THE VIETNAM CEMENT INDUSTRY – COMPETITION AND CONSUMPTION

TABLE OF CONTENT
TABLE OF CONTENT.................................................................................................................................................I
LIST OF TABLES........................................................................................................................................................II
ACKNOWLEDGEMENT.............................................................................................................................................I
ABSTRACT...................................................................................................................................................................II
CHAPTER I. INTRODUCTION.................................................................................................................................1
I. RATIONALE ...................................................................................................................................................1
II. PROBLEM STATEMENT..............................................................................................................................1
III. RESEARCH METHODOLOGY...................................................................................................................2
........................................................................................................................................................................................3
CHAPTER II. CONCEPTUAL FRAMEWORK......................................................................................................4
I. VALUE CHAIN CONCEPT AND RELATED ISSUES OF STRATEGIC MANAGEMENT IN
MANUFACTURING ..........................................................................................................................................4
II. THE CEMENT INDUSTRY.........................................................................................................................11
CHAPTER III. HPCC - COMPANY PROFILE.....................................................................................................15
I. BACKGROUND.............................................................................................................................................15
II. THE VIETNAM CEMENT INDUSTRY – COMPETITION AND CONSUMPTION...............................15
III. BRIEF OF HPCC’S OPERATION..............................................................................................................16
IV. THE NEW PLANT PROJECT....................................................................................................................17
CHAPTER IV. AN ANALYSIS ON THE COMPANY’S CURRENT VALUE CHAIN...................................18
I. SUPPLY..........................................................................................................................................................18
II. MANUFACTURING....................................................................................................................................20
III. MARKET ANALYSIS................................................................................................................................23
IV. SUMMARY.................................................................................................................................................30
CHAPTER V. THE PROJECT OF THE NEW PLANT IN THUY NGUYEN – TRANG KENH - HAI
PHONG.........................................................................................................................................................................32
I. THE NECESSITY OF THE NEW PROJECT................................................................................................32
II. THE NEW PLANT’S OPERATION............................................................................................................33
III. MARKET ANALYSIS................................................................................................................................34
IV. INFORMATION FLOW..............................................................................................................................36
V. ORGANIZATIONAL CHANGES................................................................................................................36

CHAPTER VI. CONCLUSIONS AND RECOMMENDATIONS........................................................................38
I. CONCLUSIONS.............................................................................................................................................38
II. RECOMMENDATIONS...............................................................................................................................39
REFERENCES.............................................................................................................................................................43
APPENDICES..............................................................................................................................................................44
EXHIBIT 6.A. HAIPHONG CEMENT COMPANY (OLD STRUCTURE).......................................................46
EXHIBIT 6.B. HAIPHONG CEMENT COMPANY (NEW STRUCTURE)......................................................47
EXHIBIT 7.A. BALANCE SHEET...........................................................................................................................48
EXHIBIT 7.B. INCOME STATEMENT..................................................................................................................49
EXHIBIT 8. GEOGRAPHICAL CONSUMING MARKETS...............................................................................50
HA GIANG...........................................................................................................................................................50


MIDDLE AREA.....................................................................................................................................................50
LAO CAI..............................................................................................................................................................50
SON TAY.............................................................................................................................................................50
HAI PHONG.................................................................................................................................................................50
HANOI.................................................................................................................................................................50
THAI BINH...........................................................................................................................................................50
MIDDLE AREA.....................................................................................................................................................50

LIST OF TABLES
Table 1

Increases in material inputs price and their influence on costs

Page 19

Table 2

Proportion of material inventory to current assets

Page 19

Table 3

Comparisons of productivity and capacity

Page 20

Table 4

Components of product cost

Page 20

Table 5

Cost structure of major activities

Page 22

Table 6

Proportion of inventories to current assets’ value

Page 22

Table 7

Comparison of costs and price

Page 23

Table 8

Geographical consuming markets

Page 24

Table 9

The supply of Clinker

Page 25

Table 10

White Cement product

Page 25

Table 11

Selling prices for different types of cement provided by HPCC

Page 29

Table 12

Structure of consumption in type of cement

Page 29

Table 13

Commission expenses

Page 30

Table 14

Transportation cost

Page 30

Table 15

Estimated production capacity

Page 34

Table 16

Consumption capacity in geographical markets

Page 35

ACKNOWLEDGEMENT
I wish to express my sincere gratitude to Prof. N. Ramachandran, my teacher and also my
advisor, for his valuable support and enthusiastic encouragement during my research work.
I would like to give sincere thanks to Prof. H. Paul who gave me useful recommendations on
dealing with the issues raised by the research.
I am honestly grateful to Dr. Do Ba Khang for his kindly suggestions and contributions to the
result of my research presentation.
Special thanks should go to the Government of Switzerland, SAV Programmers, and my
teachers for their great support during my two-year study in Vietnam and AIT.
I am very thankful to people at Hai Phong Cement Company, especially Mrs. Hue and Mr. Hai,
for the enthusiastic help they gave me during my collection of research data.
Thanks are also dedicated to my lovely friends and SAV 6 classmates for their warm sentiment
and sharing.
Especially, love and gratitude are reserved for my grandparents, my mother, and other family
members who gave me invaluable support and encouragement.

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ABSTRACT
It has been recognized that the traditional accounting system, with a narrow focus, is no longer
appropriate in the today’s turbulent business environment. However, though Strategic Cost
Management has been increasingly paid attention by economists, a formal adoption of concepts
like Value Chain Analysis and Activity-Based Costing into enterprises is in fact not as simple
as we initially thought.
One of the biggest hindering forces is people’ mindsets. How to change their viewpoints of
managing, controlling, and operating a business has been still a great question.
With Hai Phong Cement Company (HPCC) being a case study, the research attempts to analyze
and identify problems and their reasons, and also opportunities for improvement. Based on the
theoretical issues reviewed in Chapter 2, the study is continued in Chapters 3,4, and 5 to

consider the possibility to involve these strategic concepts into organizations like HPCC, which
had a long time operating under the old management mechanism.
With recommendations given in Chapter 6, it is expected that a selective adoption of the
strategic management approach will benefit not only HPCC but other enterprises in other
industries as well.

