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268 International Journal of Current Research, Vol. 4, Issue, 11, pp. 267-270, November, 2012
Available online at http://www.journalcra.com about material management and working capital are important performing ones. Yung-Jang (2002) researched on the cash
INTERNATIONAL JOURNAL for manufacturing company it centers on the relationship conversion cycle and liquidity analysis of the food industry in
OF CURRENT RESEARCH between efficiency in management of materials and company Greece and found a positive and significant relationship
International Journal of Current Research
profitability and its effects on owner’s value. between the cash conversion cycle and profitability (measured
Vol. 4, Issue, 11, pp.267-270, November, 2012 by Return on investment (R01) and net profit margin (NPM).
In Pakistan, Lazarids and Tryfonidis (2006) investigated the This result indicated that a longer cash conversion cycle can
effect of working capital management and profitability for improve company’s profits. Inventory is one of the
ISSN: 0975-833X
RESEARCH ARTICLE sampled firms. The study sought to establish the effect of components which make up working capital and this why the
working capital management on liquidity as well as on studies reviewed above are related to inventory management.
THE IMPACT OF INDIRECT MATERIAL INVENTORY ON THE PROFITABILITY OF BREWERY profitability. They made use of regression and time series data. All the above studies provided us with a suitable background
COMPANIES IN NIGERIA It was found that there was a significant negative relationship regarding inventory management and firm profitability. Also
between net operating profit and average collection period. given the results of these researches, they provided us with
Eneje, Beatrice Chinyere Ph. D, and Udeh, Anastasia Ifeoma ACA Falope and Ajilore (2009) investigated the relationship views of already conducted researches on the same area for
between corporate profitability and working capital different countries and environment from different aspects.
School of Financial Studies, Department of Accountancy, Institute of Management and T
Technology, Enugu State, management in a sample of 131 companies listed on the
Nigeria Athens stock exchange for the period of 2001-2004. The study METHODOLOGY
which made use of regression analysis found that there is
ARTICLE INFO ABSTRACT statistical significance relationships between profitability This research covers quoted brewery companies in Nigeria.
measured as gross operating profit and cash conversion cycle. The population of quoted brewery companies listed on the
Article History: This study examined the impact of indirect material inventory on the profitability of brewery
They opined that managers can create profits for the Nigerian stock exchange was seven brewery companies out of
Received 30th August, 2012 companies in Nigeria. A sample of two brewery companies listed on the Nigeria stock exchange was
used for this study. Regression analysis was applied to annual da data sourced from annual report and companies by handling correctly and keeping each different which a sample of two brewery companies was purposively
Received in revised form
28thSeptember, 2012 accounts of the sampled companies for the period 1989-2008.
1989 2008. The result indicates that indirect component (account receivable, accounts payables, inventory) selected using judgment sampling techniques based on the
Accepted 11th October, 2012 material inventory has significant influence on the profitability of Nigeria brewery Plc and Aggregate to an optimum level. In Ghost and Maji (2010) study, they researcher’s knowledge of the population. The two brewery
Published online 23h November, 2012 Company. It also shows that that indirect material has insignificant influence on the profitability of utilized panel data econometrics in a pooled regression, where companies chosen are those companies whose published
Guinness Nig. Plc. The findings confirm that there is a significant relationship between profitability time series and cross-sectional observations were combined financial reports and required data were available for the
Key words: and indirect material inventory in line with the previous studies. This implies that the brewery and estimated. They found a significant negative relationship whole period under review. The data for the measure of the
Profitability; companies in Nigeria should ensure adequate use of indirect material inventory as they contribute to variables are collected from annual financial statement of the
Brewery firms;
between net operating profits and the average collection
the efficient functioning of the production machinery. period, inventory turnover in days, average payment period sampled companies and non-quoted companies were excluded
Indirect inventory;
Raw materials; and cash conversion cycle for a sample of fifty firms quoted due to non-availability and non-disclosure of their financial
Indirect materials. Copy Right, IJCR, 2012,, Academic Journals
Journals. All rights reserved. reports respectively. Data collected were analyzed using
on the Nigerian stock Exchange. In India Shin and Soenen
(1998) examined the efficiency of working capital multiple regression analysis. The study made use of following
