THE EFFECT OF COST REDUCTION TECHNIQUES AND PRODUCTIVITY IN MANUFACTURING FIRM (CASE STUDY OF OMOT PREMIUM WATER, ONDO)

THE EFFECT OF COST REDUCTION TECHNIQUES AND PRODUCTIVITY IN MANUFACTURING FIRM (CASE STUDY OF OMOT PREMIUM WATER, ONDO)

ABSTRACT

Cost reduction programme has become an important practice among manufacturing firm in Nigeria the Introduction of cost reduction programme has increased productivity, reduction of unit and total cost of production and an increased in the profitability and growth of manufacturing firm in Nigeria. It was in this line that this study aims at evaluating the effect of cost reduction techniques to achieve profitability in manufacturing firm in Nigeriausing Omot Premium water, Ondo State Lagos as a case study. The study objectives are to examine the effect of cost reduction techniques on the performance of manufacturing firms in Nigeria. Both primary and secondary data were employed for the study. The primary data were generated from the management and senior staff officers heading various department of Omot Premium water, Ondo State. Out of  50 set of questionnaires administered.46 were correctly answered and returned, while the secondary data were obtained from published and unpublished report which include textbooks, newspapers, journal articles seminar papers and online report. Four (4) research questions and three (3) research hypotheses  formulated in chapter one were analyzed  using the simple percentage while the three (3) hypotheses were analyzed  and tested using the chi-square statistical method. The conclusion reached is that there is a significant and positive impact of cost reduction techniques on the profitability and growth of manufacturing firms in Nigeria. The researcher recommends that manufacturing firms should institute or continued the use of cost reduction scheme or programme. This will help in avoiding unnecessary cost. The researcher also recommendsthat manufacturing firms should consistently review the method and techniques of cost reduction approved by management in line with the rate of inflation in the economy.

 

 CHAPTER ONE

INTRODUCTION

1.1       Background of the Study

Cost Reduction Techniques are very important element in any Manufacturing Firm or in a project planning and control. Materials represent a major expense in Manufacturing Organizations, so minimizing procurement or purchase costs present important opportunities for reducing costs. Poor materials management can also result in large and avoidable costs during operation. First, if materials are purchased early, capital may be tied up and interest charges incurred on the excess inventory of materials. Even worse, materials may deteriorate during storage or be stolen unless special care is taken. For example, electrical equipment often must be stored in waterproof locations. Second, delays and extra expenses may be incurred if materials required for particular activities are not available. Accordingly, insuring a timely flow of material is an important concern to the Organizations.

 

Cost Reduction Techniques are not just a concern during the monitoring stage in which production is taking place; decisions about material procurement may also be required during the initial planning and scheduling stages. For example, activities can be inserted in the project schedule to represent purchasing of major items such as raw materials to be used for production. The availability of materials may greatly influence the schedule in production with a fast track or very tight time schedule, sufficient time for obtaining the necessary materials must be allowed. In some cases, more expensive suppliers or shippers may be employed to save time. Cost Reduction Techniques are also a problem at the Organization level if central purchasing and inventory control is used for standard items.

In this case, the various projects undertaken by the Organization would present requests to the central purchasing group. In turn, this group would maintain inventories of standard items to reduce the delay in providing material or to obtain lower costs due to bulk purchasing. This organizational materials management problem is analogous to inventory control in any Organization facing continuing demand for particular items.

Materials ordering problems lend themselves particularly well to computer based systems to ensure the consistency and completeness of the purchasing process. In the manufacturing realm, the use of automated materials requirements planning systems is common. In these systems, the master production schedule, inventory records and product component lists are merged to determine what items must be ordered, when they should be ordered, and how much of each item should be ordered in each time period. The heart of these calculations is simple arithmetic: the projected demand for each material item in each period is subtracted from the available inventory. When the inventory becomes too low, a new order is recommended. For items that are non-standard or not kept in inventory, the calculation is even simpler since no inventory must be considered. With a materials requirement system, much of the detailed record keeping is automated and project managers are alerted to purchasing requirements.

1.2       Statement of the Problem

There are many factors that inhibit the ability of a Company to keep cash flow at necessary levels for operations, inaccuracy of inventory which, results in production shortages, premium freight, and often inventory adjustments. The major issues that all manufacturing firm face are: Raw Material Procurement, Logistics- inbound and outbound, Warehouse and Stores, Manufacturing Process (Production), Energy, Packaging, Recycling of waste and Waste Reduction, Information Management and Human Resources. Materials Managers have striven to determine how to manage these issues in the business sector of manufacturing since the beginning of the industrial revolution.

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.

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.

