Pakistan Paper Industry

Factors of Production Cost in Pakistan Paper Industry

By

Muhammad Yasir Khan 10630

Muhammad Talha Khan 11798

MUNEEB AHMED

AND

JAWAD

Thesis Submitted in Partial Fulfillment

Of the Requirements for the Business Research Centre of

Master in Business Administration

At Research Centre In

Khadim Ali Shah Bukhari Institute Technology

Hyderi, Karachi

Khadim Ali Shah Bukhari Institute Technology

August, 2018

1
 ACKNOWLEDGEMENT

By the grace of ALLAH the Almighty and the benevolence of Prophet MUHAMMAD

(P.B.U.H), we have been able to present this report. In performing our report, we had to take

the help and guideline of some respected Persons, who deserve our greatest gratitude. The

completion of this report gives us much Pleasure. We would like to show our gratitude Sir

Masood Mir, Sir Kamran Kashif, Ms. Hina Amin, Ms. Mufarrah Malik for giving us a

good guideline for the report throughout numerous activities. We would also like to expand

our deepest gratitude to all those who have directly and indirectly guided us in writing this

report.

2
 ABSTRACT

The subject area of the study is Production cost and its factors. The study is suitable for

discussion in master level classes. The study explains the situation of a sector which is fighting

for its survival. The study reveals the alternative operations strategies it applies to maximize its

supplies and reduce its costs. The study describes Pakistan paper manufacturing industries and

the low profitability of this sector.

3
 Table of Contents

ACKNOWLEDGEMENT 2

ABSTRACT 3

LIST OF TABLES 4

CHAPTER 1: INTRODUCTION.1

1.1 Background of the Study 6

1.2 Problem Statement 8
1.3 Outline of the Study 10
1.4 Research Objectives and questions 10
1.4.1 Research Objectives 10
1.4.2 Research Questions 10

1.5 Terms of definition 11

CHAPTER 2: LTERATURE REVIEW

2.1 Review of Empirical Study 12

CHAPTER 3: RESEARCH METHOD

3.1 Research Model 14

3.2 Research Hypothesis 15

3.3 Research Design 15

3.3.1 Type and Nature of Study 15

3.3.2 Sampling Design 15

4
 3.3.3 Procedure of Data Collection 16

CHAPTER 4: RESULT & ANALYSIS

4.1 Reliability, Cronbach Alpha, Demographic, Frequency Table 18 - 21

4.2 Pie Chart, Regression, Correlation 22 - 23

4.3 Model Summery, Anova Table, Coefficient 24 - 25

CHAPTER 5: CONCLUSION & REFERENCES

5.1 Conclusion, Recommendation 26 - 27

5.2 Reference 28 - 29

5.3 Appendix 30 - 31

Chapter: 01. Introduction:

5
1.1 Background:

Paper industry of Pakistan is the important sector and serves the domestic market. In Pakistan

companies like Century paper, Board mills and Packages improving their product day by day

through spending huge amount in Research and development process. Companies improving

their technologies in manufacturing process and developed some effective and efficient concept

in operational processing. But still lots of improvement’s and consistent policy are required by

the government of Pakistan to compete in the world market.

When independent of Pakistan in 1947, there was not a single plant to manufacturing paper in

this country. All the requirements of the demand filled through imports. In 1953 Pakistan

Development Corporation established the 1st paper mill in East Pakistan at Chandargana now in

Bangladesh. Adam jee paper and board mill at Noshera in KPK and a News Paper mill at Khulna

in East Pakistan in 1959. When the Bangladesh was separate from Pakistan the real shortage of

paper seemed and demand was increased. Supplies of paper totally cut off from Bangladesh.

Now a day almost 100 unite organized industries are producing writing and printing paper.

Paper industries of Pakistan are not prime industry of Pakistan In fact it is in developing stage.

Consumption is high and production is low as per consumer demand. Mostly local demand fulfill

through import. Over the last 60 years paper and board industry has emerged out of its infancy

and is now catering to nearly 70 per cent of the domestic demand. Some mills have also exported

various paper/board grades to Mexico, Africa and the Middle East. However, greater effort is

required in product standardization to create a regular export market.

