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, Pakistan’s 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 operational 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 stakeholder’s 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

• Honesty in communication;

• Excellence in products and services;

• Consistency and synchronisation in words and actions;

• Compassion in relationships within the micro and mega environments of the organization;

• Fairness to all stakeholders through adherence to laws, regulations and policies.

FFC’s Financial Health

Fauji Fertilizer Company (FFC) enjoys stable gas supply from Mari gas fields because they come under Fauji Foundation’s 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: FFC’s 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. FFC’s 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 2010’s 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 Company’s 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

“FFC’s 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 Company’s 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 Company’s 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

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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 FFC’s 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 FFC’s 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

FFC’s 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 organization’s 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 supply 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 management’s 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 Oracle’s 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 Oracle’s 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.

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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 Pakistan’s 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 Pakistan’s 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

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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 FFC’s 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 country’s 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 feasible for the fertilizer sector. The other says that the shortfall can be met by using LNG during winter, and scheduling annual shutdowns of plants when the shortfall is at its maximum. LNG imports have become almost inevitable, since Pakistan has not been able to make the Iran-Pakistan gas line a reality due to the opposition of the United States.

There have also been suggestions to shift the fertilizer units to coal gas. However, the cost associated with making this shift is prohibitively expensive. The future remains to be seen, but if this problem is not addressed immediately, it will blow out of proportion and be uncontrollable. The government’s reliance on imported fertilizer has eased the pressure on the demand for now, but this will hit the country’s fiscal management hard, since the fertilizer import bill reached USD 848 million during the first seven months of the current financial year, against USD 300 million during the same period last year.29

According to a report prepared by International Resources Group for the Asian Development Bank and the Ministry of Planning and Development Government of Pakistan:

“The System Level Economic Valuation indicates that reducing gas to the fertilizer sector costs the economy PKR 196 million per mmscfd, while increasing gas to the power sector costs the economy PKR 98 million per mmscfd.”30

The above clearly shows that the losses resulting from unavailability of gas for the fertilizer sector far outweigh the gains to be made when gas is directed towards the power sector. Providing gas to the fertilizer plants reaps higher economic value as compared to the power sector. When Pakistan has the requisite internal capacity to meet the demand for urea, why should it have to import? The government’s role here is critical. It should realise that the viable solution is to provide uninterrupted supply of gas to all fertilizer plants in the industry, and the other industries can make do with imported furnace oil.

Table: 2.12 Production and Off-take of Fertilizers (‘000’ Nutrient Tons)

Year

Domestic Production

% Change

Import

% Change

Total

% Change

Off-take

% Change

2007-08

2,822

876

3,698

3,581

2008-09

2,907

3

568

-35.1

3,475

-6

3,711

3.6

2009-10

3,082

6

1,444

154.2

4,526

30.2

4,360

17.5

2010-11

3,076

-0.2

645

-55.4

3,721

0.6

3,933

-9.8

2010-11 P

2,287

532

2,819

3,064

2011-12 P

2,255

-1.4

1,024

92.6

3,279

16.3

2,913

-4.9

Source: National Fertilizer Development Centre

P: Provisional (July-March)

The table above has been taken from the Economic Survey of Pakistan, carried out for the year 2011-12.31 It tracks the performance of the fertilizer industry in Pakistan over the last five years. Domestic production has been declining since 2010. Import of fertilizer has been on the rise simultaneously. The figures are supported by the facts that gas shortage is acute, and the problem is just getting more severe, due to which domestic production has been falling, and the shortfall in demand has to be met by importing fertilizer. Until and unless a permanent solution to the unavailability/shortage of gas is not found, the scenario that has been observed since 2010 is expected to prevail in the coming year as well.