INTRODUCTION management of companies during 1992-1993 to 2001-2002. In variables: Net operating profit (p) representing profit as the
However, few studies in developing countries are in this measuring the efficiency of working capital management, dependent variable while the independent variables are: Rm
Whenever the operations of the business include the direction. performance, utilization, and overall efficiency indices were representing Raw materials; (Sc) storage costs; (Fx) foreign
ownership of inventory, it becomes very important that calculated instead of using some common working capital Exchange costs (represented by foreign currencies purchased
adequate inventory management techniques be adopted. In Nigeria, there are growing numbers of studies that have management ratios. It was found that the Indian cement for import); (IM) indirect materials. The null hypothesis
Inventory consists of raw material, work-in- progress, finished tested the relationship between working capital management industry as a whole did not perform remarkably well during indirect material cost (maintenance, repairs and operating
goods and indirect material. Indirect material is a category of and corporate profitability. Ogundipe, Abiola aand Ogundipe those periods studied. In another study, Delof (2003) supplies) have no significant effect on the profitability of
material and includes all the items used to support production (2012) and (Ogbadu, 2009) studied working capital examined the relationship between the length of Net trading brewery firms in Nigeria. The analysis was guided by the
and operation (Onuigbo, 2010). These items are not physically management, firm’s performance and market valuation; cycle, corporate profitability and risk adjusted stock return in following linear models:
part of the finished product but are critical for the continuous Amadasu, (2003) investigated effective material management America. They made use of correlation and regression
operations of plant, equipment and offices. and profitability; Oko, Mgbonyebi and Umeachi (2007) analysis, by industry and capital intensity. They found a strong P=βo+βiRM+β2SCt+β3Fxt+β4IM+Ui
investigated the management oof pharmaceutical inventory in negative relationship between the length of the firm’s net
Millions of naira worth of spares and engineering parts as it is trading cycle and its profitability. In addition, shorter net trade Where;
the Nigeria Health industry; Raheman and Mohamed (2007)
called in the breweries are tied/locked in obsolete
obsole items. This researched on impact of inventory in enhancing business cycles were associated with higher risk adjusted stock returns.  P=Profit (dependant variable)
emphasizes the need of paying more attention on management growth in Nigeria. All these studies concentrated in working In a related study Sadlovska and Viswanathan (2007)  RM= Raw Materials comprising of local and
of this indirect material. Improvement in the capacity capital and inventory management and did not take examined the impact of working capital management on imported raw materials.
utilization and cost reduction can be achieved by better cognizance
nizance of indirect material inventory and brewery firms’ profitability for Belgian firms. Using correlation and  Sc= Storage costs15% of cost of sales.
indirect material management. Studies by Eghide (2009) have profitability. Therefore, this study aims to examine how regression tests, they found a significant negative relationship  FX=foreign exchange costs (All the foreign
indicated that 40 percent of the total working capital is tied in indirect material inventory impact on profitability of brewery between gross operating income and the number of day’s currencies purchased for imports).
spares inventory and out of this about 25percent is obsolete in companies in Nigeria. The rest of the paper is divided into accounts receivable, inventories and account payable. On the  IM=maintenance repairs and operating supplies
terms of value. The objective of indirect material management four sections. Section
tion two is concerned with the theoretical basis of these results, they suggests that mangers could create (addition of Engineering spares and sundry
is to provide the right parts at the right time and at a framework and review of related literature. Section three value for their shareholders by reducing the number of days’ materials).
competitive and right cost. elucidates the methodological framework while section four for accounts receivable and inventories to a reasonable  βo=is the intercept of the regression and βi,β2,β3,β4
discusses the findings and section five concludes the paper. minimum. The negative relationship between accounts are the coefficient of the regression
An improper management of materials/spare parts will result payable and profitability is consistent with the view that less  Ui=is the error term capturing other explanatory
into difficulties if brewery companies continued operation and Review of Related Literature profitable firms wait longer to pay their bills. Lyroudi and variables not explicitly included in the model
consequently, sales and profit will suffer. Empirical studies in Lazaridia (2000) examined working capital optimization;  t =denotes time.
