ABSTRACT
This study looked at the impact of dispersed manufacturing system on performance of Nigerian firms. The need to reduce cost of production has made organizations to adapt to the many challenges the manufacturing industry faces today. Such challenges for industrial companies include: innovation, speed, and flexibility, possibilities of information technology and data-communication, the globalization of markets, and the ongoing specialization of firms. Another phenomenon is the increasing participation of innovative small and medium sized enterprises in international manufacturing networks. As such, the problems associated with manufacturing firms either dispersed or concentrated are; inability of dispersed or concentrated firms to minimize cost of production; un-sustainability and growth of potential; insufficient return on capital employed and insufficient earnings on per book value basis. It is against this background that this study sought to examine: the impact of cost of production on sustainability and growth of dispersed and concentrated manufacturing firms in Nigeria; the impact of cost of production on return on capital of dispersed and concentrated manufacturing firms in Nigeria and the impact of cost of production on earnings per share of dispersed and concentrated manufacturing firms in Nigeria. The research design adopted for the study was the ex-post facto research which enabled the researcher to make use of secondary data from ten (10) manufacturing firms as well as determine cause-effect relationship between dependent and independent variables both on a firm by firm basis as well as on aggregate basis. The cost of production rate (CPR) was the dependent variable while Sustainability and Growth (SG), return on capital (ROC) and earnings per share (EPS) were the independent variables as performance indicators and the study adapted the OLS Regression model to test the hypotheses. The findings from the study revealed that on a firm by firm basis, there was mixed variations on the impact cost of production rate on the performance of Nigerian firms however on aggregate basis for dispersed firms; there is positive non-significant impact of cost of production rate on sustainability and growth (t-value =0.109, SG coefficient = 0.002); there was a positive non-significant impact of cost of production rate on return on capital (t-value = 1.030, ROC coefficient = 0.353); and the impact of cost of production rate (CPR) on earnings per share (EPS) for dispersed firms was positive and non-significant (t-value = 0.595, EPS coefficient = 0.001). On the other hand for concentrated firms on aggregate basis, there was positive non-significant impact of cost of production rate on sustainability and growth (t-value = 0.103, SG coefficient = 0.229), there was a positive non- significant impact of cost of production rate on return on capital (t-value = 0.695, ROC coefficient = 0.180) and the impact of cost of production rate on earnings per share for concentrated firm is negative and non-significant (t-value = 0.599, EPS coefficient = -0.015). Thus, it was recommended that for improved performance, firms should adapt dispersed manufacturing system since performance indicators performs better when compared with concentrated firms and government should increase expenditure on basic infrastructural facilities such as road, electricity as to enhance the growth of manufacturing firms in Nigeria.
CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
Capkun, Hameri and Weiss (2009) posit that the dominant theme of the operations management literature over the past century has been to improve operational performance. This can be achieved by reducing the lead time from raw materials to finished goods, reducing the amount of waste in the process and by reducing the quantity of physical units held by the firm. Numerous techniques have been proposed to achieve this goal, including: business process reengineering, total quality management, supply chain integration, just-in-time, lean thinking, agile manufacturing, and activity-based management. The inherent logic of these techniques is self evident and widely accepted. The majority of success stories in operations management stem from small sample research in the automotive, machinery, and job-shop industries. These studies document increased market share, higher profitability and greater product quality for firms that have employed the above techniques to improve their operations (see, Capkun, Hameri and Weiss, 2009).
About half a century ago, Forrester’s (1961) non-linear simulations on information and delivery delays in internal operations and supply chains helped academics and managers understand how information distortion and order batching lead to ever longer lead times and inventory build-up. Scale and cost-centric manufacturing dominated operations management until the 1970s when the quality movement turned the focus to continuous improvement and errorless operations (Forrester, 1961).
Factors such as globalization, deregulation of markets, changing demands and shorter product life cycles, pose new challenges for most firms. In order to be competitive, firms must be able to continually improve their performance by reducing costs and improving quality, productivity, and speed to the market, and being innovative in terms of introducing new products and services. Therefore, the ability to combine old and new knowledge in order to generate new products/services remains important to the prosperity of the modern firm. Thus, the identification of the most successful work practices either in dispersed or concentrated manufacturing setup in terms of their ability to facilitate the innovation of products/services is an important empirical challenge.
Much of the literature on high performance working practices has concentrated on the manufacturing sector (Applebaum, 2000; Cappelli, 2001) including specific industries (Dunlup, 1996; Ichniowski, Shaw, and Prennushi, 1997; Paul, 2003; Youndt, 1996). However, the ever growing importance of the service sector, combined with the relatively few studies focusing on this particular sector, emphasizes the need for examining the service sector in more detail (Hunter, 2000).