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CHAPTER I.
I.

INTRODUCTION

RATIONALE

Historically, in many Vietnamese enterprises, the conventional accounting system has always
been considered an effective and essential managerial tool for evaluating and controlling
business performance. Companies almost rely on ledgers, which record data of inside
transactions only. Costs are calculated based on units of materials purchased, direct labor
employed, and overhead. Analyses of financial statements also go around these three main
items of costs.
Such a management mechanism might be appropriate in the past, when there were not many
players in the market, and customer requirements were simple. At that time, moreover, direct
labor was the major force in production and, generally, accounted for a large proportion in the
manufacturing cost structure. Thus, while it was not very difficult for producers to sell their
products, there was also no big concern about the current accounting system.
It is, however, not the case of today’s business environment, which is characterized as strongly
competitive with higher and more complicated customer demand. Low cost is no longer the
only effective weapon for firms to compete on the market. Direct labor is also not a reliable

variable for determining cost allocations due to the emergence of advanced technologies and
machinery as a replacement for manual work. The current accounting system alone serves as a
tool just for checking and investigating variances. Only little strategic insights could be
withdrawn from those rigid numbers. The rapidly changing business environment, therefore,
necessitates a new management approach.
The Value Chain Analysis and Activity-Based Costing (ABC) concepts have been introduced
since 1980s. They bring in a comprehensive view of analyzing and managing a business’s
operation. The Value Chain Analysis concept takes into consideration not only internal
manufacturing (operating) processes but also linkages and relationships between the firm with
suppliers and customers, whereas the ABC method studies costs through out the value chain
with activities, not units of items, being the basis.
These concepts are, indeed, rather new in Vietnam, both intellectually as well as practically.
The research is, therefore, aimed to get an understanding of the importance and necessity of
adapting a new management approach. Considerations and judgements of whether it is feasible
to apply the whole concept into any business are also needed, since not all enterprises and their
own business environments are the same.
II.

PROBLEM STATEMENT

Relying on the current accounting system, many companies could not recognize that they, while
reporting profit, are in fact not profitable at all.
Through a Value Chain analysis, weaknesses are likely to be revealed more convincingly. With
Hai Phong Cement Company being an example, the study is expected to prove why some
Vietnamese companies, particularly State-owned enterprises fail to manage costs and sales
effectively and, as a result, lose their competitive position in the market. Finding possible roots
of such incompetence and determining whether it could be improved are the issues raised for
the research.
One of the biggest problems for any enterprise is how to change the management’s mindsets of
adopting and involving the new concepts into the organization. The author has no ambition that

a new accounting system will immediately replace the traditional one. Although the results of
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many researchers have favored Strategic Management with Value Chain Analysis and ABC
System as the central elements, it does not mean that problems will surely be solved all at a
time. Success or failure also depends on characteristics of the industry and of the company
itself. In fact, applications of the new approach should be acknowledged as support for, not an
elimination of, the current accounting system.
In the case of Hai Phong Cement Company, which is now under pressures of the market with
strong competition from other cement producers, recognition of weaknesses is not easy, but
how to deal with these in a tough condition of limited capital, time and other resources is an
even more difficult task. This issue should be taken into account by the decision makers.
III.

RESEARCH METHODOLOGY

1. Objectives
The study is to:
-

First, get general ideas about the necessity to adopt Strategic Management, with Value
Chain Analysis and ABC system as central elements, into the corporate strategy.

-

Second, examine the current situation of management in the reality as well as the possibility
for these concepts to be implemented in Vietnamsese enterprises (in this case, Hai Phong
Cement Company).

-

Finally, realize what further adjustments are needed for such an application of the concepts,
and where and how to start.

2. Information sources
For an in-depth understanding about the nature of the industry in which the studied company
operates, i.e. cement manufacturing, secondary information is crucial:
-

Articles on Strategic Cost Management: to have basic ideas of the concepts

-

Industry Books: to get better understandings of the manufacturing processes so as to know
what, who, and how to add value as well as where possible for cost savings.

-

The Internet: information about famous companies producing cement is searched for as a
source for learning and benchmarking. For example, Lafarge Corporation of England is
considered a good illustration.

-

Newspapers: news about the cement market, including the demand, the production capacity
and, if possible, the operating situation of some domestic cement producers like Hoang
Thach, Chin Fon, and so on.

The most important source of information is from visiting the company. Observations, direct

questions with accountants and employees, together with collection of financial statements are
the focus of the research. This approach is expected to help our understandings of the company
with real and valuable information, through which a comprehensive analysis could be achieved.
3. Scope
The study is expected to collect cost-related information as much as possible, but it did not go
in details into ABC calculations. Instead, it concentrates on, along the value chain, findings of
important items ignored by the management, which have been obviously the roots of the
company’s ineffectiveness.
4. Presentation of the Research report
The report is presented as follows:
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Chapter 1: Introduction
Chapter 2: Conceptual framework
Chapter 3: Hai Phong Cement Company Profile
Chapter 4: An analysis of the current value chain at Hai Phong Cement Company.
Chapter 5: The project of a new plant in Trang Kenh – Thuy Nguyen – Hai Phong.
Chapter 6: Conclusions and recommendations
5. Limitations
The study was conducted at the end of the financial year, 2000. In addition, Hai Phong Cement
Company is now carrying out its project of moving the current factory to the suburb, and
building a new clean-technology plant instead. Therefore, there were some difficulties in
collecting sufficient needed information since the people were busy accomplishing their urgent
mission and responsibilities.
Moreover, the ability to get exact costs and expenses for each specific activity, as required by
the ABC concept, was limited due to the fact that the company is still relying on the
conventional accounting system, which focuses only on examining items purchased and
employed.

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CHAPTER II.