Table 2.9: Fertilizer Off-take and Imports of Fertilizers and Pesticides

Fertilizer off-take (000 N/Tonnes)

Import of Insecticides

Fiscal Year

N

P

K

Total

Import of Fertilizers 000 Tonnes

Quantity ( Tonnes)

Value (Mln Rs)

1990-91

1,472

389

33

1,894

685

13,030

1,489

1991-92

1,463

398

23

1,884

632

15,258

1,946

1992-93

1,635

488

24

2,147

759

14,435

1,731

1993-94

1,659

464

23

2,146

903

12,100

1,706

1994-95

1,738

428

17

2,183

261

21,776

2,878

1995-96

1,992

494

30

2,516

581

30,479

5,081

1996-97

1,985

420

8

2,413

878

30,856

5,272

1997-98

2,075

551

20

2,646

714

29,225

4,801

1998-99

2,097

465

21

2,583

885

31,893

5,515

1999-00

2,218

597

19

2,834

663

26,124

4,692

2000-01

2,264

677

23

2,964

580

21,255

3,477

2001-02

2,285

625

19

2,929

626

31,783

5,320

2002-03

2,349

650

20

3,019

766

22,242

3,441

2003-04

2,527

674

22

3,223

764

41,406

7,157

2004-05

2,796

864

33

3,693

784

41,561

8,281

2005-06

2,926

851

27

3,804

1,268

33,954

6,804

2006-07

2,650

979

43

3,672

796

29,089

5,848

2007-08

29,525

630

27

30,182

876

27,814

6,330

2008-09

3,034

651

25

3,710

568

28,839

8,981

2009-10

3,476

860

24

4,360

1,444

38,227

13,473

2010-11

3,134

767

32

3,933

645

36,183

13,178

2011-12P

2,379

517

17

2,913

1,024

22,510

8,531

Source: Pakistan Bureau of Statistics National Fertilizer Development Centre

P : Provisional (July – March)

This table gives data for the past 12 years, with fertilizer and insecticide separately.32 Despite a decline in imports of both inputs in the last two years (mainly due to domestic products being cheaper and intense local competition), the usual trend has been an upward one. This hints towards the fact that both these products are very crucial for the agriculture sector.

International Situation

“With respect to the global scenario, China is the biggest NPK consumer in the world, constituting nearly 30% of overall NPK consumption. Moreover, China is also the largest urea user, consuming 38% of world urea output while having a 30% share in world urea capacity. A similar condition prevails in DAP where China consumes nearly 31% of the total DAP produced. After China, the second largest driver of world urea and DAP demand is India, which consumes around 22% urea and 20% DAP of global output. As far as regional capacities are concerned, China holds the largest urea capacity followed by India33.

Crop yields in Pakistan lag behind major producing countries – potential to improve

Yield Gap (kg/acre)

Country

Wheat

Sugarcane

Rice (Paddy)

Cotton Seed

World

7,622

176,630

10,643

5,185

China

11,762

180,592

16,193

9,648

India

6,921

170,126

8,324

2,979

Pakistan

6,054

127,190

8,694

5,054

USA

7,454

182,200

18,950

5,558

Brazil

196,881

10,446

9,280

Egypt

299,206

24,036

5,763

Source: Economic Survey of Pakistan – 2009/10

“Pakistan still has to import phosphate due to a lack of raw material availability. More recently, the sole DAP producer in the country, Fauji Fertilizer Bin Qasim (FFBL), an associate company of the Fauji Fertilizer Company (FFC), has entered into a joint venture with Morocco to form Pak Moroc Phosphate (PMP), which should provide phosphoric acid to FFBL. Though the company entered into this agreement to improve its supply-chain as a result of backward integration, the country as a whole still remains deficient in phosphates and has to import on average 70% of its total DAP need.”34

The chart below shows that 2007 onwards, domestic production of phosphates is on the rise, but the import of phosphates has its peaks and troughs. However, the first half of this decade (actual and expected), has seen and will be seeing domestic production remain almost the same, but a concurrent increase in imports.