The empirical analysis of innovation in the manufacturing sector is according to Coombs and Miles (2000) dominated by one of two distinctive approaches. The “assimilation approach” argues that innovation in services is fundamentally similar to innovation in manufacturing, and therefore the same concepts and tools may be used for studying innovation activities in the two sectors. However, innovation in manufacturing is more dependent on adopting externally developed technologies where the aim is to promote new manufacturing provision and/or enhance service productivity (see, Coombs and Miles, 2000).
The “demarcation approach” highlights the difference between processes of innovation in manufacturing and services. The dynamics involve to a high degree customers’ requirements and as such the creative use of human skills is important. The possible differences between the innovation processes in manufacturing and service makes it interesting to examine in what way high performance work practices are used in the two sectors. Moreover, the lack of consensus in the literature on the nature of high performance work practices (Paauwe, 2005) implies that the application and effect of high performance work practices may be different across the manufacturing and service sectors.
Several scholars have proposed and identified high performance work practices. However, much of the research has focused on one single practice, see e.g. Mahoney (1995) and Huselid (1995), and the link between systems of practices or bundles of practices (MacDuffie, 1995), and different types of firm performance have scarcely been examined empirically (Arora and Gambardella, 1990; Ichniowski et al., 1997; Mendelson and Pillai, 1999; Michie and Sheehan, 2003).
According to Athey and Stern (1998), two types of approaches have been used in the literature. The first relies on testing whether the practices are positively correlated, conditional on observables, as for instance in Arora and Gambardella (1990). The second approach uses various regression techniques in order to measure the effect of a set of variables and their interaction terms on productivity. For instance, Ichniowski et al. (1997) find, by applying the second method a number of systems by using recent literature and bivariate correlations and argue by OLS estimation, that systems of practices determine productivity and quality, while marginal changes in individual work practices have little effect. This approach suffers from the obvious limitation that the researcher in advance has to specify the exact combinations of practices to be included in the analysis. An alternative to this procedure is to identify bundles of practices using factor and or cluster analysis (Boselie, 2005; Laursen, 2002; Laursen and Foss, 2003). These methods involve a large degree of subjectivity both with respect to the number of practices considered as well as the particular combinations used. Traditional factor and cluster analysis is moreover best suited for continuous data, which is rare in measuring the adoption of various work practices.
Recent research on improving operations and performance has been concentrated primarily on dispersed and concentrated firms and how it affects the ability of firms to male and enhances profit. Virtually all of this research has been carried out at the plant level, is case oriented with a small sample size, or is a narrow industry specific survey. The overwhelming majority of studies show the positive effect of cost reduction implementation on earnings and financial performance through the increase in productivity and inventory efficiency (Neil and O’Hara, 1987; Huson and Nanda, 1995; Lawrence and Hottenstein, 1995; Boyer, 1996; Fullerton et al., 2003; Nahm et al., 2003; Christensen et al., 2005). Other studies like Callen et al. (2000) and Fullerton and McWatters (2001) provide support that just in time implementation improves firm performance through lower inventory levels, reduced quality costs, and greater customer responsiveness with higher profits. With only two exceptions (Balakrishnan et al., 1996; Sakakibara et al., 1997), these studies all contend that strategies aimed at increasing inventory performance (primarily through reduced inventory levels) are positively related to increases in value added defined as an increase in market share, sales, and profitability.
The lead time related research has focused principally on the automotive, machinery, and computer assembly operations. By contrast, supply chain research extends to all industries. The underlying emphasis in supply chain management is on information transparency, reliable lead times, and the clever positioning of various value-adding operations in long logistical chains. Hendricks and Singhal (2003) document that supply chain “glitch” announcements are associated with negative abnormal stock returns, observing that the impact is greater for smaller firms. To date, the direct relationship between inventory performance and financial performance has been investigated only to a very limited extent. Claycomb et al. (1999) provide a model of the causal relationship between inventory and financial performance. Gaur et al. (2005) and Roumiantsev and Netessine (2007) both document a negative correlation between inventory performance and financial performance in the retail industry whose value proposition relates to efficient product availability. By contrast, the value proposition of the manufacturing industry is based primarily on value adding operations, product innovation and efficient order fulfillment. Chen et al. (2005) analyze the link between sources of inventory and long-term stock returns of manufacturing firms. They find that while firms with abnormally high inventory levels have poor long-term stock returns, firms with slightly lower than average inventory outperform firms with extremely low inventory. Shah and Shin (2007) use aggregate sector data to show a link between sources of raw materials and profitability for the wholesale, retail, and manufacturing sectors.
