THE EFFECT OF MATERIALS MANAGEMENT ON THE PROFITABILITY OF THE MANUFACTURING COMPANY (A STUDY OF CADBURY NIGERIA PLC)

CHAPTER
ONE

INTRODUCTION

1.1     
BACKGROUND TO THE STUDY

Over the last decade, our world has changed dramatically
due to the growing phenomenon of globalization and revolution in information
technology. There is tremendous demand on companies to lower costs, enlarge
product assortment, improve product quality,

and provide reliable delivery
dates through effective and efficient coordination of production and
distribution activities.

To achieve these conflicting goals, companies must
constantly re-engineer or change their business practices and employ
information systems (Mahesh, 2006).

Materials Management has always been an area of
scrutiny for organizations. This has become a central focal point as trends
from the supply chain arena have indicated that substantial operating cash can
be freed with leaner and more efficient handling of inventory.

As organizations examine the state of their
inventory, they often find that visibility across locations and warehouses are
inadequate, stock levels are inconsistent, demand is uncertain, and
communication between stocking locations or warehouses may be minimal or non-existent.
Among other things, the lack of an integrated interaction between peripheral
systems and materials managers leads to unnecessary purchasing and
overstocking.

The concepts of “materials management,” “physical
distribution management,” and “logistics management” are the primary materials
organizational tools which have been used successfully in the past and will be
used increasingly in the future to achieve closer coordination and control of a
firm various materials activities.

In general materials management is concerned with
bringing materials from outside of an organization to the point of production
and moving in processes.

If we distinguish between the operational function
of customer service and the resultant goal of customer value and satisfaction,
this discussion leads us to conclude the consequences of materials management
are lower costs and improved customer value and satisfaction to achieve
competitive advantage. Industry reports support this contention (Performance
Management Group, 2001).

The fast developing and technologically changing
environment has placed before the materials manager a tremendously challenging
task and responsibility. The task is really herculean when we recognize the
importance of materials, equipments and components per annum that go into the
production channels. The challenges become tough because the money tied up in
inventory or materials and equipment are enourmous.In fact, in many organizations
(big and small), materials form the largest single expenditure item. According
to Subramanian (1974) an analysis of the financial statements of a large number
of private and public sector organizations indicates that materials account for
nearly 60% of the total expenditure. #

Consequently, the importance of materials
management lies in the fact that any significant contribution made by the
materials manager in reducing materials cost will go a long way in improving
the profitability and rate of return on investment. Such increase in
profitability, no doubt, can be affected by increasing sales.

While
most of the writing and discussion on materials management is on acquisition
and standards, much of the day to day work conducted in materials management deals
with quality assurance issues. Parts and materials are tested, both before
purchase orders are placed and during use, to ensure there are no short or long
term issues that would disrupt the supply chain.

This aspect of material
management is most important to the heavily automated industries, since failure
rates due to faulty parts can slow or even stop production lines, throwing off
timetables for production goals (Mentzer, 2001).

The
other major component of materials management is standards compliance. There
are standards that are followed in supply chain management that are critical to
a supply chain’s function. For example, a supply chain that uses just-in-time
or lean replenishment requires absolute perfection in the shipping of parts and
materials from purchasing agent to warehouse to place of destination.

Systems
reliant on vendor-managed inventories must have up-to-date computerized
inventories and robust ordering systems for outlying vendors to place orders on
(Hax and Candea, 2004).

Effective
materials management according to Christine
(2002) is essential in order to provide the best service to customers, produce
at maximum efficiency, and manage inventories at predetermined levels to
stabilize investments in inventories.

Successful materials management requires
the development of a highly integrated and coordinated system involving sales
forecasting, purchasing, receiving, storage, production, shipping, and actual
sales. Both the theory of costing
materials and inventories and the practical mechanics of cost
calculations and record keeping must be considered.

Costing materials
present some important, often complex, and sometime highly controversial
questions concerning the costing of materials used in production and the cost
of inventory remaining to be consumed in a future period.

In financial accounting, the subject is
usually presented as a problem of inventory
valuation; in cost accounting,
the primary problem is the determination of the cost of various materials
consumed in production and a proper charge to cost of goods sold
(Freeman, 2006).

1.2   STATEMENT OF THE PROBLEM

Many
organizations seem to be failing in the realization of the corporate goals and
objectives. However, for most of these organizations (particularly
manufacturing organizations), materials are crucial aspect of the firm’s
prosperity and goal attainment (Burt,2003).

The
challenge is that some firms do not have genuine and efficient management of
the purchase, storage and usage of the materials. The importance of materials
management is evident in the amount of expenditure allotted to materials and
the significant contribution of materials to organizational performance.

Efficient materials management will reduce materials cost, improves
profitability and increase rate of return on investment. Such increase in
profitability, no doubt, can be influenced by increasing sales. In fact, as
market pressure intensifies, organizations will be forced to cut down the
costs.