Screen Shot 2012-11-19 at 11.56.31.png Source: Fertilizers in Pakistan. Demand, Production and Imports. By Eqan Ali Khan, Business Head, Fert and Agri Commodities; Mar 30, 2011

Despite the persistent gas shortage and price hike, it is projected that from 2011 till 2015, that the consumption of MOP (muriate of potash), SOP (sulphate of potash), and NPK (nitrogen-phosphorous-potassium) will all increase. This depicts the strength of the agriculture sector, and as a result, the fertilizer sector. In such a scenario then, capacity expansions by firms like Engro and Fatima are very welcome.

Screen Shot 2012-11-19 at 11.57.51.png Source: Fertilizers in Pakistan. Demand, Production and Imports. By Eqan Ali Khan, Business Head, Fert and Agri Commodities; Mar 30, 2011

Domestic Situation

The sector in Pakistan is dominated by four major firms, namely Fauji Fertilizer Company (FFC), Engro Chemical Pakistan Ltd (ECPL), Fauji Fertilizer Bin Qasim (FFBL) and Dawood Hercules Chemical Ltd. (DHCL). A brief overview and profile of the latter three firms is presented below:

Engro Chemical Pakistan Ltd

“Engro is the second largest player, while also being the first ever company to establish a urea plant in the country. The company was initially established as Esso Pakistan Fertilizer Company Ltd. in 1965 with 75% shares held by Esso. With an initial investment of $ 43 million, the plant was established having a capacity of 173,000 tons. With Esso becoming Exxon, the company was renamed as Exxon Chemical Pakistan Ltd. In 1991, Exxon decided to divest its fertilizer business on a global basis, which resulted in an employee-led buyout of Exxon’s 75% stake in the company. Since then, the company has evolved into a dynamic and well-diversified conglomerate. The holding company ECPL now has a urea capacity of 975,000 tons and an NPK capacity of 160,000 tons. The company also has a share of 21% within the marketing segment. Currently, a 41% stake of the company is held by the Dawood group.”35

Fauji Fertilizer Bin Qasim Ltd

“FFBL is the only DAP producer in the country and also manufactures superior quality granular urea. The manufacturing complex was built at a cost of $ 68 million. Formed as a venture between FFC, FF and Jordan Phosphate Mines Co. (JPMC) in 1993, the company ran into a series of crises in its early years due to technical, financial and managerial reasons. As a result, its DAP plant was mothballed in 2001 due to accumulated losses of Rs 6.5 billion. In 2003, JPMC sold its stake and the company was renamed FFBL, having resumed production after a lapse of two years. The company currently has annual urea and DAP capacities of 551,000 tons and 445,000 tons respectively. The company’s off-take is handled by FFC and, as such, FFC had a 44% share in DAP marketing during 2007/08. Presently, a 51% stake is held by FFC and 17% is held by FF2.”36

Dawood Hercules Chemical Ltd (DHCL)

“The company was incorporated in 1968 as a joint venture between the Dawood Group and Hercules Inc. USA. The plant had an initial capacity of 345,000 tons which was enhanced to 445,500 tons as a result of revamp activities during 1981-1991. DHCL markets its products through Dawood Corporation Ltd (DCL), though its activities are confined to Punjab and NWFP. During 2008, DCL maintained a share of 8.2% in the overall fertilizer marketing activities in the country. The company is primarily held by the Dawood Group while it also holds 38% stake in ECPL.”37

PROCUREMENT

In simple terms, procurement is the buying and selling of goods and services. However, there is more than meets the eye with this definition. There is an entire process of procurement, starting from acknowledging the existence of demand, ending with delivering the product and receiving payment. The process typically involves the following steps, but is not limited to these.38

Purchase planning

Standards determination

Specifications development

Supplier research and selection

Value analysis

Financing

Price negotiation

Making the purchase

Supply contract administration

Inventory control and stores

Disposals and related functions

“Importantly, and distinct from purchasing, procurement involves the activities involved in establishing fundamental requirements, sourcing activities such as market research and vendor evaluation and negotiation of contracts. It can also include the purchasing activities required to order and receive goods.”39

Another distinction between procurement and purchasing is made by Van Weele:

Purchasing is any activity for which the company receives an invoice from an outside party while procurement includes all activities in order to get the product from the supplier to its final destination.40

Direct procurement takes place in manufacturing only. It includes all items which make up the finished product, mainly raw material and components. In supply chain management, focus is on direct procurement, since it contributes to the production process and affects it directly. On the other hand, indirect procurement is related to the resources that a company needs to purchase to further its operations.