However, none of the above studies analyze the relationship between inventory performance and performance of manufacturing industries at the firm level, nor do they analyze the relationship between different performance measures with inventory performance between dispersed and concentrated firms. This is the lacuna that this research tends to fill. The use of different measures of financial performance allows the analysis explore the level of profit above production costs as well as after operating expenses. Such performance measures as cost reduction ratio, sustainability and growth, return on capital and earnings per share on costs of production are to be employed in this research.
1.2 Statement of the Problem
Dispersed manufacturing system is a solution designed to allow companies to outsource component parts from other manufacturing firms. This outsourcing by some manufacturing firms provides critical manufacturing visibility across the supply network that is giving opportunities to some countries which in normal circumstances may not produce such goods. Dispersed manufacturing system is increasingly embraced by high-tech-manufacturers seeking new ways to reduce cost, increase agility and enhance market competitiveness.
Dispersed Manufacturing Networks are a hot topic both in the business world and in academia since these constitute adequate remedies for many of the challenges the manufacturing industry faces today. Current challenges for industrial companies include: innovation, speed, and flexibility, to which Dispersed Manufacturing Networks provide an answer through their capability for absorbing change and capturing market opportunities. Part of the changes arises because of the emerging possibilities of information technology and data-communication, the globalization of markets, and the ongoing specialization of firms. Another phenomenon is the increasing participation of innovative small and medium sized enterprises in international manufacturing networks. All these simultaneous developments foster the specific characteristics of (international) networks of companies: collaboration, decentralization, and inter-organizational integration.
However, certain problems associated with manufacturing firms either dispersed or concentrated are:
1. Inability of dispersed or concentrated firms to minimize cost of production
2. Un-sustainability and growth of potentials
3. Insufficient return on capital employed and
4. Insufficient earnings on per book value basis
Customers in geographically dispersed, emerging, and established global markets nowadays demand higher quality products at lower cost in a shorter time. As a result, firms have been forced to reorganize their activities and realign their global strategies in order to provide the speed and flexibility necessary to respond to windows of market opportunity. Organizations have moved from centralized, vertically integrated, single-site manufacturing facilities to geographically dispersed networks of resources. In order to acquire technological know-how and assets quickly, or to acquire a local presence in new and distant markets, strategic partners are increasingly part of the network structure. The changes require adaptations by companies to fit the characteristics of industrial networks in dynamic environments. Therefore, management science needs to address the increasing complexity of industrial networked structures.
Dispersed Manufacturing Networks comprise the total primary process, product development and supply chain, in an international setting, relying on applications of information technology and data-communication to exchange information and coordinate actions; these networks consist of loosely connected entities. The quest for agility in Dispersed Manufacturing Networks indicates the capability to operate virtually at the borderline between outsourcing and alliances. This has profound implications for the resource allocation processes. First, every opportunity requires tuning of available resources to match the specific demands. Secondly, optimization of the allocation of resources becomes an issue that exceeds a singular opportunity. Thirdly, agents act independently and therefore the tuning of resources becomes a two-way communication issue for the network. This means without doubt that decision-making for resource allocation becomes anything but a one-time decision or that allocation decisions get fixed through establishing alliances. The continuous motion within industrial networks makes that decisions hold only for temporary states and situations, accounting for contingencies, and the assessment of each opportunity.
However, the bulk of available works is devoted to the contractual aspects and the social dynamics of inter-organizational relationships; the dynamic forms of communication and coordination have been neglected, and therefore, these do require more attention from researchers in the domain of industrial networks. Additionally, research can yield these approaches in two ways to deal with the specific characteristics of industrial networks: (a) converting existing theories for individual firms to the domain of networks, (b) developing new theories from new perspectives. Converting existing theories makes especially sense for guided networks. The true advantages of networked firms, the decentralization within the network and specialization of individual agents will only be partially addressed in guided networks. The more deterministic methodologies that might fit the domain of individual organizations in guided networks need to be expanded to the non-linear characteristics of networks, in which interaction amongst agents dominates. Yet, there is a strong need for adequate, integrative approaches to manage the collaboration, decentralization, and the inter-organizational integration as a consequence of these loosely-connected entities.