1.3    Objective of the Study

Generally, this study is aimed at evaluating the effect of cost reduction techniques and productivity in manufacturing firm (case study of omot premium water, ondo.). The specific objectives include:

1. To find out if cost reduction scheme are applied in the Omot Premium water, Ondo State
2. To find out how effective, the resources of Omot Premium water, Ondo State are utilized to improve profitability.
3. To investigate if the cost reduction technique of Omot Premium water, Ondo State has a significant effect on the profitability of the business.
4. To offer suggestions on specific cost reduction techniques to the company under review.

 

1.4    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.

1. Is there any cost reduction scheme or programme Omot Premium water, Ondo State if not, is there any possible means of installing a cost reduction system so as to eliminate avoidable cost or waste and enhance the Omot Premium water, Ondo State Profitability.
2. Does effective cost reduction technique any significant and positive impact on the profitability and growth of Omot Premium water, Ondo State?
3. Does effective cost reduction technique help in the achievement of increase productivity?
4. Does effective cost reduction technique help in reduction of unit cost and total cost of production?

 

1.5    Research Hypotheses

The following hypotheses stated in Null (H_o) and alternative hypotheses (H_i) forms were formulated for the study

H_o:    effective cost reduction does not have a significant and positive impact on the profitability and growth of Omot Premium water, Ondo State

H₁:    Effective cost reduction does have a significant and positive impact on the profitability and growth of Omot Premium water, Ondo State

H_o:    There is no significant relationship between effective cost reduction technique and the achievement of increased productivity in   Omot Premium water, Ondo State

H₁:    There is a significant relationship between effective cost reduction technique and the achievement of increased productivity in Omot Premium water, Ondo State

H₀:    There is no significant relationship between effective cost reduction technique and the reduction of unit cost and total cost of production in Omot Premium water, Ondo State

H_i:     There is a significant relationship between effective cost reduction technique and the reduction of unit cost and total cost of production in Omot Premium water, Ondo State

1.6      SIGNIFICANCE OF THE STUDY

The findings from this study will help to highlight those areas where they are problems; cost reduction techniques are about improving profitability. By reducing expenses, profits are increased without even addressing sales program enhancements. If the cost reduction plan is matched with a sales increase program, it doubles the results. It is just one more reason why a cost reduction program must be an integrated plan that is results-oriented. A structured plan will put a Company on track to achieve maximum profitability. In some Companies materials management is also charged with the procurement of materials by establishing and managing a supply base. In other Companies the procurement and management of the supply base is the responsibility of a separate purchasing department. The purchasing department is then responsible for the purchased price variance from the supply base.

In large Companies with multitude of customer changes to the final product over the course of a year, there may be a separate logistics department that is responsible for all new acquisition launches and customer changes. This logistics department ensures that the launch materials are procured for production and then transfers the responsibility to the plant materials management.

1.7          SCOPE OF STUDY

The scope of this research entails the examination of the problems and prospect of cost reduction techniques and productivity in a manufacturing firm. It covers other costs as required for ordering the materials, carrying the materials in inventory, its maintenance and handling charges must be assigned to the cost of materials before it enters into a product or transformed into some other form.

In order to economize all the costs of materials management, Company has to adopt definite method of deciding the quantity of materials to be ordered, quantity to be stored as inventory and work in progress inventory. In order to reduce the material cost and all other costs stated above, there has to be some efficient and effective cost reduction techniques, which must be dynamic to adjust with changing demand and production.

1.8    LIMITATION OF THE STUDY

Some respondents requested to be paid by researcher. Others were not too enthusiastic, especially those at the top who always gave excuses of being too busy and because time was also not on the side of the researcher, she had to make do with only the available respondents. Responses given by respondents might not be totally accurate and honest.

1.9    Definitions of Terms

The following terms which are used in this study are defined precisely as they relate to the context of this research work.

1. Cost: According to Adeniji (2009) “Cost may be defined as the amount of expenditure (actual or national) incurred on or attributable to a specified things or activity”.
2. Cost Reduction: This is the process whereby a permanent cost saving are made without affecting the quality or the usefulness of a given product.
3. Profit Squeeze: This is the persistent dwindling of return investment ceased by high cost of operation.
4. Profitability: It is the yardstick for measuring returns, efficiency and effectiveness on the use of productive resources.
5. Cost Centre: A cost centre is any location, person or item of equipment for which cost may be ascertained and used for the purpose of cost control (Adeniji 2009:9)
6. Profit Centre: This is a centre used to assign responsibility or revenues and expenses.
7. Evaluation: This is the review of a process and the measurement of the achievement of the process of the derived goal.
8. Technique: This can be seen as the style or mode adopted in implementing a decision geared toward achieving a desired objective.
9. Inflation: This is the general increase in the prices of goods and services and fall in the purchasing power of consumer or value of money.
10. Economy: This is the state of a country in terms of the productions and consumption of goods and services and the supply of money.

THE EFFECT OF COST REDUCTION TECHNIQUES AND PRODUCTIVITY IN MANUFACTURING FIRM (CASE STUDY OF OMOT PREMIUM WATER, ONDO)

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