Page 151 - DMGT525_MATERIALS_MANAGEMENT

Materials Management

Notes The new world order marked by global uncertainty with hard economic times had made
every potential buyer to seek value for every unit of his expenditure and the ability to
report higher profit had failed the litmus test for corporate performance measurement for
manufacturing companies due to its highly subjective nature. In addition, the value of
company’s product is a factor that cannot be dispensed with, as emphasized by International
Standard Organization (ISO) in performance measurement. To satisfy the above
multifarious requirements, companies have adopted a new strategy called value analysis.
This means a reduction in cost without necessarily reducing the value of the product. This
can be achieved through a systematic analysis of every work performed in every
department in order to formulate the most effective way of obtaining an ideal system of
utilizing people, machines and material in the work places. Therefore, if cost management
is to be really effective, there should be an integration of all functions within the business
in such a way that costs should add up and be managed by competent hands. This is
perhaps the bedrock of value analysis.
The need to satisfy the conflicting demands of various stakeholders while operating within
the regulatory framework is an issue that continues to bother the management of
manufacturing companies in their quest to attain greater heights. The management is thus
placed in a difficult position that hinders high returns in terms of dividends to shareholders.
High profits and dividends can be achieved through increased prices that customers are
not ready to pay. Worse still, customers equally demand for high quality products at
reduced prices while providers of funds lend at prohibitive interest rates and for shorter
repayment period while regulatory bodies such as International Standard Organization
and National Agency for Food, Drug and Administration and Control (NAFDAC) set
minimum standards below which companies’ products must not fall. But manufacturing
must of course continue if human existence is to be guaranteed. What then is the way out?
This calls for an approach that is capable of achieving organizations multi-faceted objectives
in the face of competing socio-economic demands as constraints. This vacuum can be filled
by value analysis. Cost reduction should not be confused but differentiated from cost
control. Olowokure (1981) defined cost reduction as a “systematic approach to the
achievement of real and permanent reduction in the unit cost of producing goods or
rendering services without impairing the quality and functional elements of outputs”.
It starts with an assumption that current or planned cost levels are too high, even though
cost control might be good and efficiency levels high.

Cost Control on the Other Hand
The regulation of the cost of operating a business and is concerned with keeping cost
within acceptable limits, the limit will usually be specified as a standard cost in a formal
operational plan or budget. If the actual cost differ from planned cost by an excessive
amount, cost control action will be necessary (Ayinde, 1999).

Cost is any consideration given up in exchange for a benefit while profit is revenue less
controllable divisional costs and apportioned central administration costs (Lucey, 1988).
Profit can be improved either by increasing the sale value/quantity or reducing the cost
or both, but in most cases, sales revenue depend on market forces which can seldom be
substantially influenced by manager and even a real increase in cost cannot be passed on
fully to customers because if demand falls and there is the need to reduce price to boost
sales, hence a portion of the costs is borne by the manufacturer. In this spirit, Ayinde,
(1999) therefore was of the view that it is not always possible to improve profit by increasing
the sales value but believe that cost reduction is generally the only alternative for improving
the profitability of a product. David and Kogan (2001) had identified the problem involved
in cost control in industries as always complex and became further complicated due to
Contd...

146 LOVELY PROFESSIONAL UNIVERSITY