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 .6 Problems finding process .11 Industry and competitors condition .15 Possible reasons of problem.16 Design Solutions and Suggestion. Sakura Income Statement of 2013-2014-2015. PNJ Income Statement 2013-2014-2015. Data collected from competitors (unofficial).
a Comparison between Selling Price, Cost of Production and Required Price of some Ring models. b Comparison between Selling Price, Cost of Production and Required Price of some Earing models. c Comparison between Selling Price, Cost of Production and Required Price of some Bracelet models. d Comparison between Selling Price, Cost of Production and Required Price of some Pendant models.
Transcript and Result of interview. Data collected from 276 products of Sakura Jewelry. Company Working Card and Suggesting Costing Card. Collected Precious stone price during May 2016 to December 2016.57 References 1 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 2 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. 3 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 4 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 5 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. 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 1,300- 1,500 taels per month but the quality could not be compare to Sakura Jewelry.
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 6 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 7 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.
8 - 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.