CONCEPTUAL FRAMEWORK

I.
VALUE CHAIN CONCEPT AND RELATED ISSUES OF STRATEGIC
MANAGEMENT IN MANUFACTURING
1. What does Value Chain Analysis say?
The Value Chain framework is a method for breaking down the chain, from basic raw materials
to end-use customers, into strategically relevant activities in order to understand the behavior of
costs and the sources of differentiation. (See Exhibit 1).
EXHIBIT 1. Value Activities within a Firm
Raw
Materials

R&D

Manufacturing

Marketing

Distribution

Service

2. Traditional Accounting vs. Value Chain Concept
It has been recognized that the traditional accounting system is no longer appropriate for a

comprehensive evaluation of an enterprise’s performance. It has increasingly revealed
disadvantages, particularly in the today’s highly changing business environment.
Exhibit 2 clarifies and compares the scope covered by the Traditional Management system and
the Value Chain Analysis approach. The former is characterized as internally oriented, while
with the latter, up- and down-stream linkages are both scrutinized.
EXHIBIT 2. Traditional vs. Value Chain Management

Linkages with
suppliers

Material
arrival

Manufacturing

Sales
revenue

Linkages with
customers

Traditional Accounting System
Value Chain Analysis Management Approach
The traditional cost accounting techniques allocate costs to products based on attributes of a
single unit, such as number of direct labor hours required to manufacturing a unit (in
manufacturing), or purchase cost of merchandise resold (in retailing).
Let’s consider the overhead cost, which has been usually inaccurately calculated in financial
reports of companies. The traditional cost accounting method allocates most overhead costs on
the basis of either direct labor or direct materials. When the product line becomes more
complex, however, those costs traced to individual product are more inaccurate, especially for

overhead costs. Thus, distortions may occur if we calculate overhead using direct labor or
machine hour rules.

4


For example, while allocating overhead based on direct labor, the system suggests overhead
would decrease with decreasing direct labor. It is, in fact, not always true. Overhead, once
increased, is difficult to reduce when sales figures decrease, especially as the decrease in sales
will occur sometime before you can reduce overhead, thereby causing the overhead percentage
to go up for the period of reduced sales.
Moreover, there is a tendency for overheads to climb in the high performance divisions. When
sales decline, overheads do not decline in direct proportion to sales, because management has a
tendency to hold on employees and inventories in the hope of recovery in the near future. Under
the stress, companies start using crisis or pressure methods such as: temporary layoffs; firing
deadwood from indirect personnel without a thorough analysis; cutbacks on preventive
maintenance; and slowdown of R&D. These actions may have initial success; however, the
gains from the programs are always short-lived and are accompanied by costly negative effects
such as lower quality of products, reduced services, increased absenteeism, and lower
productivity.
The traditional accounting system may contain the total cost of each value-creating process, but
may not reveal the causes or factors for the significant individual costs. Using single output or
volume measures to assign costs is often misleading. Causality is very difficult to determine
because unfavorable variance may have multiple causes. With numbers summarized on an
aggregate level, it becomes difficult to allocate individual responsibility for variances.
The traditional management accounting focuses on internal information. It places excessive
emphasis on manufacturing costs. It also assumes that cost reduction must be found in the
value-added process, i.e. selling price less the cost of raw materials. It considers this process as
the only area in which a firm can influence costs. There is misleading here since there are also
other purchased inputs such as engineering, maintenance, distribution, and service. According

to this system’s principles, we have limited choices: raising the selling price, or reducing costs.
The first option of increasing the price is really unfeasible today, especially it seems to be
impossible when the firm has no predominantly competitive advantage.
The second option, i.e. reductions in production costs, could be carried out as follows:
+ Reduce cost of raw materials: buying cheap materials at high volume while compromising
quality, raising inventories and thus raising costs for warehousing and handling. In fact, many
companies often “forward buy” to take advantages of lower prices. As a result, shipments are
typically made in large volume, requiring minimal packaging and special handling, leading to
higher unnecessary costs for quality control and storage.
+ Reduce cost of direct labor: lowering the wage will negatively affect employees’ morale and
productivity. In the reality, downsizing and reorganizing the operation is usually the preferable
solution of companies.
+ Reduce cost of overhead: the question for almost all enterprises is always how to start,
through layoffs, firing, or cutbacks on maintenance. Overheads are not merely tools, trucks, and
furniture as many people think. There are a large number of overhead functions which remain in
the ‘back offices” and are not associated with any single department.
Looking at items in financial reports, if we want to improve profitability by reducing costs, we
find it difficult to determine where to start with, and how, because each item consists of
multiple activities. Moreover, there are other non-value-creating activities that could have been
eliminated, but they seem to be invisible and not presented in the report paper. As a result, these
non-value-creating activities still exist and continue contributing to the burden of costs.
The Value Chain Analysis, on the contrary, covers both external and internal data. It uses
appropriate cost drivers for all major value-creating processes. It exploits linkages throughout
the value chain and provides continuous monitoring.
5


The Value Chain concept defines four areas for improvement:
-

Linkages with suppliers:

Supplier development may be an example of this linkage. A firm’s ability to produce a quality
product at a reasonable cost, and in a timely manner, is heavily influenced by supplier’s
capabilities. Consequently, without a competent supplier network, a firm’s ability to compete
on the market can be significantly hampered.
-

Linkages with customers:

The principle for success in the market is that doing business should not be one-time. It was
admitted that customer returns help save many costs of advertising and attracting new
customers. Therefore, customers should be cared for even after they have purchased and left the
firm.
-

Process linkages with the value chain of a business unit:

Cooperation among sub-units in the production line as well as communication between them
with other departments, particularly those responsible for material purchasing, transportation
and sales should be ensured to save costs of waste (time, materials and money), and costs for
warehousing and handling (when excessive inventories).
-

Linkages across business unit value chains within the firm:

For instance, share in distribution with other business units. Transport is a highly visible and
expensive part of distribution, especially for heavy industrial products. Therefore, such
cooperation with (an) other business units may help all the parties benefit from reduced
transport costs.

