UNIVERSITY OF ECONOMICS HO CHI MINH CITY International School of Business ------------------------------ PHAM THI PHUONG LINH FAILURE IN INVENTORY MANAGEMENT AT FASHION DEPARTMENT IN KHATOCO TRADING CO., LTD MASTER OF BUSINESS ADMINISTRATION Ho Chi Minh City – Year 2019 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com UNIVERSITY OF ECONOMICS HO CHI MINH CITY International School of Business ------------------------------ PHAM THI PHUONG LINH FAILURE IN INVENTORY MANAGEMENT AT FASHION DEPARTMENT IN KHATOCO TRADING CO., LTD MASTER OF BUSINESS ADMINISTRATION SUPERVISOR: DR. NGUYEN PHONG NGUYEN Ho Chi Minh City – Year 2019 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com LIST OF CONTENTS EXECUTIVE SUMMARY .1 History of establishment and development .2 Mission of the company .7 Current development and market analysis .1 Complaints of clients about wrong shipping products .2 Differences between the stocks on count (floor) and stocks on system (sheet) .3 Differences between stocks quantity on accounting system and that on warehouse system.9 Initial cause-effect map .11 Updated cause-effect map .14 PART 2 – PROBLEM JUSTIFICATION .1 Definition of inventory management .2 Central problem: Failure in inventory management .24 Problem importance – consequences of the problems .24 PART 3 – CAUSE VALIDATION .1 Outdated and separated inventory control system .2 Insufficient inventory control procedures and regulations .3 Culture miss-match: No connection between relevance departments in inventory control .1 Insufficient inventory control procedures and regulations .2 Outdated and inconsistent inventory system .30 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Cause importance .33 PART 4 – SOLUTION AND IMPLEMENTATION .1 Written working processes in inventory management .2 Setting up integrated system for inventory control .3 Project details and schedule .57 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com LIST OF FIGURES Figure 1: Company structure .2 Figure 2: Sale and Profits of The Company and Fashion section from 2016 to 2018 .4 Figure 3: Number of agency's complaints from 2016 to 2018 .6 Figure 4: Portion of customer complaints in 2018 .6 Figure 5: Fashion Sale, Cost of goods sold and GPM in 2016, 2017 and 2018.11 Figure 6: Initial cause-effect map .12 Figure 7: Updated cause-effect map .17 Figure 8: Amount of client’s orders during 2016-2018 .26 Figure 9: Final cause-effect map .32 LIST OF TABLES Table 1: Fashion sale and profit growth rate from 2016 to 2018 .5 Table 2: Transportation cost from 2016 to 2018 .7 Table 3: Stock reconciliation at 31st December 2018 .8 Table 4: Stock reconciliation between warehouse system and accounting system at 31st December 2018 .9 Table 5: Stock clearance and normal sale in 2017 and 2018 .10 Table 6: Participants of second in-depth interviews in March 2019 .18 Table 7: Inventory turnover days of fashion products .25 Table 8: Participants of third in-depth interviews in April 2019 .28 Table 9: ERP’s estimated costs .47 Table 10: ERP project schedule .51 LIST OF FLOWCHARTS Flowchart 1: Goods reception process .35 Flowchart 2: Goods delivery process .37 Flowchart 3: Inventory internal transfer .40 Flowchart 4: Goods return process .42 Flowchart 5: ERP implementation process .50 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com EXECUTIVE SUMMARY Nowadays, cost management is more concentrated by many corporations over the world, especially in highly competitive market. Hence, to maintain the growth in long term and achieve sustainable competitive advantages over rivals, any business line or any company needs to be effective and efficient in managing its internal activities and Fashion business line of Khatoco Trading Co., Ltd is also not an exception. Although the financial results of fashion section in the company still show some positive signals with an increase in sales and profits, non-financial aspects indicate some problems include: increment in customer complaints, discrepancies in inventory information between accounting system and warehouse system as well as between stock counts and system records.
These are the significant symptoms which should be focused and analysed to find more inside problems. Based on the deep interview technique of qualitative research, secondary data analysis and literatures review, some potential problems and central problem of failure in inventory management are identified. This problem does exist because of some causes related to insufficient inventory management procedures and regulations as well as outdated and inconsistent inventory system. Therefore, to solve those causes effectively and efficiently, the recommendations of compiling written working processes for all inventory activities and building ERP system for Khatoco Trading are raised in details.
These solutions will not only solve the main problem related to stocks control in short-term but also in the long-term of business life. More than that, they also help Board of Directors in managing and controlling entire company’s processes and save costs for the company. LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com PART 1 – BACKGROUND Company background 1.1 History of establishment and development Khatoco Trading Co., Ltd (Khatoco Trading), one of the subsidiaries of Khanh Viet Corporation with 100% owned by the Parent Company, was establish on 21st May, 2002 under the Decision No 77A/2002/QD-UB of the Chairman of Khanh Hoa Provincial People's Committee and officially wen to the business on 1st July, 2002. The company was operated on the basis of separation and re-arrangement from the rooms and branches of Khanh Hoa Tobacco Import and Export Division, including: Textile and Garment Business Department; Cigarette Trading Department with 3 branches at Hai Phong, Ha Noi and Can Tho.
Upon the establishment, the number of Khatoco ’s employees were 108 people who were recruited and chosen from other members of Khanh Viet Corporation. The initial function of Khatoco Trading was to consume textile products of Tan Tien Textile Factory (one member of Khanh Viet Group) and men’s shirts produced by Khatoco Garment Factory with the fabric supplied by Tan Tien Textile Factory. In May 2003, Khatoco Trading Company established a Cigarette Trading department on the basis of withdrawing the cigarette market staffs from Khatoco Khanh Hoa Cigarette Factory in Khanh Viet Group and recruiting new employees. From 2014, the company have had three following business activities, in which cigarette and men fashion are the two key business lines: - Cigarette trading: Specialize in wholesale and retail trading domestic cigarettes that were produced and supplied by Khatoco Khanh Hoa Cigarette Factory.