Read also  Definition of management

Request for Tender

The fertilizer manufactured by local companies is distributed by those companies’ respective distribution channels. However, the government imports as well. The entire process is carried out by inviting suppliers via a request for tender. All imported stock is stored in mega warehouses, owned by the government. To transport imported fertilizer to whichever destination, transporters are hired, and these are hired and registered usually before the season takes off. All this is also done via tender.41

A request for tender (RFT) is a formal invitation to suppliers for the supply of products or services. It is an open invitation to all relevant suppliers, rather than selected or handpicked suppliers. To make the entire process transparent and free from nepotism, RFTs usually follow some legally standardized structure. An evaluation team will go through the tenders put in by potential suppliers, and decide who will get the contract.42

As a consequence of the scale of the tender process, the majority of RFTs are published by the government sector, but companies in the infrastructure and utilities sectors may also publish RFTs. The closest equivalent to an RFT in the mainstream private sector is a request for proposal (RFP), which, since public money is not involved, typically has a less rigid structure.43

COMPETITORS

Engro Fertilizer

Engro Corporation is one of the leading Pakistani business conglomerates with stakes in the fertilizer, food, power generation, petrochemicals, automation and terminal storage industries.44

It was 1957 when a search for oil by Pak Stanvac, an Esso/Mobil joint venture led to the discovery of the Mari Gas field near Daharki. Esso proposed the establishment of a urea plant in that area which led to a fertilizer plant agreement signed in 1964. In the subsequent year, Esso Pakistan Fertilizer Company Limited was incorporated, with 75% of the shares owned by Esso and 25% by the general public. In 1978, it was decided to rename the company from Esso Pakistan Fertilizer Company Limited to Exxon Chemical Pakistan Limited.

In 1991, Exxon decided to divest its fertilizer business on a global basis. The employees of Exxon Chemical Pakistan Limited, in partnership with leading international and local financial institutions, bought out Exxon’s 75% equity. This was, at the time, and perhaps still is, the most successful employee buy-out in the corporate history of Pakistan. The company was renamed as Engro Chemical Pakistan Limited.

By 2009, Engro was on a fast growth track, with expansion and diversification into countries other than Pakistan. To better manage operations and management, Engro Chemical Pakistan was converted into a holding company named Engro Corporation, and its fertilizer business was subsequently demerged to a newly formed Engro subsidiary named Engro Fertilizers Limited.45

Engro works on the software SAP, similar to Fauji Fertilizer Company. (For information on SAP, its advantages and disadvantages refer to section SAP – ERP). Operations, specifically the procurement department, are run on SAP – ERP.

Engro in 2012

Engro Fertilizers reported a loss of PKR 1.7 billion in the first half of 2012, relative to profit worth PKR 2.2 billion over the same period in 2011.

SNGPL linked fertilizer plants, namely Engro and Dawood Hercules, received gas for only 33 days of operations in the first six months of 2012. Urea sales fell by 30% due to gas supply issues, but higher prices resulted in the Company’s revenues increasing by 5%.46

Due to the new tax, commonly named the gas cess, imposed on Engro’s old plant since January, the Company’s gross profit margin fell by 19.76% during the first half of 2012.

