Fauji Fertilizer Company Ffc Background Management Essay

Fauji Fertilizer Company Ffc Background Management Essay In 2002, FFC acquired ex Pak Saudi Fertilizers Limited Urea Plant, situated at Mirpur Mathelo. This acquisition, worth PKR 8,151 million, is one of the largest industrial sector transactions in Pakistan to date. Today, FFC has three plants with a combined capacity of 5,770 MTPD of prilled urea. It is one of the thirty biggest companies of Pakistan, represented via the KSE-30.2 Along with being one of the largest urea producers in the country, FFC is involved in training manpower and providing turnaround services within Pakistan and in the Middle East. A timeline of the evolution of FFC ensues.3 1978: Incorporation of the Company. 1982: Commissioning of Plant I, Goth Machhi with annual capacity of 570 thousand tonnes. 1991: Listed with Karachi and Lahore Stock Exchanges. 1992: Through the De-Bottle Necking (DBN) programme, the production capacity of Plant I was increased to 695 thousand tonnes per year. 1992: Listed with Islamabad Stock Exchange. 1993: Commissioning of Plant II, Goth Machhi with annual capacity of 635 thousand tonnes of Urea. 1993: Initial investment in Fauji Fertilizer Bin Qasim Limited, a DAP and Urea manufacturing concern; currently stands at Rs 4.75 billion representing 50.88% equity share. 1997: With achievement of Quality Management System certification in Goth Machhi, FFC became the first fertilizer plant in Pakistan to achieve this distinction. 2002: FFC acquired ex Pak Saudi Fertilizers Limited (PSFL) Urea Plant situated in Mirpur Mathelo (Plant III) with annual capacity of 574 thousand tonnes of urea, which was the largest industrial sector transaction in Pakistan at that time. 2003: FFC obtained certification of Occupational Health Safety Assessment Series, OHSAS-18001:1999. 2004: With investment in Pakistan Maroc Phosphore, Morocco S.A. of Rs 706 million, FFC has equity participation of 12.5% in PMP. 2008: Investment of Rs 1.5 billion in Fauji Cement Company Limited, currently representing 6.79% equity participation. 2008: DBN of Plant III was executed and commissioned successfully for enhancement of capacity to 718 thousand tonnes annually. 2010: Investment in FFC Energy Limited, Pakistans first wind power electricity generation project. 2011: SAP ERP implemented in the Company, improving business processes by reducing time lags and duplication of work. Vision Pakistan is a burgeoning market, not just in terms of head count, but also in advancement in the way agri-business is now carried out. Gone are the days of antiquated fertilizers, instead, only the best is now sought. FFC foresees this market to be extremely lucrative. It wants customers to benefit from its palette of product offerings, both domestic and outside the home country. It seeks to be thought of as not just the best there is, but also as a conscientious and caring company. FFC aims to be positioned as a very well-rounded organization in the minds of all its stakeholders, whether external or internal. Its value chain has quality at its core. It strives to be successful via total integration of streamlined processes, incomparable products, driven and motivated workforce, and extraordinary service, all the while staying ahead of the competition and continuously scanning the market. Corporate Strategy Our flexible and dynamic corporate strategy strives for enhancing customer satisfaction by adding value over the long run. We aim at creating value for the stakeholders by maintaining and improving our competitive position in the market. This is achieved by focusing on our sustainable competitive advantage that is derived by continuously assembling and exploiting an appropriate combination of resources and capabilities in response to the changing market conditions. Our organizational culture is one of our most fundamental competitive advantages. We have built and preserved an innovation-adept culture, a culture that promotes transparency and accountability through honesty, integrity and diligence in our dealing with employees, customers, financial market, government, regulatory authorities, and all the other stakeholders. Diversification in business line is also being considered. Our unique corporate strategy gets aligned with the resource allocation system and flows down to the oper ational levels, thus ensuring its implementation at all levels along with the achievement of the intended results.6 FFC focuses on value addition. This means that everyone at the company tries to make each subsequent year better than the previous one. This enhances the value creation process. For this, the corporate strategy is characterised by flexibility and innovation, which are also the core components of the culture of the organization. FFC prides itself on having been able to develop a culture which is innovative, transparent, and honest. Innovation allows FFC to be able to anticipate and prepare for change, by aligning its internal