Material Management is all about purchasing mix. It involves the
procurement of materials in store and the ability to know the total number of
available goods that are to be issued out on request. All the functions are
primarily carried out by the store manager whose mission is to ensure that
goods are not below average as to satisfy the demands of customers.

The general
importance of materials management is to ensure that the demand and sales of
the company are streamlined as to enable it to be aware when the management or
the organization is short of goods and will not go to the extent of making use
of their buffer stock.(Maloni,1997).

1.3   OBJECTIVE OF THE STUDY

This
study will show with statistical evidences that materials management will
significantly increase the profitability, wellbeing and productivity of the
organization. However, the specific objectives of the study are: 

1.      To
examine the impact of materials management on the productivity of the
organization.

2.      To
examine the impact of materials management on profitability.

3.      To
examine the effect of materials management on the organizational efficiency and
performance.

4.      To
examine the impact of materials management on customers’ satisfaction.

5.      To
examine the effect of materials management on the organizational coordination.

1.4   RESEARCH QUESTIONS

In
this study, attempt will be made to provide answers to the following questions

1.      What
is the impact of materials management on the productivity of the organization?

2.      What
is the impact of materials management on profitability?

3.      What
is the effect of materials management on the organizational efficiency and
performance?

4.      What
is the impact of materials management on customers’ satisfaction?

5.      What
is the effect of materials management on the organizational coordination?

The
research work was taken up to show the significance of materials management to
aggregate performances of the organization. Apparently, all organizations,
whether service oriented or good oriented need to pay attention to the essence
of materials and materials management in their organizations. Consequently, it
is clear that the contribution and importance of this study cannot be over
emphasized.

The
results of this study should also assist in defining new methods/ strategies of
materials management for manufacturing sector in particular and management
organisations in general.

Finally,
the results of this study should help scholars, students and upcoming
researchers in the conduct of future research.

1.6     
RESEARCH
HYPOTHESES

This
study will be geared towards testing the following hypotheses.

Hypothesis One

Ho1   There is no significant relationship between
materials management and organizational productivity.

Ha1  There is significant relationship between
materials management and organizational productivity.

Hypothesis Two

Ho2   There is no significant relationship between
materials management and profitability.

Ha2  There is significant relationship between
materials management and profitability.

Hypothesis Three

Ho3   There is no significant relationship between
materials management and organizational efficiency and performance.

Ha3  There is significant relationship between
materials management and organizational efficiency and performance.

Hypothesis Four

Ho4   There is no significant relationship between
materials management and customer’s satisfaction.

Ha4  There is significant relationship between
materials management and customer’s satisfaction.

Hypothesis Five

Ho5  There
is no significant relationship between materials management and organizational
coordination?

Ha5  There is significant relationship between
materials management and organizational coordination?

1.7     
SCOPE
AND LIMITATIONS OF THE STUDY

The
area of this study is on materials management in the organization, directed to
the case of Nestle Nigeria Plc, a reputable manufacturing organization.

1.8     OPERATIONAL
DEFINITION OF TERMS

In the course of study, certain words and group of words were used to describe certain situations and the meanings of these words are given below:

Economic order quantity: This is the level of inventory that
minimizes the total inventory holding costs and ordering costs. It is one of
the oldest classical production scheduling models.

Consumer
satisfaction: This implies that the organization
meets the wants of the consumers. It is a measure of how products and services
supplied by a company meet or surpass customer expectation.

Materials management: This is the act of directing and controlling the
acquisition and usage of materials in the organization. Planning and control of
the functions supporting the complete cycle (flow) of materials, and the
associated flow of information.

Supply chain:This is the linked set of resources and processes that begins with the sourcing of raw material and extends through the delivery of end items to the final customer.

Supply Chain Management:This encompasses the planning and
management of all activities involved in sourcing, procurement, conversion, and
logistics management.

Logistics:The management of business operations, such as the acquisition, storage,
transportation and delivery of goods along the supply.

Just-in-time manufacturing:  This can be defined as the elimination of all
waste and continuous improvement in productivity.  This means there should be no safety stocks, and lead times are minimal.

Safety stock: This is also referred to as buffer stock. It is
used to describe a level of extra stock that is maintained below the cycle
stock to buffer against stockouts.

Manufacturing: This is the use of machines, tools and labour to make things for use or sale.
The term may refer to a range of human activity, from handicraft to high tech,
but is most commonly applied to industrial production, in which raw materials
are transformed into finished goods on a large scale.

Productions: These are processes and methods employed in transformation of tangible inputs (raw materials, semi-finished goods, or sub-assemblies) or intangible inputs such as ideas, information, know-how into goods and services.

Profitability: This is the act of making gains in business activity and for the benefit of the
owners of the business.

Efficiency: This is concerned with the percentage resource actually used over the resources
that were planned to be used.

Performance: This is described as the net wealth after subtracting
the inputs and throughputs (the activities of processing work) from the outputs
or final results.