Mills in Pakistan produce various grades of paper. Presently, there are over 100 paper and board

producing units in organized sector with capacities varying from 10 to 300 tons per day.

Estimates for annual production in 2007 are around 750,000 tons of paper and board. These units

6
produce writing and printing paper, packaging board, liner board, C medium, continuous

computer reels, tissue and security/banknote paper. However, art papers and newsprint are

imported due to zero wood pulp production capacity in Pakistan. Some Paper Mills became the

manufacturing units to produce newsprint locally.

Pakistan is also one of the few countries in the world where agricultural waste and Neutral

Sodium Sulfite cooking process is used to produce paper and paperboard grades. The fiber is

given a combination of treatments with alkali and chlorine. Such methods were used for

bleaching as early as 1787, and it is claimed that straw pulp was so made in 1830. It was not until

considerably later that any real progress was made, but in the early part of the present century

two processes were developed commercially. The Pomilio process later developed into a

successful continuous method.

Pakistan paper industries manufactured difference kind of papers products. Some major products

are box board, writing paper, floating paper, coated paper, craft paper, tissue paper, kite paper,

flying paper, wrapping paper, butter paper, liner paper, printing paper, Newspaper, fancy paper,

toilet paper, wall paper, laminated paper, corrugated paper ,producing bags, tapes packaging

materials, polythene plastics and other allied.

1.2 Problem Statement:

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In Pakistan forest area constitutes just around 4.8% or 4.2million hectares however as per

internationally law, in any state should have at least 20% to 30% forest area. Paper production

depends on wood based material. Unfortunately, in Pakistan, forests are not good in a condition

Government of Pakistan is not allowed to more cutting due to change atmosphere.

In Pakistan, paper industry have to face some genuine issues, like forest area is not available to

support paper industry that’s why industries have to purchase raw material from different

countries (china, Brazil and Singapore).

Straws: Paper mills are presently the main uses of the marketed supplies of wheat straw. Rice

straw is generally used as packing material for products.

Bagasse: it is well established raw material for making all grades of paper. Mills produced fine

quality paper to board. Bagasse 40% imported from Brazil.

Grasses: grasses is used to making pulp and paper. Grasses import 50% from china and Brazil.

Cotton waste: used cotton waste for making pulp of high quality for producing superior quality

paper.

Government rules are not supportive to paper industry. Paper industry total depend on raw

material and inbound & outbound logistic. Hence in Pakistan infrastructure is not well

established to support inbound & outbound logistics. Taxations, imports duties and currency

difference increased raw material cost day by day. The shortage of water, electricity and gas

supplies also affecting the cost of manufacturing.

Mostly Pakistan paper Industries are located at upper Sindh, Punjab and KPK. Where raw

material import easily but port is not located nearby so have to face problem to inbound logistic

when import from other countries so cost incurred and timing problem have to face due to

transportation transit after the port shipment. Production total depend on Raw material and

8
logistic. Due to expensive raw material and low skilled labor paper mills have to face low

income.

However one of the major In Pakistan, electricity and gas crisis increasing day by day and

averages every mills need to 8 MW electricity required on daily basis. Unfortunately in Punjab,

where industries are exists, over there electricity issues a lot of problem create because just for

12 hours electricity given by government to industries. 12 hours load shedding specific issue for

paper mills. Paper mills have to face some genuine issues due to shortage of electricity. Because

production total depend on electricity. Some serious condition is that mill cannot afford

expensive electricity because due to expensive electricity mills have to face low income.

However Paper demand is high as per market condition but they cannot complete market

requirements. Their supply side generic issue supply is low and demand is high due to low

production. Many studies have been conducted on the yield and production of various industries

in Pakistan but the analysis of Production cost with respect to the factors of production is very

rare.

Production Cost is crucial in terms of business profitability and profit maximization from the

stand point of a paper manufacturer hence, this research is important and will help organizations

to enhance their business performance and attain sustainable competitive advantage.

9
1.3 Outline of the study

The main aim of this research is to investigate the factors affecting the unit production

cost of Paper Industry of Pakistani. It is also to be explored that which of the variables

contributes to the cost of production significantly or insignificantly as compared to one another.

