Increase the profitability by improving supervisor’s management and leadership skills – the case of pomina 2 steel JSC

Author: Pham Nguyen Khanh – ISB MBA9 | 2 I EXCECUTIVE SUMMARY Pomina Steel Joint Stock Company POM is a joint stock company producing and trading steel, mainly steel used in contraction

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PHAM NGUYEN KHANH

INCREASE THE PROFITABILITY BY

IMPROVING SUPERVISOR’S

MANAGEMENT AND LEADERSHIP SKILLS – THE CASE OF POMINA 2

STEEL JSC

MASTER OF BUSINESS ADMINISTRATION

Ho Chi Minh City – Year 2020

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PHAM NGUYEN KHANH

INCREASE THE PROFITABILITY BY

IMPROVING SUPERVISOR’S

MANAGEMENT AND LEADERSHIP SKILLS – THE CASE OF POMINA 2

STEEL JSC

MASTER OF BUSINESS ADMINISTRATION

Ho Chi Minh City – Year 2020

SUPERVISOR: Tran Vi

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Author: Pham Nguyen Khanh – ISB MBA9 | 1

SUPERVISOR’S MANAGEMENT AND LEADERSHIP SKILLS –

THE CASE OF POMINA 2 STEEL JSC

I EXCECUTIVE SUMMARY 2

II COMPANY OVERVIEWS 3

1 Overviews 3

2 Products of the Company 3

3 Company group model 3

4 Procedure of production: 4

III SYMPTOMS: 7

IV RESEARCH METHODOLOGY 9

1 Research Method 9

2 Data Collecting Methods 9

V PROBLEM ANALYSIS 10

1 Problem definition: 10

2 Problem validation 19

VI CAUSE ANALYSIS AND VALIDATION 25

1 Possible causes: 25

2 Causes validation 30

VII ALTERNATIVE SOLUTIONS 32

1 Proposed solution 32

2 Evaluation and solution decision: 34

3 Action plan: 35

4 Expected outcome: 37

VIIISUPPORTING DOCUMENTS 38

1 Interview Guide 38

2 Survey Table 40

3 Reference 42

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I EXCECUTIVE SUMMARY

Pomina Steel Joint Stock Company (POM) is a joint stock company producing and trading steel, mainly steel used in contraction and sheet Pomina is a well-known brand with a leading market share of construction steel nationwide For many years, their product quality is the most important value that keeps the brand growing Currently, it‘s one of the leading steel manufacturers with revenue ranking top among the biggest 3 steel producers in the Vietnam market

But despite the steady growing revenues, there’re a lot of managerial problems happened inside the company Work-place-accidents, waste of materials, constant decrease in net profit, as well as complains about ecology for the harmful effects to the environment

Mid of 2019, an serious work-place accident happened and caused big losses Pomina Steel 2’s factory had to shut down for more than 6 months, and could open again only in October of

2019 This was a recent accident we have to remember that in the previous years, 2016,2017 similar disasters already happened with more serious damages These accidents made a hard impact on the company, cost many lives of workers and a lot of money They made the net profit gone down dramatically but until now the management still couldn’t decide for a reliable solution to solve the deep root of it

This thesis would like to focus on formulating suggestions to improve the profitability starting from analyzing facts to find the causes of “ why would the accidents happened” and hopefully suggest of applicable solutions The methodology is identifying the problems based on empirical analysis, process-oriented analysis from the interview of key-person, as well as survey processes The validation of this thesis would base on analyzing the company’s data, process audit and literature support

From those analyses, the poor quality of the supervisors’ management and leadership skill was identified as the main problem to make the accident happened, consequently brought down their net-profit to negative

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II COMPANY OVERVIEWS

1 Overviews

On July 17/2008, the company was granted the License of Business Registration Joint Stock Company No 4603000570 by the Department of Planning and Investment of Binh Duong Province, operating under the Vietnam Enterprise Law, with charter capital of 500 billion dong Currently, Pomina's charter capital reaches VND 1,630 billion

Pomina has one subsidiary and two factories, including 5 production lines, 3 steel rolling lines and 2 steel refining lines, and is currently the largest steel supplier in Vietnam for:

• Steel billet: 1.5 million tons

• Rolled Construction steel: 1.6 million tons

2 Products of the Company

High-quality steel products such as rolled steel, plain steel and especially steel bar with steel grades: SD390, SD490, Gr60 with the apple-shaped embossed logo and steel grade engraved per meter of product

3 Company group model

The Pomina Steel group includes 3 different companies:

- Pomina 1 steel factory (Series 27, Song Than 2 Industrial Park, Bo An, Binh Duong):