the developed countries have established that efficient In cost management accounting, purchasing and supplying of improving performance with innovations and new
inventory management improves company performance and engineering material and handling have dominated the technologies in inventory management and supply chain. The
EMPRICAL RESULTS AND DISCUSSION
consequently makes positive effect upon shareholders wealth. literature. The importance of material management and study made use of survey research. It was revealed that the
working capital management has been an area of interest best performing companies have cash conversion cycle (CCC)
*Corresponding author: [email protected]; [email protected] among researchers. Reasons behind this common opinion that is about 5-6 times shorter than that of the average and low
Regression analysis was applied to find out the impact of From Table I it will be observed that IM has negative Lyroudi, K. and Lazaridia, J.(2000) “The cash Conversion
indirect material inventory on profitability and the results are relationship with the profitability of NB plc and aggregate. Cycle and liquidity Analysis of the food Industry in
as269 International Journal of Current Research, Vol.
presented in tables (I-V) below This4, Issue, 11, pp.
implies 267-270,
that November,
an increase 2012brings about a decrease in
in IM Greece.
profitability of the NB Plc and aggregate. Ogbadu, E. E. (2009) “Profitability through Effective
The regression equation is given by
The R-square of the estimated regression are 92%,95.5% and Management of Material’’’
270
Journal of Economics and
International Journal of Current Research, Vol. 4, Issue, 11, pp. 267-270, November, 2012
P = 956706.76 + 0.103Rm + 1.59Sc + 0.628Fx – 0.933Im 85.5% Practically this means that about 92%, 96% and 86% of International Finance’’’vol.1no4, 99-105.
The results of the multiple linear regression analysis carried the variation seen in profits of NB plc, Guinness Nigeria Plc Ogundipe, S. E., Abiola, I. and Ogundipe, L.O. (2012) Sadlovska, V. and Viswanathan, N. (2007) “working Capital
out using data obtained from Nigeria Breweries Plc (NB Plc), and aggregate are due to the predictor variables considered, ‘’Working capital Management, firms Performance and Optimization: Improving performance with innovation and
Guinness Nigeria Plc and aggregate are contained in Tables I- the overall regression as seen in Tables II and III is deemed Market Valuation in Nigeria’’ International Journal of new technologies in inventory management and supply
V above. The estimated regression equation is given in the adequate if the P-value of the test is less than 0.05 (5% level social and human science. Vol.6 pp 143-147. chain finance, new Delhi, Hill Coy Ltd.
first row of Table I. the equation shows that the firms can of significance). The P-value here for this regression is 0.000, Oko, L. Mgbonyebi, D-C. and Umeachi, A. (2008)“Impact of Shin, H. H. and Soenen, L. (1998) “Efficiency of Working
make profit of (956706,-3588509.31 and -1722943.04 units in hence it is accepted as been highly adequate see Table III. The Inventory Control in Enhancing Business Growth in Capital and Corporate Profitability “Financial practice and
the absence of the dependent variables considered in this Hypothesis of this study showed that the parameter estimate is Nigeria’’ International Journal of Investment and education, vol.8, pp.37-45.
study. obtained as 0.933, 0.739, and 2.486. The P-value is 0.046, Finance’’’Vol.1no2,55-63. Yung-Jang, W. (2002) “Liquidity Management Operating
0.0382 and 0.001. Since the P-value for NB plc and aggregate Onuigbo, J. A. (2010) “Material handling (The technology and Performance and Corporate Value: Evidence From Japan
Table 1. Regression Results for Aggregate and Individual < 0.05, we reject the null hypothesis and conclude that indirect Management); Vic. Chuks Publisher, Journal of Business and Taiwan’’, Journal of Multinational Financial
Company Effect Regression Model
material costs have significant effect on profitability. In Finance and Accounting. Management.Vol.12no2,159-166.