1.4 Research Objectives and Questions

1.4.1 Research objectives:

1. To investigate the impact of electricity on production.

2. To investigate the relationship between raw material (wood based) and production (paper).

3. To investigate the effects of inbound logistic on production positively or negatively.

4. To investigate the affects at the production or supply when electricity, water and gas is unable

to maintain market demand according to its consumer.

1.4.2 Research questions:

1. What is the impact of electricity on production cost?

2. What is the relationship between raw material (wood based) and production (paper)?

3. What effects of inbound logistic on production cost positively or negatively?

4. What affects at the production cost or supply when electricity, water and gas is unable to

maintain market demand according to its consumer

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1.5 Terms of definitions:

1.5.1 Independent variables:

Material: the basic ingredients which are needed for production.

Labor: Labor is person including an apprentice employed in industry. It may be skilled,

unskilled, and technical.

Logistic: How the raw material acquire from the point of purchases to manufacturing area and

how the finished good supply from the point of manufacturing to sailing point.

Electricity: Electricity is important variable for production paper.

Gas: Gas is important variable for generate energy to production paper.

Water: Water is important variable in operation level for production paper.

1.5.2 Dependent variable

Production (paper): The action of manufacturing from components or raw material, or the

process of being so manufactured.

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 CHAPTER 2: LTERATURE REVIEW

2.1 Review of Empirical Study

Many studies have investigated the impact of energy supply on production but provided

contradictory empirical findings.

Altaf, (2012) Claimed that the demand of pulp and paper in Pakistan will increased day

by day and only import material are filled this because forest resources have not a potential to

filled the supply of demand.

Hali, qbal, Yong, & Shah, (2017 ) Claimed that Electricity is the real problem in Pakistan

and due to this crisis the living style is extremely changed .12 hours a day in urban areas and 8

hours a day in rural area load shading, and only 20% to 30% for industries. Then how can

country grow economically

AMAN, (2012) investigate Pakistan is facing all time worst condition electricity

shortage, gas shortage, fuel shortage , water shortage and all kinds of those shortages which are

necessarily required to run the business disturbed the paper industry as catering the 65% demand

of the paper in the country and they were bearing the high cost of doing business

AMAN, (2012) claimed that the price and books are increased due to rise in duties on

imports. After increased in duties and taxation the paper mills also readjust their prices as well as

the mills price result increased the cost of packaging material.

Aqeel & Butt, (2001) in electricity crisis examined with P. test they proved that

relationship between production and energy source. He reported that production is dependent on

energy supply mean that relation is significant.

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 SHABBIR & MIRZAEIAN (2017) claimed pulp and paper industries are the world

fourth largest industries they consume 6% of the total world energy. Pakistan pulp and paper

industries consume around 7% of the country industries energy; according to law of supply and

demand low supply generate high demand and when demand increased the price also increased.

The impact of price increased the production cost

On similar grounds SIDDIQUI, (2004) claimed that energy plays a vital role in

production. In productivity model with Z test. He investigated the impact of energy supply on

production and found that electricity affect production positively. Hence I said in this article

negatively impact on production. It means the relationship is insignificant.

In case of Sri Lanka Morrimoto & hope, (2004) in production of supply chain network

with T. test proved that paper supply and production totally depended on wood or raw material.

Raw material availability positive impact on paper production or supply it proved that the

relationship is significant.

Later on SHAHBAZ & LEAN, (2012) used production function to test the nexus between

the electricity use and production their empirical evidence indicated that 1% increase in

electricity use capital use and labor uses will increase 0.29% respectively. This entails that

electricity supply is playing critical role in domestic production. Investigated the affectivity of

new able and nonrenewable energy use on production. They highlighted that both energy sources

are important and have positive impact on production. They proved that the relationship between

electricity and production is significant.

QASIM & KOTANI, (2014) investigated that between the relation of low skilled labor

and production with the sample of 330 office employees. They found that if skilled labor is not

13
available easily in market so production will be slow and industry have to face low income. They

proved that the relationship between production and skilled labor is significant.

Daniel, (2014) Claimed that the cost of labor reduced working hour by individual

employee and employment. Labor cost increase total employment or increase hours per worker,

but they cannot do both. The amount of work performed the total no of person’s hours. This loss

traded off against the benefits that higher costs might provide to specific groups of workers.