strengths with the external opportunities. Transparency enables FFC to satisfy every stakeholders requisites, since nothing is swept under the rug. This promotes diligent behaviour and accountability at all levels. Honesty is a trait which is valued from the very top to the very bottom of the hierarchy at FFC. It is this particular combination of all the above that the culture is both employee centric and customer centric. The human element, be it in the form of a worker/manager or a customer, is highly valued at FFC. Therefore, while the former is kept abreast of everything that goes on in the organization, the latter is assured of premium quality product and premium quality service every single time. Organization is all about teamwork. FFC is aware of this, which is why it demands uncompromising integrity and hard work from all individuals, so that the sum is greater than the parts. There is mutual understanding, trust, and interdependence. In return, FFC has a very worker friendly environment. Commitments within the company as well as with business partners, suppliers and customers are valued and kept. FFC is founded upon the principles7 of à ¢Ã¢â€š ¬Ã‚ ¢ Honesty in communication; à ¢Ã¢â€š ¬Ã‚ ¢ Excellence in products and services; à ¢Ã¢â€š ¬Ã‚ ¢ Consistency and synchronisation in words and actions; à ¢Ã¢â€š ¬Ã‚ ¢ Compassion in relationships within the micro and mega environments of the organization; à ¢Ã¢â€š ¬Ã‚ ¢ Fairness to all stakeholders through adherence to laws, regulations and policies. FFCs Financial Health Fauji Fertilizer Company (FFC) enjoys stable gas supply from Mari gas fields because they come under Fauji Foundations ownership. This translates into a huge competitive advantage over other fertilizer manufacturers, which are linked with the Sui-based networks. Financial highlights of FFC for the current year appear in the table below. These are for the period ended September 30, 2012.8 2012 (Rs 000) 2011 (Rs 000) Turnover 29,208,413 36,321,157 Cost of sales -22,778,306 -22,565,347 Gross Profit 6,430,107 13,755,810 Administrative Expenses -677,700 -550,247 Other Income 695,185 1,092,089 Taxation -991,876 -3,721,386 Profit after Tax 2,130,481 7,169,794 Earnings per share (Rs.) 2.28 7.68 Source: FFCs Annual Report for the Third Quarter, 2012 Revenue increased by 49% during the first half of 2012, due to high urea prices and sales of imported DAP. FFC urea sales exceeded 500,000 tons in June, which made up for declining sales in the first five months of 2012. In total, urea sales were up by 6% to 1.2 million tons in the period under review.9 Urea prices remained volatile from April to June 2012, as the GoP decided on a price slash for May, along with an announcement of reversal of Rs 50 per bag in June. This was much needed so as to be able to compete with cheaper imported fertilizer, due to government subsidy on it. FFCs urea plant underwent 30% gas curtailment last year, which was ten percent more than that decided for the plants operating on the Sui gas network. This resulted in an extended shutdown of 27 days of the urea plant, and a decline of 17% in urea production, on a YoY basis. The scenario on the DAP front was opposite to the one on the urea front. In spite of the gas curtailment, FFC managed to operate the DAP plant at a level which exceeded 2010s production level of 0.66 million tons. Due to the imposition of Gas Infrastructure and Development Surcharge (GIDS), gross profit margin was 47% during April to June 2012, a decline of 12.52 percentage points on a yearly basis. This was also exacerbated by the net reduction of Rs 100 per bag of urea during the same period. Other income was unable to support the bottom line as it declined by 15%, mainly due to lack of dividend earning from subsidiary Fauji Fertilizer Bin Qasim Limited. Financial charges increased by 36% which can be explained by the increase in short-term borrowings. However, long-term borrowings have declined, and the Company was able to have a very healthy debt to equity ratio (19% in 2011 as compared to 49% in 2006). Debt increased due to the Companys decision to revamp its urea and DAP plants several years back. FFC has been able to repay its long-term obligations because of its sustainable revenue stream. 