24 14.75 284,771.60 478,787.13 430,553.57 (48,233.56) Red 13,014.29 164,631.43 14.75 284,771.60 462,417.32 430,553.57 (31,863.74) White 13,014.29 145,857.14 14.75 284,771.60 443,643.03 421,053.57 (22,589.46)

18K 13,014.29 163,710.22 14.75 296,212.12 472,936.63 441,636.90 (31,299.72)

Blue Topaz 13,014.29 180,497.09 14.75 296,212.12 489,723.49 444,803.57 (44,919.92) Red 13,014.29 164,776.43 14.75 296,212.12 474,002.84 444,803.57 (29,199.26) White 13,014.29 145,857.14 14.75 296,212.12 455,083.55 435,303.57 (19,779.98)

Earing 5,644.44 74,296.00 10.89 93,194.44 173,134.89 172,583.33 (551.55) 14K 5,644.44 74,919.76 10.89 90,092.59 170,656.80 167,833.33 (2,823.46)

Blue Topaz 5,644.44 82,252.61 10.89 90,092.59 177,989.65 171,000.00 (6,989.65) Red 5,644.44 74,951.11 10.89 90,092.59 170,688.15 171,000.00 311.85 White 5,644.44 67,555.56 10.89 90,092.59 163,292.59 161,500.00 (1,792.59)

18K 5,644.44 73,672.23 10.89 96,296.30 175,612.97 177,333.33 1,720.36

Blue Topaz 5,644.44 79,050.03 10.89 96,296.30 180,990.77 180,500.00 (490.77) Red 5,644.44 74,411.11 10.89 96,296.30 176,351.85 180,500.00 4,148.15 White 5,644.44 67,555.56 10.89 96,296.30 169,496.30 171,000.00 1,503.70

Pendant 6,511.11 86,834.22 11.20 133,479.24 226,824.57 208,472.22 (18,352.34) 14K 6,511.11 86,798.48 11.20 128,058.36 221,367.95 203,722.22 (17,645.73)

Blue Topaz 6,511.11 95,242.11 11.20 128,058.36 229,811.58 206,888.89 (22,922.69) Red 6,511.11 87,042.22 11.20 128,058.36 221,611.69 206,888.89 (14,722.81) White 6,511.11 78,111.11 11.20 128,058.36 212,680.58 197,388.89 (15,291.69)

18K 6,511.11 86,869.96 11.20 138,900.11 232,281.18 213,222.22 (19,058.96)

Blue Topaz 6,511.11 95,538.76 11.20 138,900.11 240,949.98 216,388.89 (24,561.09) Red 6,511.11 86,960.00 11.20 138,900.11 232,371.22 216,388.89 (15,982.33) White 6,511.11 78,111.11 11.20 138,900.11 223,522.33 206,888.89 (16,633.45)

Ring 5,535.71 77,560.26 8.88 94,719.52 177,815.49 175,976.19 (1,839.30) 14K 5,535.71 77,385.35 8.88 89,583.33 172,504.40 171,226.19 (1,278.20)

Blue Topaz 5,535.71 83,536.76 8.88 89,583.33 178,655.80 174,392.86 (4,262.95) Red 5,535.71 78,119.29 8.88 89,583.33 173,238.33 174,392.86 1,154.52 White 5,535.71 70,500.00 8.88 89,583.33 165,619.05 164,892.86 (726.19)

18K 5,535.71 77,735.17 8.88 99,855.70 183,126.59 180,726.19 (2,400.40)

Blue Topaz 5,535.71 85,146.94 8.88 99,855.70 190,538.36 183,892.86 (6,645.50) Red 5,535.71 77,558.57 8.88 99,855.70 182,949.99 183,892.86 942.87 White 5,535.71 70,500.00 8.88 99,855.70 175,891.41 174,392.86 (1,498.56)