As mentioned earlier, the conventional management accounting approach tends to emphasize
across-the-board cost reductions, whereas Value Chain Analysis recognizes inter-linkages and
admits the possibility that deliberately in increasing costs in one value activity can bring about a
reduction in the total cost. For example, purchasing higher-quality, higher-priced raw materials
could reduce scrap significantly and thus lower the total cost.
3. Activity-Based Costing
The concept of Value Chain Analysis is normally studied in connection with an ABC system.
The ABC system, while using multiple, not single, cost drivers, helps to identify causes to
activities. By applying Pareto’s rules, companies are also able to identify non-added value
activities.
An ABC system, as contrast to the conventional accounting numbers, focuses on activities
required to produce each product. In an ABC system, costs are organized into two categories:
material costs and activity costs.
Material costs are non-payroll costs that are obviously related and conveniently traceable to a
specific product. They have been traditionally treated as direct costs.
Activity costs are the conversion costs involved in performing or supporting the activities that
take place within the organization, except for any non-payroll costs. They include all labor and
fringe benefit costs and manufacturing overhead.

EXHIBIT 3. Value Chain Activities and Possible Cost Drivers

6


Types of activities

Possible cost drivers
Structural activities:

Manage location

Number of locations

Manage technology

Number of different models

Manage complexity of products: e.g. reducing Number of different models
the number of models to save costs
Manage institutional structure: managing debt Debt level, debt capacity
level
Integrate vertically: going up- or down-stream Number of industry segments in which the
from the core business
company is present
Integrate horizontally: control market size, Sales volume in units or dollars, number of
market share, and range of geographic influence different customers
Gain experience, learn, and manage skill sets

Cumulative number of units sold, cumulative
number of individual sales

Procedural activities:
Provide quality: quality management training, Employee training level, return merchandise
quality standards, employee empowerment
rates, customer satisfaction ratings
Manage employees: Degree of centralization of Employee turnover rates, span of command
authority, size of work unit, number of work
units
Manage capacity

Percentage of capacity utilization, number of
production or service facilities

Manage efficiency

Lead time from product to concept to
production, R&D cost compared to
competitor

Manage product complexity

Number of parts per product, number of
separate operations, flexibility of the
production process

Manage plant layout

Throughput time, ability to convert from one
product/service to another
Operational activities:

Production

Direct labor hours, set-ups, machine hours

Inbound logistics

Purchased orders, number of parts

Quality

Number of inspections

While the traditional accounting system just focuses on operational reports with items of cost
like direct materials, direct labor, overhead, and so on, the Value Chain and ABC concepts
7


study all aspects of the chain, accompanied by possible cost drivers. They are structural
activities, procedural activities, and also operational activities. (Refer to Exhibit 3).
In the ABC approach, an activity hierarchy is established. It includes the following activities:
Process activities: these activities are classified into two levels. The unit level includes direct
materials-related activities, varying proportionately with production and sales. The other one is
batch level, e.g. setting up a machine, which is performed for each batch produced but
independent of number of units in the batch.
Process-support activities: they provide support to other major activities within the
organization, but do not relate directly to the organization’s products. E.g.: equipment
maintenance, production control, and scheduling.
Organization and facility-support activities: these include general supervision, planning, and
security.
Customer of market-related activities: they are sales administration’s tasks to deal with
customer inquiries, orders or customer order changes.
Product or product line-related activities: e.g. market research, process experimentation, and
technological application studies.).
Such a classification is aimed to avoid the situation that some important activities are
overlooked. While covering the whole chain in a systematic manner, the ABC method also
helps to identify interrelationships among activities and determine responsibility centers.
4. Financial vs. Non-financial measures
It is not always easy to obtain sufficient financial data on these activities. With only financial
numbers, moreover, it is not reliable enough for a comprehensive evaluation of a business’s

operation. An ABC system, therefore, needs not only financial numbers but non-financial
measures as well.
Financial measures reflect the results of past decisions, not the actionable steps needed for
surviving in today’s competitive environment. In fact, some companies make extensive use of
non-financial measures to evaluate factory performance. The reason is that if management
accounting system measures only costs, employees tend to focus on costs exclusively.
Non-financial performance measures, meanwhile, are recognized another key to strategically
adapted cost management. It was documented that each company, in its non-financial process,
usually goes through the six major steps:
-

A shock to its operating environment.

-

The old control system was found inadequate.

-

Defining key success factors.

-

Finding objective, quantifiable performance measures.

-

Implementation.

-

Evaluating the new control system.

Normally, in many cases, the most important non-financial measures are:
-

Reliability: e.g. on-time delivery.

-

Responsiveness: e.g. lead-time required to fill an order.

-

Quality: e.g. outgoing quality rate, customer returns.

8


Ferolows et al.(1986) presented a step-by-step generic guide that any manufacturing change
should follow:
-

First, high quality must be ensured.

-

Then, delivery reliability must be achieved.

-

Then, production costs must be lowered.

-

Then, production flexibility must increase.

Even more important are questions of whose responsibility these measures belong to and how to
deal with such commitments. Improvement in competitive areas will certainly take a period of
time, rather than as a result of any quick fixed cost cutting solutions. In some manufacturing
firms, cost reductions are done by firing or downsizing, while direct labor cost accounts for
only a little proportion of production costs. As a result, cost distortions happen while nothing
has been really improved.
5. What does WASTE mean in an organization?
It was recognized that there are seven common accepted wastes in organizations, including:
-

Over production: excessive lead time and storage times, excessive work-in-progress stocks.

-

Waiting: when goods are not moving, goods and workers are affected. There should be no
waiting time with a consequent faster flow of goods. Also, waiting time for workers should
be used for training, maintenance and should not result in overproduction.

-

Transportation: double handling and excessive movements are likely to cause damage and
deterioration.

-

Inappropriate processing: overly complex solutions instead of simple procedures, large
inflexible machines instead of small flexible ones, thus encouraging employees to
overproduce to recover the large investment in complex machines.

-

Unnecessary inventory: costs are likely to double for maintaining, storing, and handling
activities.

-

Unnecessary motion: involves the ergonomics of production where operators have to
stretch, bend and pick up when this could be avoided.

-

Defects: time, money, and labor are obviously wasted while the firm still incurs costs.

There are three types of operations that are undertaken, according to Yasuhiro Monden
(Monden, 1993). These can be categorized into non-value adding (NVA), necessary but nonvalue adding (NNVA), and value adding (VA).
-

NVA: they are pure waste and unnecessary actions which should be eliminated completely.
For example: waiting time, stacking intermediate products, and double handling.