- Men Fashion trading: Design, process the textile products and distribution the men fashion products include shirts, T-shirts and trousers. - Ostrich and crocodile trading: Purchase and sell ostrich and crocodile meats, products from ostrich and crocodile meats, other food products (ostrich eggs).2 Missions of the company - Mastery over the nationwide 360-degree cigarettes trading chain including Distribution - Agency - Retail - Consumers. Page | 1 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com - Khatoco Men's shirts become one of the strong brands in the market segment of modern, masculine and stylish middle-age men from 30 to 50 years old.3 Company’s size Currently, Khatoco Trading is ranked as a large company not only in Khanh Hoa Province but also in Viet Nam with the total number of full-time staffs is more than 700 employees. Moreover, the average annual turnover (profits before taxes) of the company in 3 recent years was approximately VND173 billion and the total asset calculated as at 31st December 2018 was about VND1,777 billion.4 Internal structure The internal structure of Khatoco Trading is shown in the following chart: Figure 1: Company structure Source: Company structure Decision No.5 Geographic distribution Khatoco Trading’s products are widely distributed throughout Viet Nam from northern area to southern area.
In which: - The cigarettes are focused in many provinces spreading over 3 regions in Viet Nam such as: Ha Noi, Lang Son, Cao Bang, Hai Phong, Thai Binh in Northern area; Nghe An, Hue, Da Nang, Binh Dinh, Khanh Hoa, Binh Thuan, Dak Lak in Page | 2 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com the Middle and Highland area; Ho Chi Minh, Long An, Ben Tre, Bac Lieu, Kien Giang, Ca Mau in Southern area. - Towards men fashion products, Khatoco Trading concentrates mostly on middle area including Khanh Hoa, Binh Dinh, Da Nang, Nghe An and Can Tho province in Southern Vietnam. Products are mainly distributed through agency channel and showrooms. Besides, the products are also distributed in Ha Noi, Ho Chi Minh, but the volume is not as many as mentioned area.
- Ostrich and Crocodile meats are mainly sold to the restaurants and food shops in the whole country.6 Stakeholders To be a one of member of Khanh Viet Group – State owned entity, the major stakeholders of Khatoco Trading include the Parent Company – Khanh Viet Corporation, Khanh Hoa Province People's Committee as well and related parties and internal suppliers: Khatoco Khanh Hoa Cigarette Factory, Khatoco Garment Factory, Khatoco Ostrich - Crocodile Trading Company, customers, employees and managers of the company.7 Current development and market analysis The increase in the legislations towards tobacco industry creates difficulties for the company to develop this business line, even nowadays, cigarette product of Khatoco is one of strongest brands in Viet Nam market and directly compete with Thang Long Tobacco Company and Sai Gon Tobacco Company. Therefore, men fashion is considered as key products that company will invest in to gain the competitive advantages in long-term period. Moreover, the potential growth of Vietnam apparel market is supposed to be high expected to rise by 12-14 percent from 2019-2022 and gained annual growth rate of 10 percent in 2017 according to the statistic of Vietnam Textile and Apparel Association (1). Furthermore, the domestic demand is climbing powered by young aged to middle aged consumers who are living in the urban with their increased disposable incomes.
In addition, spending on apparel keeps going up and reaches the second place and closely behind foods spending. This is the reason why fashion market is more attractive. The main markets of Khatoco Trading’s fashion Page | 3 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com products are Nghe An, Da Nang, Binh Dinh, Can Tho and Nha Trang, and these markets are also developing in the number of young citizens who desire to express their characteristics and status via outfits. Khatoco Trading is also focusing on exporting clothing by processing orders from foreign partners in EU and USA.
Therefore, a positive signal for export section of Khatoco Trading is that export was forecasted to rise by 15 percent per annum from 2016 to 2020 [1]. As a result, the bright sight of the market in the near future creates more opportunities for men fashion products of Khatoco Trading. Currently, the close competitor of Khatoco Trading in apparel industry is Owen at the middle-age and middle-class men segment.8 Organizational performance The growth in revenue and profits of the whole company are shown in the following chart: Figure 2: Sale and Profits of The Company and Fashion section from 2016 to 2018 Sale and profits from 2016 to 2018 8,000,000 250,000 7,363,363 7,000,000 200,000 6,000,000 193,112 5,691,625 5,722,753 150,000 5,000,000 149,019 132,570 4,000,000 100,000 3,000,000 50,000 2,000,000 (10,364) (6,639) 3,211 - 1,000,000 183,259 197,655 213,064 - (50,000) 2016 2017 2018 Total sale of Company Total sale of Fashion Total net profit of Company Total net profit of Fashion Source: Company’s financial statement 2016, 2017 and 2018 According to the above chart, there is the down trend in revenues and profits of the company from VND 7,363 billion in 2016 to VND 5,722 billion and from VND 193 billion in 2016 to VND 133 billion in 2018 respectively. The decrease in total sales and Page | 4 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com profits of the Company is mainly due to the decrease in sales and profits of Cigarette which faced many barriers from the Gorvenment.
On the other hands, the sale and profits of Fashion section still increased during 3 years even profits of 2016 and 2017 were negative, showing the positive signal for the business of Khatoco. Table 1: Fashion sale and profit growth rate from 2016 to 2018 Men Fashion 2017 vs 2016 2018 vs 2017 section Sale increase rate 7.80% Profit increase rate 35.