Grand Total 8,023.91 104,973.84 11.51 161,587.44 274,585.20 260,355.07 (14,230.13)

color, yellow, blue sapphire, blue topaz, black, and violet Each color has its own price and

may vary from size to size Usually, the most expensive is the Blue Topaz color and the

cheapest is White In the sample, we take 3 colors as the cheapest, the average and the most

expensive to simplify the process At this moment, Sakura pricing only charged VND 10,000 per color

In Supporting Information 5a, 5b, 5c, 5d present the product price of each model and

their calculated cost The allocation of this cost base on the assuming that the only variable

cost is their stone price and all the fixed cost may not significant change during the whole

year This is easy to see that for such a small sample, there are a lot of product price make no financial sense as it cost is higher than its sell price

A simple test is executed by randomly select a group of products that we have

calculated cost, stimulating the number sell of one month in order to see the outcome is not

only just a bad combination of product but rather the unavoidable truth The director of

jewelry division was also asked to manually create another combination to avoid any

mistaken of calculation Whichever combination that we stimulated, this Division has great

chance of losing money Moreover, it also confirms the common illusion that increase

revenue by increasing sale is wrong Ironically, for the manufacturing company, the more

they sell, the greater their lost.

Design Solutions and Suggestions

The following suggestions for possible solutions to offset the company problems was

generating based on 2 stage of cost management, from “cost accounting” to “cost

management”:

- The first step of this company is called “cost accounting”, it included:

+ Restructuring the accounting department with dedicated accountant

+ Uniforming the accounting method and cost allocation policy, also stated the

responsible cost center

- The second step is building the very first stage of “cost management”:

+ Investing in an enterprise resource planning (ERP) program to computerize all

company data and provide decisive information on request

+ Formulating a method to quickly estimated cost of each model of product before

actually production

+ Base on the success of previous step, further application of new and modern cost

management method, policy like balanced scorecards or activity base costing (ABC) could be implemented

At this moment, like other start-up company, their accountants also in charge of

accounting, cash keeper, human resources, administration In fact, they only collect document and send all to the accounting services company Mr Huy, manager of the accounting

services company claimed that they have around 60 customers as Sakura with limited of

human resources so that they could not provide monthly or daily data as requested Monroe

(8) said that proper cost method will guide the management in selection of manufacturing

profitable products or how much cost could be incurred before sacrificing profit. It is

suggested that the management should consider the cost of each type of product in reflection

of their ability to generate profit Blocher et al (9) emphasized cost behavior studies are

important due to the influence on the degree of operating risk, break-even point and safety

margin, profit planning and control Drury (10) explained that cost and revenue should be

traced to the individuals responsible And we could see in previous part, lacking of

information, especially cost of production and operation make the management team of

jewelry division chose the wrong way That lead to the first solution for timely and accurately decisive information is the company should establish a full time accounting department with

dedicated accountant

Cooper et al (11) claimed that it is statistically around 80% to 95% of the cost for each

product could be calculated before it enters manufacturing For the manufacturer as Sakura, it should have managed at least 90% of the cost of it products Horngren (12) also stated that

once the manufacturing process has been launch, not much could be done to significant

reduce the cost So the company should aware of the cost before not during the production

However, in the study of Olympus Optical company, Cooper et al (11) found that the

company indeed could reduce the cost during the manufacturing process as long as using

appropriate cost management method The model could be based on Cooper et al (13)

hierarchy for the costs involved in the manufacturing process This is not required to separate the company into two or more smaller company, which is unwise because a loss in Jewelry

business could help to reduce the tax obligation of the total company. The solution is only in the management accounting purposes. This will help the management understand the true

cost of each business in cooperation with its revenue in order to make management decision

timely and precisely

For timely collecting and reporting data, the company could consider investing in

computer software Hitt et al (14) proved that investing in Enterprise Resource Planning

(ERP) could improve productivity and business performance In Vietnam, there are many

company that offer reliable ERP program for start-up and S&M company such as: Ecount

ERP of Ecount (website: https://www ecount vn ) provide an multi-functional ERP with very low cost at VND 1million/month or VND 11 million/year More option could come from