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Established in February 2012, inheriting the entire production line system from Pomina Steel Joint Stock Company, including 02 production lines, each with a capacity of 300,000 tons

of construction steel / year, Equipped with modern technology of Vai-Pomini (Italy) and Simac (Germany)

- Pomina 2 Steel Joint Stock Company (Phu My Industrial Park, Tan Thanh, Ba Ria - Vung Tau):

Invested by Pomina in 2005 with the modern technological line for steel production of Techint (Italy), the capacity of 500,000 tons of construction steel and 500,000 tons of billet per year

- Pomina 3 factory and culture (Phu My Industrial Park, Tan Thanh, Ba Ria - Vung Tau):

Established in July 2009 on a space of 46 hectares in Phu My Industrial Park with a total investment of 300 million USD from Pomina Steel Joint Stock Company Pomina 3 is a project consisting of 01 steel billet plant with a capacity of 01 million tons / year, 01 steel mill with 2 production lines - each line has a capacity of 500,000 tons / year, and 01 seaport for loading and unloading With a refining capacity of 1 million tons / year Pomina 3 has become one of the largest construction steel billet plant in SEA today

- Viet Steel Trading and Manufacturing Co., Ltd (Commercial Pomina): in charge of commercial business of the entire Pomina Group

4 Procedure of production:

For the readers to understand some outlines of the Pomina’s manufacturing procedure, the author would like to briefly introduce the iron and steel manufacturing process

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There are 6 mains steps in the modern technology of steel production:

 Step 1 – The iron making process

The raw materials such as lime, iron ore, and coke are mixed in a hi-temperature furnace and being melted there The result of this process is the molten iron After the main component of steel, iron is being melted, it should be cleaned of impurities (approximately 4%-4,5%) which make the metal to be brittle The next step would be as following

 Step 2 – Primary steel making

The two modern primary methods for making steels are Basic Oxygen Steel making (BOS) and Electric Arc Furnaces (EAF) The BOS is the method that adding scrap steel to the molten

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iron when it still is in the furnace Neutral gas such as helium and argon are added to the furnace using the Bessemer process to cut down the impurities down to less than 1%

And with the EAF method, recycled steel is put into an electrical arc furnace along with the molten iron which is then heated to around 1,650 degrees Celsius in order to convert it into high-grade steel

 Step 3 – Secondary steel making

Using many techniques such as adjusting the temperature of the furnace, remove/add certain others components, degassing, ladle injection, argon bubbling,… to form the most perfect steel composition

 Step 4 – Casting

After getting the perfect mixture, the next step would be pouring it into molds to cool down and form into the finished steel Once cooled, the metal is then cut into desired lengths depending on the application, slabs for plates, blooms for sections such as beams, and billets for longer products such as wire or thin pipes

 Step 5 – First forming

This process is also known as hot rolling, the casted-steel now would be formed into many different kinds of product such as slabs, blooms, and billets

 Step 6 – The manufacturing, fabrication and finishing process

Finally, the first-formed steel now will be going through secondary forming processes such

as machining, shaping, jointing and coating, and then be divided into flat products, long products, seamless pipes, and specialty products

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Cost of

goods sold 4.452 4.656 6.228 2.962 3.547 91,4% 93,7% 90,3% 98,9% Operating

cost 15,78 17,56 23,59 10,46 9,98 0,3% 0,4% 0,3% 0,3% Net

operating

profit

388 323 299 261 (42) 6,3% 4,5% 8,0% -1,2%

Net profit 350 294 277 238 (42) 5,8% 4,2% 7,3% -1,2% The company had its revenue growing up every year: 4.856 billion VND in 2016 up to 6.649 billion VND in 2018 Their cost was stable through the years, but recently their net profit was decreasing, from 350 billion in 2016, and constant dropped to 277 billion in 2018 The peak was in quarter 2/2019, they recorded a big deficit on their profit, minus 42 billion VND, compared with the same quarter of 2018 was 238 billion VND Here some graphs for you to have a better view of the situation:

Here one can observe the revenue of the company had been increasing every year, from 4,856 billion VND in 2016 to 6,649 in 2018, and in Q2.2019 is 3,586 billion VND, increasing 9.4% compared to the same quarter of 2018 This was a good trend until we look at the numbers

of profit and loss

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Looking at the most important index of any company, the net profit, we observe a constant

going-down trend through the years, an opposite with the revenue, and worse we can see a loss

occured in the 2nd quarter of the year 2019 This phenomenon raises a question worth

investigating: Why does this happen while the revenue keeps increasing? What are the causes?

And what we can do to improve the situation?

