THE IMPACT OF PRODUCTION STRATEGIES ON PROFITABILITY OF AN ORGANIZATION

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

The two primary objectives of every business are profitability and solvency.  Profitability is the ability of a business to make profit, while solvency is the ability of a business to pay debts as they come due.  However, the achievement of these objectives requires efficient management of resources of the business through planning, budgeting, forecasting, control, and decision – making.  Also, the strengths and weakness of the business need to be identified and necessary corrective measures applied.  Interestingly, accounting provides information that facilitates these functions.

 In the past twenty (20) years, technological advancements, international competitions and market dynamics have brought a major impact to the textile manufacturing industry. Intense competition encourages management to develop new production and supply methodologies in order to remain competitive (Abernathy, 1995). One key issue involves the allocation of scarce production resources over competing demands, which is a typical problem in dealing with many complex man-made systems

Many manufacturing facilities generate and update production schedules, which are plans that state when certain controllable activities (e.g., processing of jobs by resources) should take place. Production scheduling can be difficult and time-consuming. In dynamic, stochastic manufacturing environments, managers, production planners, and supervisors must not only generate high-quality schedules but also react quickly to unexpected events and revise schedules in a cost-effective manner. These events, generally difficult to take into consideration while generating a schedule, disturb the system, generating considerable differences between the predetermined schedule and its actual realization on the shop floor. Rescheduling is then practically mandatory in order to minimize the effect of such disturbances in the performance of the system. Production scheduling activities are common but complex. There exist many different views and perspectives of production scheduling. Each perspective has a particular scope and its own set of assumptions. Different perspectives lead naturally to different approaches to improving production scheduling.

Successful organizations all over the world plan and schedule their production processes in-order to meet customers’ demands, eliminate waste and maximise profits. This is achieved through employing various production strategies to satisfy and exceed customer demands and needs.

Organizational profitability is greatly influenced by how an organization manages its production process (es). Since profits are measured and determined by the difference between cost of production and sales, it is imperative that operational managers must take production seriously. Production which can be defined as a process of transforming tangible inputs (raw materials, semi-finished goods) and intangible inputs (ideas, information and knowledge) into goods or services is a major determinant of profits. If customers do not buy goods and services produced by an organization, loses are likely to be incurred as cost of production will not be recovered by the firm. The primary mission of production strategy is planning the production schedule within budgetary limitations and time constraints. This is done by analysing the organization’s personnel and capital resources to select the best way of meeting the production quota. Production strategies determine (often using mathematical formulas) which machines will be used, whether new machines need to be purchased, whether overtime or extra shifts are necessary, and what the sequence of production will be. Production is also monitored and controlled to ensure very problem observed in the production process is detected and corrected to eliminate wastages and delay in production. Various studies have shown that proper production and inventory management and control leads to a ore efficient and profitable organization as delays in production, product defects and wastages are eliminated.

1.2 STATEMENT OF THE PROBLEM

Planning and scheduling the production process in the most efficient and profitable manner has been a major challenge to most manufacturing firms in Nigeria. A study conducted by Obuji (2007) revealed that firms are confronted with the challenge of sourcing for raw materials, getting the right employees and machineries for production. This challenge has crippled the operations of many organizations in Nigeria as wastages are experienced and majority of the production process outsourced are eliminated.

Production strategies have three primary goals or objectives. The first involves due dates and avoiding late completion of jobs. The second goal involves throughput times; the firm wants to minimize the time a job spends in the system, from the opening of a shop order until it is closed or completed. The third goal concerns the utilization of work centres. Firms usually want to fully utilize costly equipment and personnel.

Often, there is conflict among the three objectives. Excess capacity makes for better due-date performance and reduces throughput time but wreaks havoc on utilization. Releasing extra jobs to the shop can increase the utilization rate and perhaps improve due-date performance but tends to increase throughput time.

A feasible schedule satisfies demands. An optimal schedule minimizes total production cost while satisfying demands. The problem that most manufacturing firms face is how to establish an efficient production schedule that minimizes both total production and inventory (storage) cost while satisfying customer demands.

1.3 OBJECTIVES OF THE STUDY

The central objective of the study is to investigate the impact of production planning on productivity in Ibom Power company Ikot Abasi. Other sub-objectives are as follows:

1. To determine production strategies and activities of Ibom Power Company Ikot Abasi plant.
2. To evaluate the effect of production system in manufacturing of Ibom Power Companyproducts?
3. To explore the meaning of production strategy
4. To evaluate the relevance of production strategy concept.

1.4     RESEARCH QUESTIONS

i.        What are the production strategy activities in Ibom Power Companycompany Ikot Abasi

ii.       What is the effect of production system in the manufacturing of Ibom Power Companyproducts?

          iii.      What is the meaning of production startegy

iv.      Is Production strategy relevant to profitability.

 1.5 RESEARCH HYPOTHESIS

To carry out the study effectively, the following proposed hypothesis has been formulated and will be tested using chi-square in the course of carrying out the study:

Hypothesis:

Ho: Production strategies have no significant impact on the profitability level of an organization.

Hi: Production strategies have significant impact on the profitability of an organization.

1.6 SIGNIFICANCE OF THE STUDY

The study will be useful to operational managers in Ibom Power Company, Ikot Abasi especially in formulating policies that will enhance efficiency and increase the profitability level of the organization.

The study will also be useful to other manufacturing companies involved in the daily use of various production strategies to boost their profit. Findings and recommendations from this study will be of great benefits to these manufacturing firms, as the recommendations if implemented will go a long way in guaranteeing a sustainable and sound organization.

The study when carried out will also be of great benefit to student researchers who have interest in researching more into production and production strategies. It will act like a guide to student researchers who may find the recommendations and findings of the study when completed useful.

1.7 SCOPE OF THE STUDY

To get the real picture of how production strategy can affect profit of an organization, the researcher will make use of Ibom Power Company, Ikot Abasi. Financial statements published by the company for a period of  three (3) years (2009-2011) will be used for the study.

1.8 LIMITATION OF THE STUDY

However, there cannot be thorough research without fund. Thus, the lack of fund pose as a limitation to this work; also, time factor is included because the issue of combining lecture with research is not an easy task.

1.9 DEFINITION OF TERMS

Production: This is the act of creating output, a goods or service which has value and contributes to the utility of individuals. The act may or may not include factors of production other than labor. Any effort directed toward the realization of a desired product or service is a "productive" effort and the performance of such act is production.

Product: This refers to a good, idea, method, information, object or service created as a result of a process and serves a need or satisfies a want. It has a combination of tangible and intangible attributes (benefits, features, functions, uses) that a seller offers a buyer for purchase

Production strategy: This is the ultimate vision of the product, as it states where the product will end up. By setting a product strategy, you can determine the direction of your product efforts.

Profit: This refers to the difference between the purchase price and the costs of bringing to market

Ibom Power Company: United Cement Company of Nigeria