14
 CHAPTER 3: RESEARCH METHOD

3.1 Research Model: Shortage of Resources

Change of currency
RAW MATERIAL COST

Shortage of Skilled labor

Inflation Impact
LABOUR COST

Electric Supply

Gas Supply PRODUCTION COST

SUPPLIES COST

Water Supply

Inbound Logistic

Outbound Logistic
LOGISTIC COST

If IV + So DV +

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3.2 Research Hypothesis:

Ho1: There is a significant relationship between raw material cost and Production cost

Hα1: There is an insignificant relationship between raw material cost and Production cost

H02: There is a significant relationship between inbound logistic and Production cost

Hα2: There is an insignificant relationship between inbound logistic and Production cost

H03: There is a significant relationship between labor cost and Production cost

Hα3: There is an insignificant relationship between labor cost and Production cost

H04: There is a significant relationship between supplies and Production

Hα4: There is an insignificant relationship between supplies and Production

3.3 Research Design

3.3.1 Type and Nature of Research:

The Study is empirical in nature based on descriptive research deign. It is quantitative in

nature because the problem has been adopted by already developed model. In this we will collect

the data through survey and through questionnaire.

3.3.2 Sampling Design:

The Sampling Technique which will be used is random sample technique through random

survey will be conducted from random employees and the managers of industries.

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3.3.3 Procedure of data collection:

Data will be collected in Pakistan (Karachi). Data will collect randomly above 100
employees and the managers of industries.

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 CHAPTER 4: RESULT & ANALYSIS

4.1 Reliability Analysis:

Constructs Cronbach’s Alpha No of Items

Production Cost 0.601 03
Labor 0.313 02
Material 0.369 03
Supply 0.504 06
Abdullah, Kosni, Eswaramoorthi, Musawi Maliki, & Musa (2016) investigated that gradation of
Cronbach’s Alpha in the rules of following:
(> 0.9 = Excellent; > 0.8 = Good; > 0.7 = Acceptable; > 0.6 = Questionable > 0.5 = Poor, and <
0.5 = Unacceptable)
The reliability of dependent variable (production cost) is laying in 0.601 which questionable but
acceptable according Fornell Larcker (1989) also suggested the same that the values lies
between the 0.5 greater are acceptable values for the eternal consistency. So we can see the
above table Independent variable (Supplies) is showing the value of 0.504 respectively showing
that the internal consistency is there in the scale, as far as the Labor, and material

1. Production Cost Cronbach’s Alpha

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2. Labor Cronbach’s Alpha.

3. Material Cronbach’s Alpha.

4.Supply Cronbach’s Alpha.

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Demographic:
Statistics

Gender Age Education Profession Experience

Valid 103 103 103 103 103

N
Missing 0 0 0 0 0

Demographic analysis show the size of the population, where we have 103 person random
complete data sampling data and zero missing value.

Frequency Table:
Gender

Frequency Percent Valid Percent Cumulative

Percent

Male 87 84.5 84.5 84.5

Female 16 15.5 15.5 15.5

Valid
100.0

Total 103 100.0 100.0

Age

Frequency Percent Valid Percent Cumulative

Percent

Under-20 2 1.9 1.9 1.9

20-25 24 23.3 23.3 25.2

Valid 26-32 46 44.7 44.7 69.9

32-Above 31 30.1 30.1 100.0

Total 103 100.0 100.0

Education

Frequency Percent Valid Percent Cumulative

Percent

Below Graduate 8 7.8 7.8 7.8

Graduate 38 36.9 36.9 44.7

Post-Graduate 34 33.0 33.0 77.7

Valid
Higher-Quatification 14 13.6 13.6 91.3

Others 9 8.7 8.7 100.0

Total 103 100.0 100.0

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 Profession

Frequency Percent Valid Percent Cumulative

Percent

Business 11 10.7 10.7 10.7

Service 79 76.7 76.7 87.4

Valid Student 12 11.7 11.7 99.0

Other 1 1.0 1.0 100.0

Total 103 100.0 100.0

Experience

Frequency Percent Valid Percent Cumulative

Percent

0-1 13 12.6 12.6 12.6

2-5 40 38.8 38.8 51.5

Valid 6-10 24 23.3 23.3 74.8

10-Above 26 25.2 25.2 100.0

Total 103 100.0 100.0

In above tables shown the complete frequency data of the sampling according gender, age
education, profession and experience as seen that the maximum gender in the sampling is male
which around 85 % and maximum age in the population is between ‘ 26-32 ‘ as per educational
level maximum population of the sample is minimum graduate, as well some post graduate and
high qualified personal. As professional maximum personal belong to managerial post and have
above 6-10 year professional experience.