As mentioned above, the net profit of the company was decreasing steadily over the years

According to the various researchers such as Garrigosa (3) or Craig (4), all claimed that this is a

serious situation that could lead to bankruptcy in near future if the company could not find any

reliable solution We need to further analyze this symptom & the problem mess

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IV RESEARCH METHODOLOGY

1 Research Method

This thesis objective is to find a solution to stop the company to loose money by analyzing all possibilities, starting by checking the high costs of operation, costs of goods sold, the poor performance of employees, workers and supervisors, work-place accidents and causes To achieve this, an appropriate research method is desirable Because the goal is to provide an applicable solution, Design Science study which was discussed in Van Aken et al (1) research for a real-life “Field Problem Solving project” seems to be the most suitable method These are real-world business situations that can or should be improved In keeping Van Aken et al (1)'s idea, it is a “design process individuals and teams use to solve real-life organizational problems through the use of scientific evidence and validated local facts” For this study, the problem-solving methodology is theory-informed In other words, problem analysis and solution design should be based on comprehensive, critical and creative of use of literature

In this “Field Problem Solving project”, "regulative cycle" meaning that problem-solving cycle which was adopted from Van Strien (2) is used This cycle consists of five process steps: problem identification, analysis and diagnosis, action plan, intervention and evaluation See figure for more details:

2 Data Collecting Methods

The data collection method used in this research is qualitative method According to Van Aken et al (1), “Design Science Research can be regarded as a family of approaches: driven by field problems, using a participant-observer perspective, and pursuing a solution orientation”

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Therefore, qualitative methods were used For this field of study, both research and practical information were desired Hence, literature research and internal interviews were conducted To start, exploratory meetings were arranged with person-in-charge of Pomina Steel Then, a literature study was conducted on the topic The validation of problem and solution are based on researches of the author as well as the agreement of the company’s directors

V PROBLEM ANALYSIS

1 Problem definition:

In order to find the potential causes of the problem, meeting and interviews was organized between the stakeholders to find out what the reasons are and how to fix them effectively Some key questions need to be answered:

 Why the company has been losing money for a long period without any sign of recovery?

 What needs to be done to fix this problem? And what consequences could occurs if this situation keeps going onward?

There are 2 main problems are revealing after their meetings

1) According to the basic formula of net profit = revenue – total cost, we take a quick look at the cost of goods sold, the percentage on quarter 2/2019 is 98,9% compared to other years (average 90%-93%) This is not a normal phenomenon, because the steel industry is supposed to

be a core industry with stable cost of goods sold If the price of steel goes up, it will affect the whole economic system, especially for a newly-industrialized country like Vietnam According

to Kobak (5), the cost of goods sold affects directly to the working capital of a company, this indicator should not be ignored and should be seriously investigated

2) Labor accidents happened in their factory frequently

In 4/2014, an explosion that killed one and injured 20 other workers (6) According to Mr Nguyễn Bá Toàn – Vice director of the company, the accident happened because the mistake made by workers in the production

Mr Toan said: "This was the last batch of steel before shifts change, it might be due to maybe due to a hurry, the workers have shortened the time of steel making, forgetting to close the door of the furnace again so the explosion happened."

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While the workers were communicating between each other via radios, it was possible that during the process of pouring hot steel, they were too busy to inform others, and one team didn’t close the lid of the furnace while the other team moved the hot steel box so the molten steel batch poured out and exploded

Mr Toan also said that this is a complete steel production line, imported and tested without any error Errors are mainly due to human mistakes made intentionally or inadvertently or due to not following the steps of the process

Lost radioactive source of Pomina Steel Factory 3 (7) In 5/2014, a serious accident happened, their radioactive source had been missing The lost radioactive source was the Co-60 (radioactive source of group 4) imported by Pomina Steel Joint Stock Company since 2010 to measure liquid steel level on the casting line No 3, out of five lines of the factory Until now, there is no sign of the lost radioactive source has been reported

In 4/2019, there was another accident (fire at the factory) at Phú Mỹ Industrial Park made the factory to shut down for 30 days The accident broke the supply chain of steel delivered to customers This accident however was classified as internal information of the company, the author could only get the evidence through an interview with the Vice Director, Mr Toan about this accident Only little detail about this accident was public (8)

The author would deeply investigate each problem by literature research as well by an interview with the company’s key person

Problem number 1: The percentage of the cost of goods sold/revenue increased

Cost of goods sold of the Company was stable and maintained around 91% - 94% of total revenue from 2016 - 2018 The main raw materials of steel production are scrap steel and billet However, in the first 6 months of 2019, the Company's cost of goods sold soared up quite high around 98.9%, 8.6% higher than the same period in 2018