For some time now the Nigerian economic dynamics has been a very challenging one to businesses in the Nigerian economic domain. The manufacturing sector of the economy has been very hard hit; for example they experience very low capacity utilization, very high cost of inputs, rising prices of component parts and raw materials, lack of public power supply, hike in price of diesel and transportation cost. In addition, high cost of capital contributed in no small measure in accentuating the situation. Many businesses have struggled to remain afloat, infarct lack of capital is one of the major problems that lead to the dispersed operation, since financing a business is not easy and to provide all that is needed in the company in terms of equipments, materials and human labour needs a lot of money, thus, dispersed manufacturing system tends to solve the problem or rather becomes an advantage over concentrated manufacturing system.
Business survival is now a very big challenge. While this state of affairs gave rise to mergers and acquisitions, as well as absorptions and reconstructions in some cases, it made some firms to resort to developing multilateral business approach to meet the challenges posed by hard economic realities on the ground. For example, some firms decided to diversify into three or more groups of business to avoid the high rate of business mortality prevailing in the economy and/or diversified production of component parts in different plants scattered here and there instead of in a factory building or in one company. Dispersed manufacturing which means manufacturing component parts in different companies across the globe will be of great advantage to some companies which may not be buoyant enough to produce everything in-house.
By dispersed operation, companies decrease the required amount of capital investment and respond more effectively to unexpected but inevitable changes in demand, that is, the product will be available to the consumers even though all the component parts are not manufactured in that company, still they have it at the time they needed it and at an affordable price. They also diversify operations to take advantages of low-cost labour and risk reduction opportunities. For example, some companies relieve themselves of certain inventory and capacity responsibilities by shifting to outsourced operations. Since the goods and services produced were done elsewhere the cost of producing them and the cost of machines and even human labour used will be saved.
Business is an amorphous word with multifaceted disciplines; there are many branches of business. Some of them are engaged in raw materials extraction, others engage in the processing of raw materials into finished products, yet others engage in marketing and distribution of the products. Some firms provide what other firms require for their own operations. Construction firms provide much of the tangible economic resources of the economy. Manufacturing businesses provide industrial and consumer goods. Transportation, communication and other public utilities facilitate the operation of other businesses. Financial, real estate and insurance businesses contribute a great deal in the transfer, control and protection of assets. Those in agriculture produce food, feed and fiber. The wholesale and retail businesses are involved in the transfer of ownership and possession of goods and services. Wholesalers make the commodities available to retailers. Retailers transfer the products of industry to the consumers. The business sector also generate substantial amount of employment and income annually which are essential part of the Gross National Product (GNP).
Increasing the pace of industrialization is core of Nigeria’s current economic vision of making Nigeria one of the 20 largest economies by the year 2020. The vision emphasizes the importance of growing the private sector not only for the purpose of satisfying local demand but also to make the economy internationally competitive. From the foregoing problem facing businesses generally in Nigeria, one wonders what the effect of dispersed manufacturing system would be on performance of companies in our developing economy, in terms of profitability, survival, growth, cost reduction, return on capital, and earnings per share. Hence this study is embarked to fill the void in literature as well as contributing raw materials for policy makers on ways to enhance productivity in the country’s drive to achieving the 2020 vision.
1.3 Objectives of the Study
The main objective is to evaluate the cost benefit of dispersed manufacturing system over the concentrated ones in a developing economy like Nigeria. The specific objectives are as follows;
i. To examine the impact of cost of production on sustainability and growth of dispersed and concentrated manufacturing firms in Nigeria
ii. To examine the impact of cost of production on return on capital of dispersed and concentrated manufacturing firms in Nigeria and
iii. To examine the impact of cost of production on earnings per share of dispersed and concentrated manufacturing firms in Nigeria
1.4 Research Questions
The following questions are raised in the course of this study.
1. To what extent does cost of production have a significant positive impact on sustainability and growth of dispersed and concentrated manufacturing firms in Nigeria?
2. To what extent does cost of production have a significant positive impact on return of capital of dispersed and concentrated manufacturing firms in Nigeria? and
3. To what extent does cost of production have a significant positive impact on earnings per share of dispersed and concentrated manufacturing firms in Nigeria
1.5 Research Hypotheses
The following hypotheses are formulated for the study.
Ho1: Cost of production does not have a significant positive impact on sustainability and growth of dispersed and concentrated manufacturing firms in Nigeria
Ho2: Cost of production does not have a significant positive impact on return on asset of dispersed and concentrated manufacturing firms in Nigeria
Ho3: Cost of production does not have a significant positive impact on earnings per share of dispersed and concentrated manufacturing firms in Nigeria
1.6 Scope of the Study
The study covered the period 1998 to 2007. And special focus was on the manufacturing sector of the economy. This includes firms which are registered with Manufacturing Association of Nigeria (MAN) and with the Corporate Affairs Commission (CAC) and have their published financial statement with the Nigerian Stock Exchange from 1998 to 2007. The study also concentrated only on the medium scale manufacturing sub-sectors of the economy and number of the registered manufacturing companies with Manufacturing Association of Nigeria (MAN) is 2000.