-

NNVA: these activities are wasteful, but may be necessary under the current operating

procedures. For example: walking along distances to pick up parts, unpacking deliveries,
and transferring a tool from one hand to another.
In order to eliminate these activities, it would be necessary to make major changes to the
operating system, such as creating a new layout or arranging for suppliers in delivering
unpacked goods.

-

VA: activities that involve the conversion or processing of raw materials or semi-finished
products through the use of manual labors. They include sub-assembly of parts, and forging
raw materials.
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6. Low cost vs. Differentiation – Focus vs. Diversification
The studied company is a manufacturer of cement, which is usually considered a commodity
product. Therefore, it may be useful for us to take a look at the two strategic choices: being low
cost through concentration, or differentiated through product diversification.
Low-cost business units typically tend to have narrow product lines in order to minimize
inventory carry costs as well as to benefit from scale economies. Low-cost production should
not be dependent on large volume. Low-cost manufacturing through scale economies is seen a
narrow view. Key attributes are flexibility, innovation, and delivery speed and reliability.
(Steven Brown, 1996).
The problem for a number of companies is that their strategy is to concentrate on high volume
with large market segments. They neglect smaller but possibly profitable segments. This is also
the case of our researched company, HPCC.
Analysts suggest that a firm should focus, rather than be pulled in different directions.
According to them, a company can be unfocused in two ways:
-

Competing in markets without undertaking a manufacturing audit to see whether or not the
firm’s technology, skills, and resources match the targeted market.

-

Investing in activities which fall outside of the firm’s core competence, meaning activities
that the company might have no expertise.
7. Post mass-production school of thought

We have here “post mass-production” school of thought as guidelines summarized for
enterprises to consider:
-

The need to reduce the administration hierarchy that supports the business (Kanter, 1989;
Keuning and Opheij, 1994).

-

The need to decentralize decision-making within turbulent environment (Lawrence and
Lorsch, 1967).

-

The remove of ‘waste” from the organization through the adoption of ‘lean thinking”
(Womack and Jones, 1996).

-

The development of the supply and value chain concepts (Porter, 1980).

-

The increasing sophistication and demands of customers and consumers (Stalk and Hout,
1990).

-

The need to compete on the basis of “time” compression in addition to the other elements of
the customer “utility” equation (Stalk and Hout, 1990).

-

The need to redefine and remove bureaucracy from the administrative procedures within the
factory (Hammer and Champy, 1993). Functional organization should become a flatter and
more responsive organizational structure.

For cement manufacturing, though it is not exactly a mass-production industry in the today’s
business environment, the value of these schools of thought still remains. These issues are going
to be discussed in the next chapters, which are related to our case study – HPCC.
8. Challenges of adopting the new concepts in reality
While highly recommending Value Chain Analysis and ABC system, we still have to admit that
there are inevitable limitations and difficulties in applying these concepts into practice. We
should not admire them as if they are extremely ideal tools for all kinds of enterprises. In case
of a one-product firm, for example, it may be argued that cost data would not be substantially
10


improved with an ABC system. To this firm, ABC is quite complicated. However, there are still
benefits from doing activity-based analysis since it helps to identify non-value-added activities.
In the reality, some companies considered adopting ABC but finally rejected it, because it

looked a little complicated for their needs, while they had little control over what required by
the concept.
In adopting the ABC approach, the formidable task is to collect sufficient information to specify
activities and assign costs to those activities. ABC systems require more detailed information
than traditional cost system. In addition, Pareto’s rules, though quite useful in identifying the
most value-creating activities, also require an already effective design of an ABC system.
In effect, what many firms need is a performance indicator system that focuses externally on the
business environment and its changing demands, on markets/customers and competitors, and
internally on key non-financial indicators (such as market penetration, customer satisfaction,
quality, delivery, and flexibility) as well as more typical financial measures (sales growth,
profit, return on investment, and cash flow). The system must be oriented toward information
that can help managers make better decisions as contrasted to just reporting historical results.
II.

THE CEMENT INDUSTRY

1. Definition and usage of cement:
Cement is a hydraulically active binder manufactured from natural raw materials such as
limestone and marl. Other hydraulic materials, such as fly ash and slag, are inter-ground to
produce blended cements.
As another definition, cement is a finely ground, manufactured mineral product that, when
combined with water, sand, gravel and other materials, forms concrete which is the most widely
used construction material in the world. Cement is the glue that holds together the sand and
gravel to make concrete. Over 90% of the cement consumed have no substitute for its use.
2. Cement ingredients:
While different types of cement vary in their ingredients, four common elements are found in
all types of cement. They are calcium, silica, aluminum, and iron. The composition of cement is
as followed: lime (60-67%), silica (17-25%), alumina (2-8%), iron oxide (0-6%) together with
sulfur trioxide (1-7%) derived from gypsum, magnesia (0.1-5%), and alkalis (0.1-1.5%).
Alkalis are an important constituent of cement, but the use of pre-heaters in modern dry-process

cement plants has led to an increase in the alkali content of cement, meaning lower gain in
strength. Therefore, the alkali content should be controlled. On the other hand, however,
limiting the alkali content too severely results in increased energy consumption. Cements with a
low alkali content may be required for use in the manufacture of concrete in which the use of
aggregate introduces silica. Alkalis may enhance reactions with amorphous silica. The content
of alkalis contributes to the acceleration of the early strength and lowering of the final strength.
The chemical composition of cement influences the characteristics of cement. Specifications for
cement contain different requirements of chemical and physical properties: alkalis, loss in
ignition, insoluble residue, fineness, soundness, autoclave expansion, compressive strength, and
initial and final setting. If these principles are well understood, it is possible to produce different
types of cement to satisfy different using purposes of consumers. For example, regarding
resistance to sulfur attack and reaction with water leading to expansion, there may be “nonshrink” cement which is used for floor slabs, chemical containment structures, packing desks,
where shrinkage cracking must be minimized and durability maximized.