10 IT Vision The IT Strategy at FFC shall complement our Corporate Vision by business transformation through technology innovation, introducing best practices and connecting our processes for timely information and optimized performance to succeed in our endeavours.11 Information Systems SAP project: the implementation of SAP ERP is finally complete, with the transformation from Legacy to SAP system gone smoothly at all locations. BMS: a Building Management System (BMS) is a centralized computer based control system, linking equipment for ventilation, fire, security, power, etc. onto one platform, which enables timely and coordinated response to different facilities at the same time. Also, the integrated end-to-end system optimizes energy consumption. Electronic recruitment: FFC launched an online career portal in accordance with its HR department, and development of the portal by its IT division. All this has been done to make the recruiting process efficient, and to match individuals to jobs. SAP implementation support: IT at all locations provided support to SAP users in learning to use and adapt to SAP. This support comprised of trainings, onsite and offsite support, and troubleshooting. Technical support was also provided to help resolve outstanding issues, in alliance with functional teams at SAP Project Office. Information Security Penetration testing at branch sites: the information security department contributed hugely in that it secured its information network post SAP implementation. It assessed the potential threats which could pose a security risk towards the FFC network and/or the SAP system. Security awareness sessions at branch sites and the Head Office: the importance of information security was imparted to employees everywhere via awareness sessions. Some of the key points covered in these sessions were security risks, threat vectors, hacking trends, etc. More than 200 employees of FFC attended these sessions at their respective sites. Business Model Fauji Fertilizer Company has several important factors at the heart of its business. These have been summed up in a business model, with three components, at FFC. Growth Drivers FFCs growth is primarily driven by exponential expansion in sales revenue, powered by strong demand for our product and effective distribution network all over the country. Efficiency enhancement is our long term goal. We continuously seek opportunities to improve efficiency of our business processes to optimise costs, utilising less to produce more. Our sales are largely cash based, which gives us the margin to effectively utilise available cash resources to fulfil the Companys working capital requirements, and hence minimise external funding requirements resulting in reduced finance costs. 12 What fuels growth at FFC? The retained earnings, which are the result of ever increasing demand for fertilizer. The Company is cost effective, which allows it to reduce dependency on external funding. Our Key Assets Human capital is by far our most treasured asset, directly affecting performance of the Companys business processes, ensuring success every year. Among our most valuable assets is our brand name Sona, which is the soul behind our existence, growth and prosperity. We are continuously investing in our production facilities to enhance operational efficiency and fuel the key growth drivers. Our extensive distribution network extends to all provinces of the Country, ensuring maximum market presence.13 What makes FFC click? Its workforce. Its brand name, Sona, which helped in putting FFC on the map. Investment in production facilities to have lean operations. Strong distribution. How We Leverage Our Assets Our assets in turn are leveraged by our management excellence and our consumer centric approach. Our strategies are focused around consumer satisfaction and quality perfection. The pursuit of excellence in every sphere of operation is our aim which ensures continued success. Our farsighted management strategies are focused on development of our key assets which form the foundation for future growth.14 Success at FFC results from managerial excellence, focus on the customer, no compromise on quality, and a long term orientation. REVIEW OF TECHNOLOGY USED SAP ERP SAP AG (Systems, Applications, and Products in Data Processing) is a German multinational software corporation, which makes enterprise software to manage business operations, customer relations, operations, and record keeping. SAP ERP15 (Enterprise Resource Planning) is an integrated software solution that utilizes and consolidates information from all business functions and departments in an organization. It provides solutions for the following aspects of any business, with the modules in bullet points: SAP ERP Financials Accounts payable/Accounts receivable Financial reporting Risk management/Regulatory compliance Cash flow monitoring Travel management SAP ERP Human Capital Management HR and payroll Labour force analysis Placement/Recruitment and training/Talent management SAP ERP Operations Procurement and logistics Product development and manufacturing Sales and service Operations analytics Implementation On January 10th, 2011, one of the biggest feathers in FFCs cap was the implementation of the SAP, under its transition to an Enterprise Resource Planning (ERP) system. Abacus Consulting was its technical partner and consultant. Initially, SAP was used in tandem with FFCs old system, Legacy, but eventually, the latter was completely done away with. FFC holds the distinction of pioneering the introduction of an ERP system in Pakistan.16 FFCs management went ahead with the idea of SAP implementation believing that it would create value