IMPACT OF MATERIAL MANAGEMENT ON THE FINANCIAL PERFORMANCE OF SELECTED BREWERY FIRMS IN NIGERIA

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CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Over the last five to ten years, the world brewery market has become increasingly concentrated with a wave of business combinations among brewery giants as well as diversification of investments outside their geographical location All these are in the quest to dominate the market as well as the maximization of shareholders wealth. Increasing market domination that will enhance the maximization of shareholders wealth depends largely on certain firm specific factors such as persistent profitability. Profit maximization for any firm depends on efficient management of cost and process of production as well as increases in sales resulting from firm’s market domination. One factor that is deduced to influence firm profitability grossly is the firm’s working capital. Amadasu (2003) examined the factors that determine the profitability of the Nigerian beer brewery firms. Multiple regressions were applied to annual data generated from the annual reports of the sampled beer brewery firms covering a period of 2000 to 2011.The results show that the ratios of inventory to cost of goods sold, account receivable to sales, and sales and general expenses to sales have significant impact on gross profit margin.

Working capital is the stock stored that has a conversion or resale value in order to gain profit. It represents the largest cost of a firm especially the manufacturing firms. In normal circumstances, working capital consists of about 30% – 40% of a firm’s total investment. Investment in working capital to a large extent determines the returns earned by a firm. Nevertheless, excessive levels of current assets can easily result in a firm realizing a substandard return on investment while firms with too few current assets may incur shortages and difficulties in maintaining smooth operations (Carter, 2002). As a result, working capital management is a very important component of corporate finance as it directly affects the liquidity and profitability of a firm. It centers on current assets and current liabilities of a firm. For one thing, the current assets of a typical manufacturing firm accounts for over half of its total assets (Danna, 2003). One reason why managers spend considerable time on day-to-day management of working capital is that current assets are short-lived investments that are continually being converted into other asset types (David, 2004). Liquidity for the on-going firm is not reliant on the liquidation value of its assets, but rather on the operating cash flows generated by those assets (Drury, 2000). Working Capital Management is therefore a sensitive area in the field of financial management (Famurewa and Orekoya, 2009). It involves the decision of the amount and composition of current assets and the financing of these assets. Efficient working capital management involves planning and control of current assets and current liabilities in a manner to strike a balance between liquidity and profitability. Garcia-Teruel and Martinez “Solano (2004) pointed out that working capital management is a simple and straightforward concept of ensuring the ability of the firm to fund the difference between the short term assets and short term liabilities. The ultimate objective of any firm is to maximize shareholders wealth and maximizing shareholders wealth can be achieved by a firm maximizing its profit. A firm that wishes to maximize profit must strike a balance between current assets and current liabilities and hence keeping abreast of the liquidity and profitability trade-off. Preserving liquidity and profitability of the firm is an important objective as increasing profit at the expense of liquidity can bring serious problems to the firm and vice-versa. Working capital management is considered to be a very important element to analyze the firm’s performance while conducting day to day operations. There are chances of imbalance of current assets and current liability during the life cycle of a firm and profitability will be affected if this occurs. This is why the study of influence of working capital on firm’s profitability is drawing scholars’ attention in recent times. Numerous studies on the drivers and financial impact of working capital management for different manufacturing firms for different countries of the world have been published in recent times. However, inter-country studies of world leading firms in a given industry are sparse. Attempting to fill this knowledge gap, this study sets out to examine the drivers and financial impact of working capital management on profitability of top world leading beer brewers. This research while focusing on working capital management (as measured by the cash conversion cycle (CCC) and it is influence on profitability aims at establishing a relationship between firms’ management of the liquidity – profitability trade-off for the world leading beer brewery firms. Also since the CCC captures management of working capital, the third objective of this paper is to examine how the individual components of the CCC affect world leading beer brewers’ profitability. This study is organized as follows: Section two reviews empirical literature on working capital management.