The financial charges for this half year, up by 132% on a yearly basis, primarily incurred for construction of the new urea and prill plant, hurt the bottom-line immensely, by PKR 5.7 billion. Since the new plant stayed shut for five out of six months, financial charges could not be buttressed by sales growth, thereby pushing the company into loss.47

Fatima Fertilizer

The Fatima Fertilizer Company Limited was incorporated on December 24, 2003, as a joint venture between two major business groups in Pakistan namely, Fatima Group and Arif Habib Group.48

The fertilizer complex is a fully integrated production facility, capable of producing two intermediate products, i.e., Ammonia and Nitric Acid and four final products which are Urea, Calcium Ammonium Nitrate (CAN), Nitro Phosphate (NP) and Nitrogen Phosphorous Potassium (NPK) at Sadiqabad, Rahim Yar Khan.

The company’s major fertilizers include the widely used urea, as well as non-traditional products like calcium ammonium nitrate (CAN) and Nitro-Phosphate (NP). Therefore, a component of Fatima’s marketing strategy is to offer the non-traditional products at a discount, so as to attract farmers to use these instead of mainstream products, urea and DAP.49

Although the company was incorporated in 2003, it did not manage to start commercial production until 2011. In the first year of its operations, despite all odds against the fertilizer industry, it managed to be profitable. Today Fatima Fertilizer is hailed as one of the top fertilizer companies in Pakistan.

Fatima Fertilizer operates its business on Oracle E-Business Suite, version R12. (For information on Oracle and its modules, refer to section Oracle E-Business Suite). Due to the availability of separate modules for separate functions, all departments’ functioning is quite streamlined.

The Company launched its brand “Sarsabz” in January 2011, supported by aggressive media and outdoor campaigns in the main growing seasons. Additionally, the dealer network underwent major expansion as the business more than doubled its reach.

The farmer outreach program through the technical service team was launched with significant improvement in farmer contact. Extensive farmer training was conducted through seminars, farmer gatherings, farm visits and demonstration plots. These activities were conducted during the Kharif and Rabi seasons, for major crops. A state-of-the-art soil analysis lab at Fatima’s plant site was made operational to provide farmers with comprehensive soil analysis and supporting fertilizer usage solutions to improve yields.

Fatima Fertilizer in 2012

The Company’s net profit decreased by 82%, compared on a quarterly basis. The financial report cannot be compared with the same period last year, as the company had not started commercial operations till then.

On the brighter side, gross profit margin stood at 71.3% during the quarter, against 71.5% of the preceding quarter. Since it is newly formed, Fatima Fertilizer enjoys supply of gas at around 80% lower rates than the rest of the industry, which currently gives it an edge over its competitors, Engro Fertilizers and Fauji Fertilizer Bin Qasim, both of which posted a loss during the first half of 2012.50

The Company managed to cut down on its selling and administration expense by 27%, in tandem with lower sales. Financial charges rose by 16%, owing to significant inventory build-up. Fatima Fertilizer shocked and surprised analysts who had estimated the bottom-line to be around PKR 100 million lower than the actual figure in the first six months of 2012.51

CONCLUSION

Macro Level

Fertilizer products are variations of three primary soil nutrients NPK, i.e. nitrogen (N), phosphorous (P) and potassium (K). It is the suitability of a nutrient for crop that determines the usage of a particular fertilizer product. Pakistan’s soil is deficient in nitrogen and phosphate, which makes it all the more important that an optimal combination of these nutrients is arrived at, to achieve higher yield levels.

Imbalanced use of Fertilizers, one of the Reasons for Low Yields

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Source: Fertilizers in Pakistan. Demand, Production and Imports. By Eqan Ali Khan, Business Head, Fert and Agri Commodities; Mar 30, 2011

However, it is not that simple. Demand is influenced by the availability and price of a product at any point in time. Lower prices of Urea and DAP, being partial substitutes of CAN and NP respectively, are likely to make farmers switch to them, not realizing the adverse effects of such a move. For that matter, this lack of awareness also does not make them realize the benefits they could have enjoyed, had they maintained an optimal NP ratio. Also, it is but natural that farmers tend to favour products available in the market at cheaper rates.