addition in departments of marketing, supply chain, finance, accounting, human resource, and procurement, amongst others. The SAP implementation at FFC was carried out in several phases. Despite the management being satisfied with the entire revamping program, the system is not without its drawbacks. The most crucial of these is that SAP cannot be operated optimally until the user has complete command over its functions. Therefore, consultants and/or specialists are required if SAP has to be fully utilized for its benefits at such an early stage of its installation. SAP ERP consists of several modules and sub-modules, an outline of which appears above. The software takes the information, data, statistics, etc. from all the modules, and combines them to facilitate the organizations decision making, process streamlining, human effort expended, through product design and development, production and inventory control, human resources, finance and accounting. This overall procedure is known as enterprise resource planning, and it is carried out on a companywide scale. If this procedure is carried out correctly, any organization can transcend from its old system to this fully integrated software. The magnitude of benefits to be reaped is huge, e.g. efficient business processes, inventory reduction, and lead time reduction, to name a few. Updates in SAP only need to be done once, and they automatically get implemented company-wide. It provides real time information, reducing the possibility of redundancy errors, shortages, and higher TATs. Areas like s upply chain, procurement, finance and accounting stand to benefit greatly. On the other end of the spectrum, there are the negative aspects. Firstly, the software is anything but cheap. Secondly, it is not just expensive; it is very technical, sophisticated, and intricate. Companies face problems while implementing SAP ERP software, for example, failing to be specific about operational objectives, no orientation towards change, flexibility, and futuristic perspective, and lack of a learning organization. The following sections detail some of the major advantages and disadvantages of using SAP.17, 18 Advantages of SAP Integration: SAP does not focus on or improve individual performance, so the goal of using SAP should be getting benefits from integration. This reduces erroneous data entry and overlapping entries. Flexibility: SAP allows organizations to create their own framework of operations within the SAP structure. This framework dictates issues like access levels of employees, signoffs required at which level, flagged and correct transactions, etc. For example, FFC has the authority to determine which employee can access what area in the SAP structure. Analytical software: apart from being able to keep track of various activities going on simultaneously, both short- and long-term, SAP has in-built analytical features. For example, it can monitor the value chain, and then evaluate when the next shipment or order is due, and time it accordingly. Monitoring, evaluation, decision making, and execution, are all enabled via the usage of SAP, all at once. Disadvantages of SAP Expensive: being able to utilize SAP optimally entails software, hardware, implementation, consulting, training, hiring specialists, programmers, repair and maintenance staff, etc. Employees have to be trained in those aspects of the software that they have access to. The story does not end here, because trainers might leave after training personnel, but the repair and maintenance experts need to be kept on retainer. Other ongoing costs include those incurred for software up gradation. If IT experts or consultants are outsourced, even that increases the labour costs of the organization overall. Hidden costs arise along the way of SAP systems integration projects. SAP projects are expensive enough to begin with. Add to that the burden of additional unanticipated costs, and the corporation can say goodbye to a high ROI. A common example of such a cost is those work items that were not part of the original project plan. These include custom modifications, applying more resources to areas of the implementation that were outside the project plan, etc. Detrimental to user accuracy: software does not have the ability to detect errors, and SAP is no exception. It also falls prey to the carried-forward error. The employees know that once a wrong entry has been made, it will be a part of the entire database of information. This makes employees/users more susceptible to make mistakes. Complexity: due to this feature of SAP, organizations spread out the implementation over a period of time, rather than all at once. The complete implementation might take several years, which also enhances employees skill set in pieces. The time taken for complete integration might become so exhaustive that the managements focus on post-integration planning be pushed into oblivion. The management might just settle for the system