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

INCREASE THE PROFITABILITY BY IMPROVING 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 VIII SUPPORTING DOCUMENTS............................................................................................. 38 1 Interview Guide ............................................................................................................................. 38 2 Survey Table .................................................................................................................................. 40 3 Reference ....................................................................................................................................... 42 Author: Pham Nguyen Khanh – ISB MBA9 | 1 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. Author: Pham Nguyen Khanh – ISB MBA9 | 2 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 Personnel: 2019 % Director 1 Vice director 2 Supervisor 23 3,2% Skilled worker/Engineer 158 22% Unskilled worker 534 74% Total 718 100% 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): Author: Pham Nguyen Khanh – ISB MBA9 | 3 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. Author: Pham Nguyen Khanh – ISB MBA9 | 4 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 Author: Pham Nguyen Khanh – ISB MBA9 | 5 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. Author: Pham Nguyen Khanh – ISB MBA9 | 6 III SYMPTOMS: Billion VND % Revenue 2016 2017 2018 Q2. 2018 Q2. 2019 2017 2018 Q2. 2018 Q2. 2019 Revenue 4.856 5.094 6.649 3.279 3.586 100,0% 100,0% 100,0% 100,0% Cost of goods sold Operating cost Net operating profit 4.452 4.656 6.228 2.962 3.547 91,4% 93,7% 90,3% 98,9% 15,78 17,56 23,59 10,46 9,98 0,3% 0,4% 0,3% 0,3% 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. Author: Pham Nguyen Khanh – ISB MBA9 | 7 7000 6000 5000 4000 3000 2000 1000 0 4856 5094 Revenue 6649 3279 3586 Revenue Unit: Billion 2016 2017 2018 Q2.2018 Q2.2019 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? 400 350 300 250 200 150 100 50 0 350 Net profit 294 277 238 -42 Net profit Unit: Billion -50 -100 2016 2017 2018 Q2.2018 Q2.2019 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. Author: Pham Nguyen Khanh – ISB MBA9 | 8 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”. Author: Pham Nguyen Khanh – ISB MBA9 | 9 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." Author: Pham Nguyen Khanh – ISB MBA9 | 10 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. Author: Pham Nguyen Khanh – ISB MBA9 | 11 100.00% 98.00% Cost of goods sold 98.90% 96.00% 94.00% 92.00% 90.00% 91.40% 93.70% 90.30% Cost of goods sold 88.00% 86.00% 2017 2018 Q2.2018 Q2.2019 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. Author: Pham Nguyen Khanh – ISB MBA9 | 12 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. Author: Pham Nguyen Khanh – ISB MBA9 | 13