Given the importance that agriculture, and as a result fertilizer, has for the country, the sector cannot be overlooked when it comes to government support. In fact, government support for the fertilizer sector is like a crutch for a cripple; it is critical in ensuring smooth availability of products at affordable prices in a timely fashion. In this regard, import of duty free rock phosphate and a subsidy on natural gas are major support measures on the part of the government. Natural gas is an essential input in fertilizer contributing around 80% to the total production cost as fuel and feedstock. As the energy crisis worsened in early 2010, it posed a high business risk to the fertilizer sector, but the companies kept their margins intact by passing on the impact to consumers through increasing the per bag price of fertilizer products.52

Inconsistent Policy on Subsidizing Fertilizer

“The fertilizer industry in Pakistan is deregulated with no permanent subsidy regime. The domestic market prices are linked to international prices, except in the case of urea. The prevailing economic conditions along with mounting budget deficits pressurized the government to reduce/discontinue subsidy to different sectors. Simultaneously, readjustments in the fertilizer sector are also on the anvil. On account of relatively inelastic demand of fertilizers, producers have pricing power through which they pass on the rising cost of input to the consumers. In wake of such moves by companies, the Competition Commission of Pakistan (CCP) has directed the industry to give an explanation before any further increase in fertilizer prices. There are also proposals to provide direct subsidy to the farmer as a relief measure rather than routing it through fertilizer companies but in view of operational difficulties any material progress in this regard seems to be remote.

“While the subsidy scheme on phosphatic and potassic fertilizers was waived off from January 2009 onwards, a new scheme on potassic fertilizer at the rate of Rs. 500/bag is in effect since January 2010. The prevalent demand and supply gap in the market has triggered the setting up of new plants in the country. Notable additions in recent times include Fatima with a total capacity of producing CAN, NP, NPK and Urea at 1,580 thousand tonnes, Suraj Fertilizer Industries having a capacity of producing SSP at 150 thousand tonnes, and Agritech Limited (formerly Pak American Fertilizer) adding 137 thousand tonnes of Urea. Moreover, Engro has installed a new urea plant with a significant annual capacity of 1.3 million tonnes. While the installed capacities have reduced the import requirements of fertilizer products, the additional capacity of Engro is likely to create a surplus situation in local market of urea for some time, if the gas curtailment is taken care of.”53

Firm Level

From the quantitative analysis, it is very clear that the highly technical SAP – ERP software is creating difficulties for its users at FFC. 80% employees said that SAP was difficult to use. It provides a comprehensive and one-stop point for information, but its level of sophistication is a deterrent to its optimal usage. One of the Senior Managers admitted that: “Since it had slowed down employees (and resulted in increased TATs), some of its modules have been suspended indefinitely.”

Suspended modules meant that access had been restricted; only 3 or 4 modules are operative currently, whereas previously around 10 modules were being used.

70% of the employees used SAP daily, but despite the daily exposure, they still found working with the software difficult. Strangely, this difficulty was faced more by managers rather than employees at the executive level.

FFC incurred a huge expense when it decided to implement SAP. In the long-run, this move has been to earn even higher return. The software is state-of-the-art, installed by specialists from Germany, and extensive training has been provided to all its users. Therefore, the software is not at fault.

When I look at the negatively skewed results the data has generated, my research question “has the performance and efficiency of Fauji Fertilizer Company’s Procurement department improved after the implementation of SAP – ERP software?” has been answered. The answer is that post-SAP, the procurement department is not performing better than it was pre-SAP. The major reason behind this is the employees’ inability to understand the software completely, and use it to its fullest. Of course, the entire blame should not be shouldered by them; one must keep in mind that Pakistani companies do not have a change-oriented, and hence a change managing culture. FFC is also one of those companies, and the organizational culture has seeped into the Company’s employees as well. I am of the opinion that SAP – ERP will take quite a few years before employees adjust to it, and the decision to implement it pays off.

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