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Pie Chart:

22
Regression:
Descriptive Statistics

Mean Std. Deviation N

Production cost 1.9806 .55977 103

Labor cost 2.3204 .53712 103
Material cost 2.2621 .61685 103
Supplies 2.4660 .52620 103

Through the descriptive analysis of the total number of respondents ie; 103 its can be seem all
variable have a means value is near 2 meaning that most of the respondents either agree or
strongly agree upon the impact of production cost and its factors . In the same way all the
variables have standard deviation less than 1 which means that respondents are comprehensibly
about the impact of Production cost and its factors. it’s can be said that the average distances of
the data collected by the respondents does not have much on distance from its means value.

Correlations

Production cost Labor cost Material Supplies

Production cost 1.000 .196 .060 .192

Labor cost .196 1.000 .380 .289

Pearson Correlation
Material cost .060 .380 1.000 .229

Supplies .192 .289 .229 1.000

Production cost . .024 .274 .026
Labor cost .024 . .000 .002
Sig. (1-tailed)
Material cost .274 .000 . .010
Supplies .026 .002 .010 .
Production cost 103 103 103 103

Labor cost 103 103 103 103

N
Material cost 103 103 103 103

Supplies 103 103 103 103

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 Variables Entered/Removed

Model Variables Variables Method

Entered Removed

Supplies,
1 Material, . Enter
Labor cost

a. Dependent Variable: Production cost

b. All requested variables entered.

Model Summary

Model R R Square Adjusted R Std. Error of the

Square Estimate

1 .244a .060 .031 .55098

a. Predictors: (Constant), Supplies, Material, Labor cost

The multiple liner regression model summary is shown that there is simple correlation through
its R value 0.244 whereas the R square value is 0.060 show a weak relationship that is the degree
to which the independent variable explain dependent variable . Almost 6% of the variation in
production cost can be accounted through knowledge of independent variables.

ANOVA

Model Sum of Squares Df Mean Square F Sig.

Regression 1.907 3 .636 2.094 .106b

1 Residual 30.054 99 .304

Total 31.961 102

a. Dependent Variable: Production cost b.

b. Predictors: (Constant), Supplies, Material, Labor cost

The degree to which the regression model is able to predict the outcome is
analyzed through the significant value. The significant value ie; 0.106 which
means that the model this weakly accepted and it predicts the outcome hence, it
can be analyzed.

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 Coefficients

Model Unstandardized Coefficients Standardized t Sig.

Coefficients

B Std. Error Beta

(Constant) 1.256 .325 3.864 .000

Labor cost .174 .113 .167 1.542 .126

1
Material -.035 .097 -.038 -.362 .718

Supplies .162 .109 .153 1.485 .141

a. Dependent Variable: Production cost

Through the regression coefficients, the regression equation for the research is
formed which is as follows.

PC = 1.256 + .174LC + (-0.35)M+1.62S

Where PC represented production cost, LC represented Labor Cost, M represented Material Cost
and S represented Supplies Cost. Positive B values represent a positive relationship between
independent and dependent variable and vice versa. With each increase in labor cost, production
cost will be increased by around 0.17 units while the rest of the variable remains constant.

In the same way, with each unit increase in supplies , production cost will be increased by around
0.162,unit respectively while rest of the variable remain constant . With each unit increase in
material cost, production cost will decrease 0.35

Labor cost and the supply cost are significant predictor of the production cost, whereas material
cost are insignificant predictor of production cost, the overall hypothesis there is significant
impact of labor cost , material cost , supplies cost on production cost is partially

25
 CHAPTER 5: CONCLUSION & REFERENCES

CONCLUSION:

Pakistan is the 25 largest country in world in terms of imports. The strength of Pakistan currency
is in the worst condition 125 PKR is equal to 1 USD. The main industries of Pakistan are textiles,
pharmaceuticals, construction, chemical, cement, steel, automobiles fertilizer, electronic and
paper.

