Evaluation of the Effect of Cost Reduction Techniques to Achieve Profitability in an Inflated Economy
The cost reduction programme has become an important practice among manufacturing firms in Nigeria the Introduction of the cost reduction programme has increased productivity, reduction of the unit and total cost of production and an increase in the profitability and growth of manufacturing firms in Nigeria. It was in this line that this study aims at evaluating the effect of cost reduction techniques to achieve profitability in a manufacturing firm in Nigeria using Nigerian Breweries Plc 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 the various department of Nigerian Breweries Plc Lagos. Out of 50 sets of questionnaires administered.46 were correctly answered and returned, while the secondary data were obtained from the published and unpublished reports which include textbooks, newspapers, journal articles seminar papers and online reports. 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 continue the use of cost reduction schemes or programmes. This will help in avoiding unnecessary costs. The researcher also recommends that 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.
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 are very necessary. Mastery of 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 “all production aims to satisfy human wants and make or maximize profit”. However, in carrying out this production, certain costs are incurred. For any business to achieve its set objectives, adequate and effective cost reduction measures (formal or informal) should be adopted, achieve the organizational objectives. The effectiveness of 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 a serious profit squeeze. Iyahen, (2016) also pointed out that several factors are accounting for this which include, the increasing cost of running a business in Nigeria, drastic fall in Nigeria foreign exchange earnings. The situation is further aggravated by the 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 produced 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 earnings in the face of this harsh condition, there is a need for companies to decide with regards to cost reduction culture, to enhance profitability (Onuoha, 1993: 32). In addition to these, it will enhance the competitive ability and generate a 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 a solution to it will not only improve the profitability of its operation but also help in the improvement and betterment of the Nigerian 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 endeavour, which is to maximize profits (Addison; 1980: 54). In Nigeria today, the economy is in extremely bad shape (Osakwe, 2016). The cost of production has been 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 the 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 a cost reduction scheme and also to make it more effective and efficient to achieve the desired goal. Moreover, the problem of inefficiency under the utilization of resources 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 an increase in productivity. This is due to the inability to reduce costs by 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 its goals in an inflated economy? According to Adeniyi (2009), cost reduction campaigns are often introduced in 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 techniques 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 schemes 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 Questions
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 for Nigeria breweries Plc if not, is there any possible means of installing a cost reduction system to eliminate avoidable cost or waste and enhance the Nigeria Breweries Plc Profitability.
2. Does the effective cost reduction technique have any significant and positive impact on the profitability and growth of Nigeria breweries Plc?
3. Does effective cost reduction technique help in the achievement of increased productivity?
4. Does the effective cost reduction technique help in the reduction of unit cost and total cost of production?
1.4 Research Hypotheses
The following hypotheses stated in Null (Ho) and alternative hypotheses (Hi) forms were formulated for the study
Ho: effective cost reduction does not have a significant and positive impact on the profitability and growth of Nigeria breweries Plc.
H1: Effective cost reduction does have a significant and positive impact on the profitability and growth of Nigeria breweries Plc.
Ho: There is no significant relationship between effective cost reduction techniques and the achievement of increased productivity in Nigeria Breweries plc.
H1: There is a significant relationship between effective cost reduction techniques and the achievement of increased productivity in Nigeria Breweries plc.
H0: There is no significant relationship between effective cost reduction technique and the reduction of unit cost and total cost of production in Nigeria Breweries Plc.
Hi: There is a significant relationship between effective cost reduction technique and the reduction of unit cost and total cost of production in Nigeria Breweries Plc.
1.5 Significance of the Study
This study on the Evaluation of the effect of cost reduction techniques to achieve profitability in an inflated economy (A study of Nigeria Breweries Plc) will generally educate the entire public on how a cost reduction programme will be an effective tool employed by the management of the business organization in achieving profitability in a hyper-inflated economy.
This study will also be of immense benefit to a business organization especially Nigeria Breweries Plc to improve upon their cost reduction programme as a measure of reducing the cost of production.
Moreover, this study will also serve as a source of information and reference material to future researchers who may wish to research related areas.
Finally, the finding of this study may also help in updating previous studies conducted in the area of cost reduction techniques, thereby adding value to existing literature.
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