MISA AMIS VN program (website: http://www misa com vn ) that provide all in one

solution ERP with cost from VND 3 million/year up to 9 million/year For company that

want to seek for more profession and international program, the Sage 300 ERP (website:

(around VND 1 6 million/month)

Applying the combination of Process Costing – Activities Base Cost – Balanced

Scorecards to effectively manage and allocation cost during the whole process of company

Weygandt et al (3) proposed that for service company that have many routine work, Process

Costing could be a better choice than the traditional Job order costing The difference of two methods could be viewed as the Job Order Costing assign cost to each job but the Process

Costing track the cost through the series of manufacturing process

Cheah et al (15) stated that in order to find out the hidden quality cost, the company needs

to move beyond the data provided by the traditional accounting standards. Furthermore,

Hansen et al (4) referred an Activity-Base Cost (ABC) Management system as the solution

for new complexity requirement of modern manufacturing company James et al (16) also

emphasized that the combination of ABC and Balanced Scorecard (BSC) will improve the

company financial performance than other that use only one or none

As the stage of designing, the only parameter we know is the cost of stone and weight of

product In fact, the production rate of the company is not exactly and could range form

1,700-1,900 tael/month, the wage and salary differ as some parameter is unknown like

overtime, cash incentives or number of moving workers form company to other

companies etc make it too difficult for the company to estimate their product cost That is

the reason why we try to use the stone price and metal material price to estimating the cost of each product

The actual cost of each product could be viewed as in Diagram 1.1 below:

TOTAL PRODUCT COST

WAGE & SALARY (43%)

OVERTIME

SEASONAL EFFECT

CASH BONUS/

INCENTIVES

STONE (36%)

SIZE

KIND (Diamond, ruby, saphire, CZ, glass…)

COLOR (white, red, green, yellow…)

SHAPE ( round, diamond, cacbonchon, heart, square…)

METAL MATERIALS (12.52%)

ALLOY (1.93%)

COPPER (1.60%)

SILVER (8.99%)

OTHER COST &

EXPENSES

(8.48%)

Diagram 1 1: The construction of cost and expenses of a jewelry product

The simplest formula as show in diagram 1 1 could be rewrite as:

For example, the product: F0S_012-Bracelet-Blue Topaz-14K, has total cost of stone is VND 237,238; it weight around 0 7 tael/pcs so the requirement metal material is [(VND

14,000,000 x 8 99% + VND 3,000,000 x 1 93% + VND 2,500,000 x 1 6%) / 26 66] x 0 7 =

VND 35,617. So that the total cost is estimated as (237,238+35,617)/48.52%= 562,355

VND/pcs Compare with the actual cost we calculated in Supporting Information 7, the

product cost is VND 570,571/pcs, the estimating cost is 98 56% of the actual cost Due to the limit of time, we only test only a few number of product so that the ratio maybe truly

reflecting all the type and model of the company The test result presented in table 6 below

Company could be wise to fully recalculate all of their product to achieve better formula and ratio

Table 6: Test result for estimation of production cost of some provided samples

Base on the new cost-price, revising the company price and sale policy that at least get

the gross profit margin close to the market Çulha et al (17) stated that the price-cost margin

of the manufacturing company is up to their market size It encourage the company should

change its price-cost margin policy base on its market power in order to achieve positive

profit Weygandt et al (3) introduces the Margin of safety and margin of safety ratio as a tool for management The margin of safety is just the difference between the expected sale and

the sale at break-even As long as the margin is maintained at the desired number or just a

positive number, the management of company is authorized to adjust their strategic purposes

The simplest way to do this is improving the current “working card” of design department

into the “costing card” that reflecting all the cost and expenses related to the product This is

Weight-in tael

Cost of metal

Estimated cost of production

Stone Price

Cost of Production

No Model Type Price (VND)

an advance step from the beginning but thanks to the help of ERP software, it will be done by

a few clicks on the computer mouse.