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The main reason is due to raw material prices hike The company's main input material price escalated in the first half of 2019 influenced by the prices of the world market

Specifically, in 2019, the price of scrap steel increased by 5-10% from the end of 2018 Early 2019 a dam failure in Brazil affected the world's ore supply and impacted the prices of the international market In the second quarter of 2019, the government set a new retail price for electricity with a hike of 8-10% from the first quarter of 2019, leading to a higher increase of the cost of goods sold

In addition, the company was also affected by the increasing financial costs of the company due to extra bank loans to pay for increased sales and administrative expenses

Cost of goods sold

Cost of goods sold

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Market movements of raw materials for steel production in 2019

(Source: London Metal Exchange)

This graph shows us the price of raw material increased constantly during the period Jan to June 2019, this strongly affected the cost of goods sold

But this problem was a macroeconomic problem that affects all the steel companies around the world, influenced by the Trades war between USA and China, stated by Hofman (9) So it is impossible for us to suggest something to improve for this situation, the author would not deeply investigate this problem as the research subject for this thesis

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Problem number 2: Accidents happened

As mentioned above, many accidents happened in the 3 factories of Pomina, and the main reason was human errors made by the workers and managers The author would focus on the accident that happened in the April/2019, the quarter when the loss occurred

The conversations between the author and Mr Nguyen Ba Toan – Vice-president of Pomina 2 Steel Joint Stock Company took place in meeting rooms of the factory in Phu My Industrial Park, located at Ba Ria province This conversation aimed to obtain information of the company and gain insights of the current situation During the interview, notes were made in which the most important information was written down This is an in-depth interview with most open-ended questions, aimed at gaining deeply a wide range of insights on specific issues This type of interview was chosen because it provides reliable, comparable qualitative data, and, the interviewee was able to express their views in their own way The purpose of this study is to helps find out the potential problems, as well as clues for an applicable solution

Here is the interview of the author with Mr Toan – Vice president of the company:

After the meeting with Mr.Toan, a problem was presented to see what potentials problems were:

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Job safety is loosen

High accident rate

Obsolete machinery and

equipment & not well maintained

Lack of skill labors &

engineers

Managers do not know deeply the machinery’s standard procedure

Unskilled worker has

to work high level job

Accidents happened

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According to Mr Toan, problems needs to be further investigated including:

1> Obsolete machinery and equipment & not well maintained

2> Worker’s skill not well trained

3> Lack of supervisor’s management and leadership skill

 Obsolete machinery and equipment & not well maintained

In any production industry, the most crucial point is to keep your equipment at the best condition, especially in the steel industry

In 2018-2019, there was a big increase in demand of customers It was a benefit from the Trades war between USA and China, customers looked for new sources of materials and shifted from China to others neighbor countries such as Vietnam, or Cambodia to avoid the high tariff for their export products to USA As mentioned above, the revenue of our company increased constantly every year, from 4856 billions VND in 2016 to 6649 in 2018, and in Q2.2019 is 3586 billions VND, 9.4% up compared with the same quarter of 2018

But look at the company financial report, the author observes a constant decrease in the fixed assets booking values, show as table below:

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 Worker’s skill not well trained

In the record of the HR department, in the years 2017 and 2018, there was a high resigning rate of skilled workers, particularly in the Pomina 2’s factory The number of labor dropped from

825 people in 2017 to 718 people in 2019, mainly of the skilled workers who had more than 3 years of experience

And so what were left were mostly unskilled workers They do not have enough experience but have to work at high-level jobs such as the casting This could be a factor that made accident

in April 2019 happened, poor quality of unskilled workers This is one of the problems we should look in deeper

Number of total resigned employees in 2019

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Resigned employee’s position in 2019

 Lack of supervisor’s management and leadership skill

Another aspect of the company’s HR, the number of managers is only a small percentage compared with the number of total employees According to the company internal information,

in the year 2019 there were 718 employees working in the Pomina 2 factory:

We can see the reduction of the numbers of skilled workers from 226 people in 2017 to 158

in the year 2018 and 2019, 27% down to 22%, and the number of supervisors also reduces from

26 to 23 Notes: engineers must have at least 3 years of experience and for a supervisor at least 5 years of working experience

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On practice, the skilled workers are in charge of high-level work such as casting and steelmaking, these jobs require experience and knowledge, mistakes are unacceptable, if any mistake happened it could make a major impact for the whole factory On the other hand, the unskilled workers in charge of the less important job such as running machine for the step of rolling steel or transport materials within the factory Each working step has several teams, and each team managed by one supervisor