11


3. Characteristics of the industry
- Relationship with industries: The cement industry is closely connected with constructionrelated industries. Unlike many other goods, cement is not the final product but an intermediate
input for the construction industry. The cement industry is, therefore, considered a material
manufacturing industry.
Such a close relationship with construction–related industries means that the cement industry is
significantly affected by the space of construction projects. In another word, synchronous
cooperation with industries having demand for construction is a vital mission for the cement
producers in order to solve their output issue.
- Technology: Cement manufacturing requires modern technology. Technologies for producing
cement are complicated, requiring huge initial capital investments in addition to infrastructures
needed for transportation, and expenditures on transport means.
Technically, in producing cement, it is the kiln for clinker heating which determines the product
quality and cost. This necessitates an investment in improving and upgrading clinker kilns.

Regarding technology, there are two methods of producing cement, i.e. wet processing and dry
processing. The difference between the two methods is that the wet processing consumes much
more fuel and takes more time for heating than the dry method. All processes require an
intimate mixture of the raw materials because a part of the reactions in the kiln must take place
by diffusion in solid materials, and a uniform distribution of materials is essential to ensure a
uniform product. Except when the raw materials necessitates the use of the wet process, dry
processing is used nowadays in order to minimize the energy required for burning. Typically,
the burning process represents 40 to 60% of the production cost, while the extraction of raw
materials for the manufacture of cement represents only 10% of the total cost of cement.
- Invested capital: Cement manufacturing is characterized as a heavy industry with complex
production techniques. It, therefore, requires a huge amount of investment capital (USD 150300 million for each project; or USD 150 for each ton of cement produced). The payback time
is rather long, about 8-10 years after an average of 4-year construction.
- Seasonal factor: The cement industry typically depends on seasonal factors, because it is a
product of the construction industry. In the rainy season, limited demand for construction leads
to lower consumption capacity of cement and, thus, stagnation of the product. As a result,
during this period of time the capital turnover is slowed down while warehousing and handling
expenses increase. On the contrary, construction is rather comfortable in the dry season,
facilitating higher cement consumption. This information implies the need for careful
investment plans in addition to plans for production, particularly when an investment is divided
into different stages.
- Product handling: Moreover, there is another feature of cement involving the business
effectiveness. Cement handling is rather costly in terms of money and people. For powder
cement, the handling is carried out simply just by putting cement into silos. Building these silos,
however, requires lots of money. For packaged cement, the requirement is only for dry
warehouses, but packages must be moved around every 15 days to avoid solidity. Otherwise,
cement becomes useless.
- Material source: Materials for producing cement have no substitute: limestone and clay are
strictly required for creating cement. Therefore, the manufacturing must be connected to
material areas such as limestone quarry, coal mines, and electricity supply plants so as to make
use of available resources. If the manufacturing is performed far from the material source,

transportation will be certainly complicated and costly, affecting lead time, production costs and
then, the price.

12


4. Process of cement production
The followings are major steps in producing cement (See Exhibit 4):
EXHIBIT 4 – Cement production process flow
Quarry

Raw materials
crushing

Precalcines

Kiln

Pre-homogenization
(Blending)

Gypsum and
additives

Raw Feed
Raw feed
Raw feed
Mill
mill
mill

Cement
Mill

Homogenization

Finished
product

[1] Raw materials are exploited from the quarry. The most common material used for cement is
limestone because it is rich in calcium. It is blasted from its rockbed and then crushed to form
smaller pieces. Other materials include clay, chalk (for wet processing); and shale (for dry
processing).
[2] Stone from the crusher is then pre-homogenized by blending it with other materials (sand,
mill scale) to achieve the right quantities of calcium, silica, aluminum and iron.
[3] The crushed limestone and other additives are ground further in the raw feed mill before
being cooked in the kiln.
[4] The feed is then homogenized through a separator that strains particles that are too coarse
for the kiln. Fine materials pass through the separator while coarse materials are returned to the
mill for further grinding.
[5] Some cement plants have a preheating tower that preheats or precalcines the feed before
going into the kiln which increases production and reduces heat consumption of the kiln.
[6] The feed then goes into the kiln where it is heated. At this stage, clinker compounds form,
which are later cooled and ground into a fine cement powder in the cement mill.
[7] Some cements receive additives such as fly ash, gypsum or silica fume depending on the
properties desired from the final product. If the final product is concrete, the cement then is
shipped out and, eventually, mixed with water and aggregates to form ready-mixed concrete.
[8] If the final product is purely cement, not concrete, the powder is then moved to cement silos
that, in turn, transfer it to packing plants or for bulk transport.
5. Types of cement:

There are a variety of cement categories, of which characteristics depend on each particular
project regarding the weather, environment, and location. It is recognized that cement categories
are distinguished based on differences in additive ingredients. The below are several popular
types of cement:
+ Puzerland Cement: mixed with additional 20-40% of puzerli additive. It is used for hydraulic
projects.
+ Plastic Cement: Added by chemically plastic, making it better in anti-absorption. It is used in
projects for building roads and airports, and in hydraulics.
13


+ Water-counteraction Cement: added by water-counteraction additives. It can be stored in a
little bit longer time in condition of wet air.
+ Early-strength Cement: added by 10% of mineral and 15% of slag additives; used in
structures that require quick strength of concrete to ensure the planned pace of construction.
+ White Cement: white color, processed from special materials containing little colored oxides,
used for decoration works.
+ Swelling Cement: added by swelling additive, used for hydraulic construction applications.
The above information is expected to provide us basic understandings about the strategic role of
this industry in the national economy, requirements in the manufacturing of cement, and
possibilities for cement producers to gain profits.

14


CHAPTER III.
I.