Pakistan facing different kind huge problems which affects the manufacturing industries and
production operation. Shortage of water resource, shortage of raw material resource’s, generation
of electricity and the poor infrastructure destroy the Pakistan economy strength day by day. In
this research we find that Pakistan paper industry also affects due to these factors. The forest area
is less than 5 % of the surface and the paper industries highly depend on the pulp as a raw
material. The main factors of production cost of paper is increased due import raw material. The
import of paper and paper board is subjected to 25% import duty and 15 % regulatory duty, 18 %
sales tax, 2 % withholding tax and 1 % special excise duty which is on very higher side,
imposition of such high duties import of paper and paper board dropped day by day paper
production.

One of the major factors In Pakistan is electricity and gas crisis increasing day by day and
averages every mills need to 8 MW electricity required on daily basis. Unfortunately in Punjab,
where industries are exists, over there electricity issues a lot of problem create because just for
12 hours electricity given by government to industries. 12 hours load shedding specific issue for
paper mills. Paper mills have to face some genuine issues due to shortage of electricity. Because
production total depend on electricity. In Some serious condition mills generate expensive
electricity for production. Due to utilization of expensive electricity mills increased the
production cost and have to face low income.

One of another factor which increased the production cost. Maximum Pakistan paper Industries
are located at upper Sindh, Punjab and KPK. Where raw material import easily but port is not
located nearby so have to face problem to inbound logistic when import from other countries so
cost incurred and timing problem have to face due to transportation transit after the port
shipment

Labor is the back bone of any manufacturing industry. Every business needs effective and
efficient labor for working. Due to shortage of skillful labor in paper industry and inflation
impact on labor cost which also increased the production cost.

26
Recommendation:

Pakistan Paper industries have a potential to enhance is production capacity and decrees the
imports also stop huge quantity of illegal import of paper which is coming from Pakistan through
Afghanistan, Iran and other borders countries to fill the gap between supply and demand.

For the betterment of paper industry Pakistan government take some serious actions on power
generation and the agriculture sector, also enhance the forest area. Pakistan needs Dams on
emergency bases. Only dams can decrease the shortage of water and shortage of electricity.

Pakistan government should enhance competitiveness by bring the price low down to
international price by reducing duties on paper on paperboard. Duty should reduce on import raw
material, chemical, waste paper, plant and machinery.

27
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 Appendix
Name: ___________________

Age: Under 20 20 to 25 26 to 32 above 32

Education: Below graduate Graduate Post Graduate

High Qualification Others

Profession: Business Service Student Other

Experience: 0 to 1 Year 2 to 5 Years 6 to 10 Years Above 10 Years

We are the students of Khadim Ali Shah Bukhari Institute of Technology & are conducting a
research on ‘Production Cost effecting factor in Pakistan paper Industry’ Please answer the
following questions as your views will be kept secret. This is purely an academic research. We
will just use the answers as part of a general overview / statistical analysis and shall be used for
academic purpose only.

Question Strong Agree Disagr Strong

ly Neutra ee ly
Agree l Disagr
ee

Production Costs

Production costs increases when the

business is short of resources

Currency exchange difference is the

main factor of high production cost
Shortage of skillful labour affects the
major part in production business
High inflation increases the production
cost.

30
 Labour Costs

Labour cost is a key factor in a

production business

In inflation the labour cost should be

given as per living cost

Labour cost should be given as per

piecework scheme

Shortage of skillful labour increase the

labour cost.

Material

Shortage of raw material causes the main

issue in the production

Material with quality matters the most

than the skilled labour

High material cost increase the quality of

production

Supplies & Logistic

Through gas, energy in production cost

remains same , same as electric energy
Import duties effect on production

Time cost is batter option even you chose

B quality of raw material if A quality are
not available in local market
Logistics plays an important role in the
production business

Shortage of water decrease the production

Capacity

SRM (supplier management system)

enhance the capacity and efficiency of
production business

31
SRM (supplier management system)

Cost effective system of any business

32