The managers of the company technically are skilled workers with more than 5 years of experience They are certificate engineers, so they have good working skills, but it doesn’t mean that all of them have skill of leadership to manage the entire team Sometimes they had to directly operate the process if the job is too complicated or lack of workers One can say supervisors know deeply technical know-how, but it isn’t sure that they know how to perform their leadership skill and management skills to organize works, coach, train other team members

Back at the accident happened in April 2019, Mr Toan said that the main error comes from the fact that supervisors did not follow strictly the company standard safety procedure This was

a serious problem that the company has to find solutions for

2 Problem validation

After identifying the potential problems, now we have to validate the real reasons making the net profit dropped This process is also called selecting Problem from Problem Mess or Validation of Problem To check the validity of the potential problems stated above, actual information has to be collected as specific as possible In details, qualitative methods were used For this field of study, both desk research as well as practical information is desirable Therefore, literature review and internal interviews were carried out

To begin with, desk research through document reviews helps to identify the key factors that can impact on the management skill

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 Obsolete machinery and equipment & not well maintained

Begin with the first potential problem, machines are obsolete & not well maintained This problem can easily be spotted when we look at the financial report, the author would like to draw following table:

Tangible fixed assets 538,16 488,26 523,47 452,22 -9,3% 7,2% -13,6%

Original price 1.995,25 2.021,28 2.029,49 2.036,03 1,3% 0,4% 0,3%

Accumulated depreciation (1.457,09) (1.497,81) (1.541,23) (1.583,80) 2,8% 2,9% 2,8%

We could see that the fixed assets were almost fully depreciated The tangible fixed asset was decreasing through the years, from 539 billion VND to 452 billion VND Although every year the company did buy some fixed asset, but it was mostly parts to replace broken equipment, but this value was too small compared with the accumulated depreciation made every year (In

2017, the original price increased 1.3% but accumulated depreciation was 2.8%, 0.4% increased and 2.9% depreciated in 2018, and the same with 2019, 0.3% increased original price and 2.8%) Another table for the readers easier to understand the situation, the following is a table showing the percentage of the current value of fixed asset compares to their original prices

Unit: Billion VND 2016 2017 2018 30/06/2019

Original price 1.995,25 2.021,28 2.029,49 2.036,03

% Tangible fixed assets/ Original price 27,0% 24,2% 25,8% 22,2%

The author would like to find out more about this situation Because with this rate, the machine and equipment of the factory would be very old and cannot perform with the standard quality The author with his research through the Steel industry report in 2019 in various channel (such as Stock report, and research companies like Savills, Nielson), found that the percentage of

% Tangible fixed assets/ Original price, on average in the steel industry, should be between 60%, less than 40% would be an alert for the quality of equipment

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50-Author: Pham Nguyen Khanh – ISB MBA9 | 21

For this problem, the author took a quick interview with Mr Toan, and he said that this was the policy of the company With 3 factories, the value of machinery & equipment was huge (total

~ 7.600 billion VND for 3 factories), if replace them cyclically, in a synchronized manner for all machines it was a financial burden that the company could not take So the policy of the company was to keep using the old machines, and to replace only what was broken – could not

be used anymore If a machine was fully depreciated, they would replace with the same machine

by moving from another factory that still can operate, and buy only new ones if that was the only way This strategy could extend the machine’s life from 10 years to 15 years That’s why the original price was increased so little every year, and this policy is keeping the cost burden as little as possible, but the situation was that the revenue and net profit kept decreasing as the author mentioned above As he said, although he knew the danger of using out-of-date equipment, but this should lighten the financial burden for the company The author noticed that this strategy somehow fit with the company’s current situation, and decided that would not deeply investigate this problem

 Worker’s skill not well trained

We took a look at the second potential problem mentioned above, the not adequate skill of workers

According to Tam and Le (10), the managers should be able to deliver the relevance of employee’s work and how they contribute to the firm by excelling at their work In this case, the supervisors of the factory couldn’t convey the necessary working spirit and working standard to their workers Back to the interview with Mr Toan, he mentioned that on the day of accident, the manager rushed to finish the job, he pushed the workers to make short cut in the process, and the accident happened After the accident the company has fired the manager Anyhow, not only the supervisor was not able or refused to follow the company working safety procedure, but he also couldn’t train and coach adequately his workers The workers’ skill capacity could only be increased if their supervisors were capable to train them skills that needed to work more efficiently, stated by Cornelius (11) Return to Tam and Le (10)’s statement, this problem could

be solved if the worker had a better superior, who could support them and train them know how

to improve their working capacity

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