HPCC - COMPANY PROFILE

BACKGROUND

Hai Phong Cement Company (HPCC), the cradle of Vietnam cement industry, was early
founded in 1899. Over 100 years of its growth and development, HPCC with two famous
trademarks of Red Dragon and Blue Dragon made its presence in Liege Exhibition Fair, France
in 1904; and several thousands tons of Hai Phong cement were consumed in the market of Far
Eastern countries, China, and Singapore.
During the war against America, when the whole country was separated, HPCC was the only
producer of cement in Vietnam, dominating the domestic cement market. Then, Vietnam
cement industry also took over Ha Tien, Bim Son, and Hoang Thach factories.
HPCC, together with these cement producers, became members of the Union of Vietnam
Cement Enterprises in 1979, which was then turned into Vietnam National Cement Corporation
(VNCC) in 1994.
The current company’s address is No. 4 – Hanoi Road – Hong Bang – Hai Phong City. It
situates along the Cam River.
At the time of its establishment, this area was still the suburb with low density of population.
Today, the city is being expanded. Thus, the operation of such a big manufacturing plant inside
the city has caused significant air pollution, affecting the living condition of the surrounding
residence.
II.
THE VIETNAM CEMENT INDUSTRY – COMPETITION AND
CONSUMPTION
Prior to 1995, the Vietnam cement industry had only two kinds of cement manufacturing
models, The first one were high-volume-rotary kilns (HPCC, Hoang Thach, Ha Tien I) which
affiliated to VNCC. The second one included 30 vertical-kiln factories in local provinces.
During this period of time VNCC played a primary role, dominating the whole market for highquality cement. That was due to relative disadvantages of the vertical kilns in terms of both
quality and quantity.
Since 1995, new joint ventures were founded and then came into operation, making remarkable
changes on the domestic cement market.
There are now more or less than 10 cement manufacturers, both State-owned and joint ventures,

operating in Vietnam, including:
In the North

: Hoang Thach, HPCC, Chinfon (JV with a Taiwanese enterprise).

In the Middle : Bim Son, Hai Van, Nghi Son (JV with Japan), But Son, Van Xa.
In the South

: Ha Tien I, Ha Tien II, Sao Mai, Hoang Mai (JV with Switzerland).

Among those joint ventures, Chinfon, Sao Mai, and Van Xa all operate on high scales. Thus,
the cement market has become increasingly competitive with the emergence of those who are
really advantageous of both capital and technology. VNCC, Chinfon, and Sao Mai have their
own distribution network. The competition has been primarily based on the selling price, with
discounts and free-of-charge transports as the main tools.
The competition now becomes much stronger since the regional monetary crisis took place in
1997, which resulted in lower demand for cement than estimated. The industry’s production
capacity is now beginning to exceed the consumers’ demand. Moreover, it is also placed under
15


pressure of imported cement which is even cheaper than the domestic factories’ production
costs. The competition between VNCC with these joint ventures will surely be stronger, since
for the time being the number of new factories will increase while not many cement producers
are closed or shifted to another field due to very high switching costs.
At the moment, about 55% market share belongs to VNCC, while joint ventures occupy 2025%, and small vertical-kiln cement producers in local provinces presents the rest. The
technology used in these small factories was bought from China in 1980s, and the price charged
is usually lower in order to serve the local customers.
It is estimated that the demand for cement will be 23 million tons in 2010 (currently, the
industry’s production capacity is approximately 12 million tons). Therefore, in-depth

investments in technology and people are crucial requirements to the Vietnam cement industry.
It should be well prepared and more active in serving the market for the years to come.
Thus, there is no exception for HPCC in such a highly competitive situation. Obviously, HPCC
is now facing a lot of challenges and difficulties.
III.

BRIEF OF HPCC’S OPERATION

1. Material Resources
Major materials (limestone and clay) are exploited by the company itself at Trang Kenh quarry,
which is 20 kilometers from the current manufacturing plant.
2. Machine – Equipment – Technology:
Most of HPCC’s machinery and equipment have been bought and used for decades. They are
now too obsolescent and nearly 100% depreciated after some big repairing and maintenance
works. This has hindered the company’s capability to increase and improve its production
capacity and product’s quality. The cement at HPCC is produced in wet process. Within the
industry as a whole, only HPCC and Bim Son are using wet processing method in production,
while the others produce in dry process. Wet processing consumes much more fuel and takes
more time for heating clinker, leading to higher cost.
The production line being operated at HPCC is semi-automated. Manual workers (about 800
people) account for one forth of the company’s labor force. Since it has a plan of moving the
current factory to the new plant in Trang Kenh, there have not been any investments in new
equipment, except for big repairing works on the currently obsolescent machines.
3. Human Resource:
The number of HPCC’s total employees is approximately 3200 people, including one large
company with 3 affiliated units, i.e. Trang Kenh Stone Exploiting Enterprise, Transportation
and Repairing Enterprise, and Cement Package Manufacturing Enterprise.
More than 3000 employees is actually a great number in comparison with other cement
producers in the industry. Of these 3200 employees, female represents one third. This
proportion is not reasonable, and it needs to be adjusted since the women have had to undertake

very hard work with threats of pollution.
Wages are paid based on amount of outputs made, i.e. the volume of limestone, or mud, or
clinker exploited and produced. At first, VNCC issues the basic level of wage for each unit of
product (ton). Then, at the corporate level the company sets up wages according to specific
manufacturing process, basing on:
-

The general unit wage level issued by VNCC.

-

Qualification and managerial title/position of the employee in the company.
16


4. HPCC’s product range
Currently, the company produces and consumes over 350,000 tons of cement per year,
including sorts of PC30, PC40, sulfur long-lasting Portland cement and white cement labeled
Blue Dragon. It also undertakes transporting raw materials used for cement and other economic
sectors and repairing engines. In addition, the company also produces cement package with
output reaching 25 million pieces per year.
5. Manufacturing process
The manufacturing process of cement consists of a variety of activities, of which 4 major
processes are:
-

Raw material grinding

-

Fuel (coal) grinding

-

Kiln - Heating

-

Cement grinding

These processes can be briefly described as follows:
Firstly, at the material crushing unit, materials are exploited or purchased and then transported
to the manufacturing plant. Here, limestone, together with clay and slag, is blended into a
mixture, which is then put into the crushing mill for creating pate mud. Through a pipeline, the
mud is transferred to the kiln.
Secondly, at the fuel-grinding unit, coal, after being grinned, is also transferred to the kiln
through a throwing pipeline.
Thirdly, at the kiln, the mud created is heated by the coal, and clinker is the product of this step.
Fourthly, at the cement grinding unit, the heated- and gloomy-already clinker (for about 5 or 6
days) becomes powder. At this point, small portion of gypsum is added to the clinker thus
generating cement.
IV.

