AN EVALUATION OF COST REDUCTION TECHNIQUE IN ACHIEVING PROFITABILITY IN AN INFLATED ECONOMY.

CHAPTER ONE

INTRODUCTION

1.0    Background of the Study

          According to Aboyade (1983) Cost and revenue in business undertaking form part of what determines the financial performance and position of a business concern. Since management is concerned with profitability which is the measure of business performance, especially in the manufacturing concern, certain management techniques is very necessary. Mastery the technique in a business can help one to achieve the basic objectives of setting up a business and making it profitable (Oniwuliri, 2009).

          Hanson (1982: 21) pointed out that “the aim of all production is to satisfy human wants and make or maximize profit”. However in carrying out this production, certain costs are incurred. For any business to achieve it’s set objectives, adequate and effective cost reduction measures (formal or informal) should be adopted, in order to achieve the organizational objectives. The effectiveness of the these measures however may have helped some of these  companies to remain in business irrespective of the harsh economic condition, like inflation among others (Collins & Moore 2006).

          According to Iyahen, (2015) many Nigeria business establishments especially the manufacturing sector are in serious profit squeeze. Iyahen, (2016) also pointed out that there are number of factors accounting for this which include, the increasing cost of running business in Nigeria, drastic fall in Nigeria foreign exchange earnings. The situation is further aggravated by triple digit inflation currently present in our economy. The structural adjustment programme and payment of long exercise duties have caused some companies to be closed either indefinitely or produce at a high cost, thereby making the price of local goods to be high while the sale volume is low. All have resulted in poor profit margin, retrenchment or winding up. Firms therefore are struggling to maintain satisfactory pay-off where costs are continuously increasing which is becoming difficult to sustain. To maintain earning in the face of this harsh condition, there is need for companies to make decision with regards to cost reduction culture, to enhance profitability (Onuoha, 1993: 32). In addition to these, it will enhance competitive ability and generate reasonable profit margin for survival, growth, and expansion of the business.

          Finally, it is appropriate to say that the identification of these problems faced by some industries and the provision of solution to it will not only improve the profitability of its operation but also help in the improvement and betterment of the Nigeria economy.     

1.1     Statement of the Problem

          Every business activities result in the occurrence of cost and excessive cost could lead to a reduction in profits which is contrary to the purpose of any business endeavor, which is to maximize profits (Addison; 1980: 54). In Nigeria today, the economy is in extremely bad shape (Osakwe, 2016). Cost of production has been in the increased in the manufacturing sector of the economy, which in effect has resulted in a low contribution margin for the firm, thus making the business unprofitable.

Bathy (1980:82) asserts that greater effort should be made by manufacturing firms to keep cost to the lowest minimum, through efficient and effective utilization of the resources to achieve profitability. Many manufacturing firms are faced with the problem of how to embark on cost reduction scheme and also to make it more effective and efficient in order to achieve desired goal. Moreover the problem of inefficiency under the utilization of resource has a tremendous effect on our economy and should be taken into full consideration (Lipsey 1983:12).

Organizations are faced with the inability to make enough profit and achieve increase in productivity. This is due to the inability to reduce cost installing the appropriate cost reduction techniques in their businesses. It follows that it is essential to monitor the cost of production. So how then can cost be effectively applied in an organization to help management attain it goals in an inflated economy? According to Adeniyi (2009) cost reduction campaigns are often introduced at a rush to reduce the cost of production of goods.

1.2    Objective of the Study

          Generally, this study is aimed at evaluating the effect of cost reduction technique in a manufacturing sector to achieve profitability in an inflated economy with Nigeria Breweries Plc as the case study. Specifically, the study will be conducted to:

1.       To find out if cost reduction scheme are applied in the Nigeria breweries Plc.

2.      To find out how effective, the resources of Nigeria breweries Plc are utilized to improve profitability.

3.      To investigate if the cost reduction technique of Nigeria Breweries Plc has a significant effect on the profitability of the business.

4.      To offer suggestions on specific cost reduction techniques to the company under review.

1.3    Research Question

          This study, on the evaluation of cost reduction techniques to achieve profitability in an inflated economy will be based on the following questions to help direct the study.

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