integration, and unconsciously avoid what is coming after the integration. Management: project managers, in some instances, have to deal with problems and provide solutions, instead of the users who logged in the original complaints into SAP. The software calls for scope management, which not every employee is capable of. ORACLE E-BUSINESS SUITE Oracle Corporation is an American multinational specializing in developing software for enterprises, with a focus on database management systems. It also has software for enterprise resource planning (ERP), customer relationship management (CRM) and supply chain management (SCM), to name a few.19 The company offered software for the financial aspect of businesses in late 1980s. Now however, its product palette is not just limited to ERP, CRM, or SCM, instead it reaches into areas like warehouse management, human resource, procurement, product lifecycle management, etc. Expansion and growth of Oracles application software business has come about through acquisitions and in-house developments. Oracle resorted to product bundling when it came up with its Oracle E-Business Suite Release 12 (Oracle EBS R12). This version keeps Oracles core database management system technology intact, and the E-Business Suite branches out into several product lines.20 Oracle CRM Oracle Financials Oracle HRMS Oracle Mobile Supply Chain Applications Oracle Order Management Oracle Procurement Oracle Project Portfolio Management Oracle Quotes Oracle Transportation Management Oracle Warehouse Management Systems Oracle Inventory Oracle Enterprise Asset Management FERTILIZER INDUSTRY REVIEW For many developing countries, the focus is on economic recovery after the financial crisis of 2007-08. However, issues of increasing population and rising food prices have made food security a big concern for policy makers as well. The latter two issues are equally, if not more, important for the underdeveloped countries, and Pakistan is no exception. Pakistan is an agro-based economy. The agriculture sector has provided the impetus for economic growth. This can be observed by the fact that it provides employment to almost 45% of the total labour force, in one way or the other. It is a seasonal sector, so there are jobs all-year round. On the reverse side of this picture, income generated from this sector fuels demand for products made by other sectors (industrial and tertiary). This interdependence, so to speak, is indicative of the importance of this sector for Pakistan. Almost 21% of GDP is contributed by the agricultural sector.21 Some major crops and their contribution appear below: Crops Production (kt) 2009/10 Production CAGR 2000/01 2009/10 Yield (Kt/Acre) 2009/10 Gross Value Addition of Major Crops Wheat 23,864 2.60% 1.07 39% Cotton 2,159 1.90% 0.28 22% Rice 6,883 4.20% 0.97 18% Sugarcane 49,373 1.30% 21.2 10% Source: Economic Survey of Pakistan 2009/10 The agriculture sector of Pakistan was adversely affected due to the floods approximately two and a half years ago. They had damaged around 30% of the agricultural area, and resulted in crop losses worth USD 2.5 billion. This flood damage also affected the fertilizer sector. This is due to the evident strong inter linkages between the agriculture sector and the fertilizer industry.22 Crop-wise damage and the area affected are shown in the table below. Crops Affected Area (mn acres) Area Affected Cotton 1.3 17% Rice 1.4 23% Sugarcane 0.4 16% Source: Fertilizers in Pakistan. Demand, Production and Imports. By Eqan Ali Khan, Business Head, Fert and Agri Commodities; Mar 30, 2011 The fertilizer industry in Pakistan is basically an oligopoly. This oligopoly is characterised by 4 major players in the market: Fauji Fertilizer Company, Fauji Fertilizer Bin Qasim Limited, Engro Fertilizer, and Dawood Hercules Fertilizer. A new and fast growing addition is Fatima Fertilizer, of the Fatima Group. If we look at the production of urea by the four companies respective contribution, FFC and FFBL dominate by producing 48% of the total, Engro produces 15%, and Dawood Hercules produces 6%. Almost 20% is imported and distributed through NFML. When we look at the production of phosphorus, a similar pattern emerges. FFC and FFBL stand at 47%, Engro at 28%, Agritech at 2%, RG at 1% and around 22% is imported. C:Documents and SettingsAdministratorDesktopUntitled.png Source: Fertilizers in Pakistan. Demand, Production and Imports. By Eqan Ali Khan, Business Head, Fert and Agri Commodities; Mar 30, 2011 Fertilizer production is concentrated in nitrogenous fertilizers, which comprises 85% of all fertilizers produced in the country. Although other types of fertilizers are also produced in Pakistan, the main reason for this concentration on nitrogenous fertilizers is that its main raw material, i.e. natural gas, is cheaply available in the country. The raw material for other fertilizers such as potassium and phosphate has to be imported.23 Fertilizer is Pakistans most important and expensive