THE NEW PLANT PROJECT

The current plant, which is located inside the city, has caused a huge amount of dust everyday,
making the air significantly polluted. It was, therefore, decided by the Government to move the
factory to Trang Kenh – Thuy Nguyen – Hai Phong, which is 20 kilometers far from the current
plant in the North. The capital needed for the project is approximately 300 million US dollars.
It is expected that the construction of the project will be accomplished and the new factory, put

into operation, by 2002. What consideration really needed now is what must be changed, and
how to change them, in terms of not only the labor force but management approach, business
strategy, and value chain reconfiguration as well.

17


CHAPTER IV.

AN ANALYSIS ON THE COMPANY’S CURRENT
VALUE CHAIN

Here is an outline of the value chain at HPCC that we are going to examine:

Supply

Inbound
logistics

Material sources
Price of inputs
Limestone exploiting
Crushing
Transporting
Linkage with suppliers

I.

Manufacturing

Outbound
logistics

Technology
Labor skills
Costs
Linkage among
process units
The information
control system

Market/
Customers

Transportation (Costs)
Selling expenses
Promotion program
Customer segmentation
Product portfolio
Linkage with
customers/consumers

SUPPLY

-

The major materials are limestone and clay. They are mined by Trang Kenh Limestone
Exploiting Unit.

-

Additives like gypsum are bought from domestic suppliers (e.g., Dong Ha Gypsum
Company).

-

Additional materials (sub-materials) include:

+ Balls and bullets, which are bought from domestic construction engineering enterprises in
Hai Duong, Vinh Phu – Northern provinces of Vietnam.
+ Refractory bricks: bought from Cau Duong Brick Factory.
+ Substitute tools and components: from construction engineering enterprises.
+ Lubricants: bought from Petroleum Corporation.
-

Fuel: coal dust is purchased from Vietnam General Coal Corporation, Quang Ninh
province.

The advantage of HPCC with regard to these material sources is its long-standing relationship
with suppliers, meaning stable supply capability.
However, there are also many disadvantages. The first problem has arisen in transporting
materials, especially limestone, from the quarry in Trang Kenh, which is 20 kilometers far from
the manufacturing plant. Costs incurred include not only transportation cost but also cost of
time, damage and losses during the transporting period.
Moreover, the price HPCC had to pay to its suppliers has continued to rise since 1996, strongly
affecting its expenditure plans. This is also a problem facing other domestic cement producers.
Now we take a look at increases in the inputs’ prices:
18

TABLE 1 – Increases in Material Inputs Price and Their Influence on Costs
Item

Unit of
Input

Increase in inputs’ price
(USD per unit of input)

Increase in product’s cost
(USD per ton of cement)

Coal dust

Ton

5

0.45

Coal

Ton

10

0.4

Gypsum

Ton

6

0.3

Additives

Ton

3

0.42

Minerals

Ton

12

0.75

Pyrite slag

Ton

2

0.04

Electricity

kWh

0.02

0.84

40.02

6.8

TOTAL

(Source: HPCC’s report – 1998)
That prices of the inputs had increased actually caused an increase of nearly $7 per ton of
cement produced. The number is really considerable once multiplied by 400,000 tons of cement
consumed annually. The production costs were then forced to go up by approximately $2.5
million per year.
For a clearer view of the supply situation at HPCC, we are now looking at some other cement
producers to see how they operate as compared to HPCC.
Nghi Son is a joint venture between VNCC and a Japanese Cement Producer. One of its
advantages is its comfortable location. The plant situates near a limestone pit with potentially
great exploitable volume. Hoang Thach Cement Company also enjoys the similar advantage of
a favorable location.
La Hien, a small cement manufacturer, is located in Vo Nhai province (Thai Nguyen) where
there is a clinker pit with high quality and quantity. Moreover, La Hien imported uniform
equipment and machine, including the vertical kiln from China, thus able to reduce expenses for
repairing work.
Talking about HPCC and its relationship with its suppliers, we recognize that it lacks an

integration of the suppliers into a network. This, in addition to the disadvantage of being far
from the suppliers, is one reason for the company’s high material inventory. The following
presents the proportion of material inventory in the total current assets (in value):
TABLE 2 - Proportion of Material Inventory to Current Assets
1997
58%

1998
57%

1999
50%

Although the number seemed to decrease over the last three years, it still occupies more than
one half of the current assets. This indicates inefficiency in integrating the company’s network,
resulting in higher costs for warehousing and handling which should have been spent for other
profitable investments. (Refer to Exhibit 7.A. for more details).

19


II.

MANUFACTURING

Production capacity and cost issues are going to be analyzed in this section, sometimes in
comparison with other cement producers in the industry.
The table below presents the big difference between HPCC and some other cement
manufacturers in terms of production capacity. It is even clearer when we compare the number
of employees among these companies.

TABLE 3 – Comparisons of Productivity and Capacity
Company

Number of employees
(people)

Capacity (tons per year)

HPCC

3200

400,000

Nghi Son

250-300

2,140,000

Chinfon

600-700

1,400,000

Hoang Thach

2000

1,800,000
(Source: Vietnam National Cement Corporation - 1999)

The main force behind the low capacity of HPCC is its quite obsolescent technology compared
to the others that are invested with advanced machines and equipment. The lack of effectiveness
and efficiency is, moreover, due to the cumbersome and inflexible organizational structure, a
consequence of the old management mechanism.
Regarding cost management, it is true that HPCC, like most State-owned enterprises, has been
relying on the traditional accounting system for years. In its plans and reports, strategic issues
on the value chain, for example, are not paid enough attention. Only numbers are mentioned,
and what they reveal are only the result, making it very difficult for management to determine
the root causes and take actions for remedy.
Production costs are controlled and divided into 3 main items: Direct materials, direct labor, and
manufacturing overhead. Then corporate overhead and selling expenses are added for
determining the price. (Refer to Table 4).
TABLE 4 - Components of Product Cost
Items

Costs (USD/ton)

1. Direct materials

32

2. Direct labor

7

3. Manufacturing overhead

6

4. Production cost (1+2+3)

45

5. Corporate overhead

4

6. Selling expenses

10

7. Cost of good sold (5+6)

59

8. Price

64
(Source: HPCC report – 1998)
20