1.7 Significant of the Study
This study is significant to the Nigerian businessmen and investors. The Nigerian economy lacks business survival because of some factors that affects them such as: – very high cost of inputs, rising prices of component parts and raw materials, lack of power supply, hike in price of diesel, transportation etc. The groups below are specifically mentioned.
1. Manufacturers
The study shall benefits the manufacturers in seeing how to source the raw materials, train labour, handle factory layout, establish and reap the advantages of the growth of conurbation, relate with the government and workers, minimize confronting with stakeholder. The manufacturers will find the research very useful in articulating measures to help productivity. They shall be well challenged on improvement of work processes as well as how to arrange machinery in a work environment for maximum output. Besides, they shall find out that the recommendation given in this work shall guide their citing of their firms as well as sourcing of raw materials. Design and innovation will be boosted by the recommendation given herein.
2. Investors
The investors especially the shareholders shall find this work very interesting given herein. The investors especially the shareholders shall find this work very interesting because they will better assess the company well before investing in it. Fellow researchers would find this work very interesting in both administering of questionnaire and data analysis. This is very necessary when presenting portfolio and in evaluation of risk. A better investment analysis would be made after articulating resources. The general public shall discover that this work shall help them in getting relevant data from the companies.
3. Policy Makers
Times have really changed. The advent of multilateral or dispersed approach to manufacturing has now made it glaringly clear that firms need not operate any longer of a local corner but global. Multilateral approach or dispersed manufacturing benefits developing countries because they have far better access to the global economy than was possible in the past. The global production system now allows each activity in the value chain to be placed in the location that is most suitable. Hence countries can get into the game by performing just one or two pieces of the chain. They do not have to do it all. Thus policy makers stand to benefit from the recommendations of this research.
4. Literature
Surely, dispersed manufacturing will elicit even greater segmentation of the global production system in the future. Every firm that is foresighted is either moving into the world stage or planning seriously to do so. Multilateral manufacturing has opened up opportunities for small-scale and medium-scale firms to be relevant in the scheme of things. Also additional market or wider market share can provide incentives to develop new products, services technologies, or even take up the production of more component parts of a particular product. The introduction of performance measures such as cost reduction ratio, sustainability, return on capital and earnings per share and how the cost of production affect the firms as classified into dispersed and concentrated will contribute to literature.
1.8 Limitation of the Study
Since this research covers the whole Nigeria there is bound to be difficulties the researcher encountered. The problem of restrictions from released information from the workers in the firm may be because of fear of exposing the company’s secret or stealing such secret was huge limitation.
Finance is was another limiting factor; to gather relevant data from the ten manufacturing firms of the economy involved lot of money. Since the researcher had to go from East to West, to North and to South. Finance was a major constraint.
1.9 Definition of Terms
Dispersed manufacturing: This is the act of producing those goods and materials by firms in different locations (Womack and Jones, 1994).
Concentrated manufacturing: The production of those goods and materials under one roof in the same location (Womack and Jones, 1994).
Cost of Production: The cost of goods sold per unit sales made by the firm (Researcher, 2011).
Cost Reduction: This is a performance measure that determines how firms have been able to reduce the cost of manufacturing as a result resources (Balakrishnan et al., 1996).
Sustainability/Growth: The ability of firms to continue to exist while growth is measured as the ability of manufacturing firm to continually increase earnings attributable to share holders in the long run Lave (1982).
Return on Capital: A measure that indicates how well the firm has used the resources of owners (Pandey, 2005).
Earnings per share: Associated with the reward of an investor for making his investment from the book value figures of the firm (Patra, 2005).
Ergonomics: Arrangements of machines in the factory.
Conurbation: Concentration of firms in an area.
Stagflated: This is a combination of economic stagnation with high Indication. It is an economic phenomenon which is Feared by policy makers because it increases the aggregate demand, real income and purchasing power.
This material content is developed to serve as a GUIDE for students to conduct academic research
EFFECT OF DISPERSED MANUFACTURING SYSTEM ON PERFORMANCE IN A STAGFLATED DEVELOPING ECONOMY: A STUDY OF SELECTED COMPANIES IN NIGERIA
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