Nigerian Guinnes Nig. Plc Aggregate Nigeria the result for (brewery industries) supports the finding Raheman, A. and Mohamed, N. (2007) “Working Capital
Breweries of (Falope and Ajilore, 2009; Delof, 2003; Sadlovska and Management and Profitability case of Pakistani Firms”,
Intercept (t) 956706.755 -358509.310 -722943.037 Viswanathan, 2007). International Review of Business Research paper, Vol.3
Raw Material 0.103 0.252* -0.899*
Storage Costs 1.590 0.105 0.620* no.1 pp.279-300.
Foreign 0.628* 0.094 2.486* Conclusion *******
Exchange Costs -0.933* 0.739 0.925
Indirect Material 0.957 0.955 0.855 Indirect material inventory is one of the major components of
R 0.917 0.913 0.821 inventory that make up working capital. Expectedly therefore,
R2 0.893 0.884 25.514 the way in which indirect material is handled will have a
Adj R 38.551 31.347
F – Statistics
significant impact on profitability. This finding is consistent
Source: Statistical Analysis of SPSS with the findings of (Lizarids and Tryfonidis, 2006; Ghost and
* indicates that coefficient is significance at 5% significant level Maji, 2010; Shin and Soenen, 1998; Yun-jang, 2002).
Reduction in indirect material inventory holding will lead to
Table 2. Analysis of Variance (ANOVA) – Regression of loss of sales, increase in waste and spoilage of beer. This is in
Profitability of NB PLC line with suggestion of Falope and Ajilore (2009) that mangers
Analysis of Overall Equation can create profits for their companies by handling correctly the
SS (Sum of MS(Mean
cash conversion cycle and keeping each different components
Source Df F P-Value (inventory Accounts payable and Accounts Receivable) to an
Squares) Square)
Regression 4 7.572E14 1.893E14 38.551 0.0000 optimum level. Therefore, a well designed and implemented
Residual 14 6.875E13 4.911E12
indirect material inventory is expected to contribute positively
error 18 8.260E14
to the creation of value for shareholder.
Total
Source: Statistical data obtained from statistical package (SPSS) REFFERENCES
Key: (a) Predictors: (constant), Rm, Sc, Fx, Im (b) Dependent variable P
Amadasu, D.E. (2003) “Management of Pharmaceutical
Table 3. Correlations – Regression of NB PLC Profitability Inventory in the Nigerian Health Industry’’, Journal of
certified National accountant, April-June,43-82.
P SC FX IM RM
Delof, M. (2003) “Does Working Capital Management affects
Pearson Correlation P 1.000 .788 0.15 .800 .942
Profitability of Belgian firms?”Journal of Business Finance
Sc .788 1.000 .248 .608 .771
and Accounting, Vol.30 no.314, pp.573-587.
Fx .015 .248 1.000 .296 -.0.058 Eghide, B. (2009) “working Capital Management and
Im .800 .608 .296 1.000 .859 profitability of Listed companies in Nigeria’’, Vol.3 no.2,
Rm .942 .771 -.058 .859 1.000 PP 44-57.
Sig.(1-tailed) P . .000 .477 .000 .000 Falope, I.O. and Ajilore, O.T (2009) “working capital
Sc 000 . .168 .005 .000 Management and Corporate Profitability of selected quoted
Fx .477 .168 . .125 .413 companies in Nigeria” Research journal of Business
Im .000 .005 .125 . .000 management, vol.3, pp.73-84.
Rm .000 .000 .413 .000 . Ghost, S.K. and Maji, S.G.(2010) “Working Capital
N P 17 17 17 17 17 Management Efficiency. A Study of the Indian Cement
Sc 17 17 17 17 17 Industry’’, the institute of cost and Management
Fx 17 17 17 17 17 Accountant of Indian 2010.
Im 17 17 17 17 17
Lazarids, I. andTryfonidis, D. (2006)“Relationship between
Rm 17 17 17 17 17
Working Capital Management and Profitability of Listed
Companies in the Athens stock exchange” Journal of
Source: Statistical data obtained from statistical package (SPSS Key:Profit (P); Storage
Cost (Sc); Foreign Exchange Costs (Fx); Indirect Materials (Im); Raw Materials (Rm)
Financial management and analysis, Vol.19,pp 26-35.