input in agricultural production. The contribution that the use of balanced fertilizer makes towards increasing yield varies from around 30 to 60 percent in different crops production. Almost all of Pakistans soil is deficient in nitrogen (N), 80 to 90 percent is deficient in phosphorus (P), and 30 percent is lacking in potassium (K).24 Land used for just one type of crop is facing declining fertility, for the obvious reason that only certain nutrients are being used. When these land holdings are not used in crop rotation, the soil does not get replenished, and productivity for future crops declines. Nutrient Actual (Kg/Acre) Recommended (Kg/Acre) Nitrogen 41 41 Phosphorous 9 20.5 Potassium 0.4 10.3 Source: Fertilizers in Pakistan. Demand, Production and Imports. By Eqan Ali Khan, Business Head, Fert and Agri Commodities; Mar 30, 2011 From July 2011 to March 2012, domestic production of fertilizer decreased by 1.4%. This was the result of the industry experiencing a curtailment in the supply of natural gas, which is the main raw material for producing urea, therefore some urea plants produced less than their production capacity. However, import of urea made up for this slack, increasing the supply of fertilizer by 16.3%. On the consumption side however, this increase in supply was met by a reduction of 4.9%. Screen Shot 2012-11-19 at 11.55.38.png Source: Fertilizers in Pakistan. Demand, Production and Imports. By Eqan Ali Khan, Business Head, Fert and Agri Commodities; Mar 30, 2011 Two major reasons for this reduced fertilizer consumption was the heavy and destructive rains in Sindh province, and the price hike faced by all fertilizers. The price of urea went up by 81.4% in July-March, 2011-12 (as compared to the same period of the last fiscal year). The prices of DAP, CAN and NP also increased by 38.8%, 75.5%, and 45.7%, respectively, over the same period last year.25 Fertilizer Pre-GST Co. to Dealer Transfer Prices (Rs/Ton) Taxation Impact Post GST Co. to Dealer Transfer Prices (Rs/Ton) Urea 20,400 13.20% 23,100 DAP 66,025 19.14% 78,660 MOP 48,200 17.05% 56,420 Source: Engro Analytics The actual price which the dealer faces is truly seen after the tax burden has been accounted for. The differential is huge, as the figures in the table above show. Pakistan is able to produce approximately 7 million tons of urea annually currently. Out of this total, capacity of 4 million tons is dependent upon gas from Mari gas fields, and the other 3 million tons on Sui Northern Gas Pipeline (SNGPL) and Sui Southern Gas Company (SSGC). During 2011, all these plants produced a little less than 5 million tons of urea.26 In the past, gas supply to fertilizer units linked to SNGPL was curtailed in winter. However, last year, units receiving gas from Mari faced 20% curtailment, and the ones getting gas from SGGPL and SSGC faced mandatory closure up to 60 days. In 2012, this mandatory closure is expected to exceed 90 days. The sorry state of affairs can be assessed by the fact that from January 1 till October 31, 2011, fertilizer plants on the SNGPL network received the equivalent of just 3.5 days of gas per week, relative to other sectors, which received 4 to 5 days of gas a week. For the fertilizer industry, gas is an input without which it cannot manufacture urea, whereas for other sectors, it is not an absolute necessity.27 If current levels of gas curtailment are adhered to, industry experts expect urea production to be around 4.8 million tons during 2012. However, this is an optimistic number. Realistically, units will probably have difficulty in achieving even this production level, mainly due to the widening gap between demand and supply of gas as projected by the government. It is pertinent to bear in mind that even if subsidy on gas were to be completely abolished by the Government, Fauji Foundation has under its ownership and control Mari gas fields. In a manner of speaking, backward vertical integration exists, so any adverse change in regulations regarding gas subsidy will not be detrimental to FFCs operations. With the demand for urea forecasted to be 6.3 million tons in 2012, the shortfall is expected to be around 1.5 million tons. This is a very bleak scenario for the economy, since internal capacity is well able to meet this demand. Externally, when imports will be resorted to, they will erode the countrys foreign exchange by USD 600 million, at the very least, based on current prices, and may be even more costly if international prices rise. It is expected that any hike in crude oil prices will automatically escalate urea prices in the international markets. Growing tension between the United States and Iran has already initiated a spiraling increase in global crude oil prices.28 Under consideration is the possibility that urea manufacturers should exercise the LNG import option to meet the shortfall in gas supply. There exist two schools of thought regarding this debate. One says that running plants on LNG is not feas