Materials management is that aspect of business activity that deals with planning for purchasing, receiving, handling, storing, and releasing of materials for use in production with effective control measures. Materials are industrial goods that will become part of another physical product. Armstrong (1985) has classified materials for use in manufacture under three headings:- Raw materials primarily from agriculture and the various extractive industries e.g. mineral resources, fruits, and vegetables sold to processor.- Semi finished goods and processed materials to which some work has been applied or value added e.g. rods, wires, paper, chemicals, etc.- Component parts and assemblies that are completely finished products of one manufacture, which can be used as part of more complex product by another manufactures. Consequently, it is the managing of these materials that we refer to as materials management. Thus, materials management has been defined by Lee and Dobler (1997) as the total of all those tasks, functions and routines

1.2 Statement of Problem

Delayed deliveries, poor quality outputs due to faulty specifications, duplication of raw materials and continued threats of litigation by the suppliers due to delayed payments, is a common scenario among firms which experience poor relationship with their suppliers. Supplier relationship management provides the holistic approach needed to maximize the supplier’s value to the enterprise. It is a critical shift from managing supplies to managing suppliers. It succeeds through a focus on partnering with industry and leveraging commercial capabilities. The main idea of the relationship between buyer and supplier is to create a win-win situation for both the buyer and supplier, compared to the traditional approach where the buyer had the power and could play the suppliers against each other just to minimize cost. The collaboration should enable for example mutual cost sharing, joint improvement efforts, conflict resolution and better communication. An effective SRM solution contains essential components such as ranking, rating and optimization that allow a firm to reduce its supply base and overall costs.

In recent years Benue Breweries Ltd, Makurdi has suffered from inefficient and imprudent management of resources and product scarcity, which has resulted in invaluable economic and social losses to the society. On the surface, this scarcity has been attributed to shut downs and breakdown at the brewery due largely to a lack of smooth maintenance activities in the plant, which 100 J. Econ. Int. Finance is brought about by the unavailability of replacement of parts, which should have been provided by the materials management department. The function of the materials management department is very important especially in view of the difficulties associated with the purchase of equipment spares, which in most cases are foreign-sourced. Frequently, the materials management department has been accused for the frequent breakdown and shut downs as a result of its inability to provide the necessary spares as at when they are need.

1.3 Aim and Objectives of the Study

The aim of this study is to:

Determine the impact of material management on financial performance of selected brewery firms in Nigeria.

1. Establish the role of training suppliers on organizational performance of selected Brewery firms in Nigeria.
2. Determine the impact of rewards on organizational performance on organizational performance of selected Brewery firms in Nigeria.
3. Establish the impact of financial support on organizational performance of selected Brewery firms in Nigeria.
4. Establish the benefit of firm involvement on organizational performance of selected Brewery firms in Nigeria.

1.4      Relevant Research Questions

1. To what extent does the impact of training suppliers improve organizational performance of selected Brewery firms in Nigeria?

2 How does the impact of rewards improve organizational performance of selected Brewery firms in Nigeria?

1. To what extent does the impact of financial support improve organizational performance of selected Brewery firms in Nigeria?
2. How does the impact of firm involvement improve organizational performance of selected Brewery firms in Nigeria?

1.5  Research Hypothesis

Impact of material management on the financial performance of selected brewery firms in Nigeria

H_o: Material management does not have effect on the financial performance of selected brewery firms in Nigeria.

H_i: Material management have effect on the financial performance of selected brewery firms in Nigeria.

1.6   Significance of the Study

The researcher hopes that the findings of this study will form the basis on which future researchers could be built and most importantly the Practices of manufacturers with respect to supplier development and supplier performance evaluation will help Nigerian breweries to provide supplier development as value added services to their potential customers and finally The study will contribute to the body of knowledge in the field of manufacturing industry.

1.7 Scope of the Study

The scope of the research work is on impact of material management on the financial performance of selected brewery firms in Nigeria. The study is limited to the selected brewery firms in Lagos, Nigeria.

1.8 Definition of Terms

• Procurement: the act of procuring, or obtaining or getting by effort, care, or the use of special means: The organ procurement procedure is very complicated. 2. the act of obtaining equipment, materials, or supplies:
• Storage: the act of storing : the state of being stored; especially : the safekeeping of goods in a depository (as a warehouse)b : the price charged for keeping goods in a storehouse
• Profitability: Profitability is the ability of a business to earn a profit. A profit is what is left of the revenue a business generates after it pays all expenses directly related to the generation of the revenue, such as producing a product, and other expenses related to the conduct of the business activities.
• Department: a division of a large organization such as a government, university, business, or shop, dealing with a specific subject, commodity, or area of activity
• Material storage: Material handling involves short-distance movement within the confines of a building or between a building and a transportation vehicle. It utilizes a wide range of manual, semi-automated, and automated equipment and includes consideration of the protection, storage, and control of materials throughout their manufacturing,
• Inventory control: co ordination and supervision of the supply, storage, distribution, and recording of materials to maintain quantities adequate for current needs without excessive oversupply or loss.
• Materials management: is an approach for planning, organizing, and controlling all those activities principally concerned with the flow of materials into an organization.

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