THE EFFECT OF MATERIALS MANAGEMENT ON THE PROFITABILITY OF THE MANUFACTURING COMPANY 

CHAPTER ONE

INTRODUCTION

1.2       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?

1.5   SIGNIFICANCE OF THE STUDY

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.

1.9       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?

1.10   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.

1.11   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-assemb

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