Effect of high cost materials on bakery enterprise in Ilorin
By Mike Adeyemi
Recent empirical study into the capacity building of bakery industries in Kwara state have revealed that persistent hike in the cost of production materials has forced nearly 40 per cent of the total number of the enterprises out of business.
The studies determine best possible record levels for various bakery capitals using the bread supply chain network in Kwara state. Analysis of 650 bakeries in the state with a combined workforce capacity of 5,200 shows that total capital N564, 408, and 477.28 is spent on energy annually. Of this amount, 66.75% is expended annually to meet diesel requirements, while firewood and petrol account for 22.57% and 10.66%, respectively.
The result of ABC analysis show that flour ranks as class A with over 78%, follow by sugar at 13%, while the remainder of the ingredient constitute 9%.
Volatilities at the foreign exchange market were identified as a major factor militating against the growth of the sector in the state.
As a result, baked bread is expensive and salary very poor, making the industry less attractive. The industry in Kwara state has absorbing capacity of eight workers at least, and if this is multiplied by 650 bakeries under this analysis, that amounted to 5,200 workers with deprived disbursement caused essentially by the invisible market forces in the industry.
Since the bakeries contribute to ensuring food security, these findings and chemical analysis, if implemented, will assuage the rising food anxiety in Kwara state, particularly baked bread.
In the state, bakery firms face challenges of inventory management that contributes to material waste in the bakery business and missed delivery to ultimate customers. Subsequently, the bread production chain lacks fluctuating cost of inputs together with rising operational and maintenance costs. Therefore, tackling insufficient resources, including energy and raw materials, requires the techno-economic decision tools of the inventory control functions.
The term inventory refers to the stocking of materials in different form; raw, processed (finished) and semi processed (work in progress); in addition to factors of production (energy, land); and general supplies (administrative materials etc) in order to attain the desired goods or services security for future use. For an industry supply chain outfit such as bread baking, inventory is important for a number of reasons that include ensuring smooth operations, meeting customers’ demands and avoiding production shut down occasioned by non-availability of raw materials.
To minimise production cost fluctuations due to unstable prices of raw materials and to avoid loss of potential customers due to plant shut down in Kwara state, material inventory optimisation of the supply chain is a necessity.
As a result of these developments and other trends, bread manufacturers in Kwara are confronted with a number of challenges. Prominent amongst these challenges are need for accurate and timely forecasting of customers demand, the capability to quick response to changing market conditions and customers tastes, the ability to maintain brand equity and increase market position through superior quality and value added services, undue adulterated product devoid of label and, the continual streamlining of operational processes to maximize production costs and loses.
The foregoing surplus of concerns has influenced bakery supply chain practices and has turned inventory management into crucial strategy, most suited to offering lasting solution towards reliable future decision-making.
The bakery raw materials and ingredients of concern in this analysis include flour, sugar, yeast, butter/vegetable oil, salt, preservation, milk and eggs. These materials are the main cost drivers throughout the supply chain and are imported, except for corn and cassava flour which are new to Nigerian bakery and sparingly used.
Because of the import-based nature of these materials, shortages are often experienced in the market leading to the closure of many bakeries or production at lower capacities.
The consequence includes under-production and sometimes over-production which occur as a result of inadequate planning and unreliable forecasting.
Kwara bakery industry is operated predominantly by one-man business enterprises characterised by small lot-sizes and frequent stocking; by implication, low capital investments.
Although raw materials and ingredients make up for bread production may be available in the market, frequent changes in prices are causing major concerns within the industry.
The bakery resources most affected by these frequent price changes are wheat flour and sugar. Between January and February 2016, a 50 kg of wheat flour was sold for N6500, while a 50 kg of sugar was N8000 and right now, a 50 kg of wheat flour is sold for N 11, 2000, while a 50 kg of sugar is sold for N17,000 ex factory.
It is hope that the price of bread flour will drop down with the introduction of 10% cassava components in flour production currently taking place in the flourmill industries. The foregoing scenario of price variability analysis in bread supply chain.
There are also conflicting inventory objectives within the bakery supply chain. This factor influences such complex supply activities as facilities procurement, the purchase of raw materials, their transformation into bread and baking into bread and distribution of bread to final consumers.
Consequently, decision regarding inventory policies is hardly realised because of uncertainties. For instance, Kwara bakers often time lack information on the potential size of the market. They produce excess in anticipation of demand to ensure more revenue. The vendors on their part acted on speculation, just –in-case future demand exceeds forecast, and in the process overstock the product.
The vendors mostly hold multiple brands of bread stocks and later employ a hawking strategy so as to reduce the number of days stocks are held on the shelf. This practice results in large inventories with attendant increased holding costs and health risks. Two, multiple brand selling neutralises the expected competition among the products, since demand of popular brands when unfilled were substituted with unpopular, overstayed and stale brands by vendors.
To recover the performance of bakery sectors in the state, the Kwara state government in its governmental duties can aid bakery sector through tax incentive. Presently, Kwara bakers are remitting over N2.2 million to the coffers of the state government via taxes per annum.
To bring about productivity and efficiency in the sector in the state, a tax reduction could be dish, leveraging on the active performance of the industry in the area of tax payment.
The state government can moreover promote viability of the industry through supply of flour at subsides rate through the Kwara state ministry of commerce and industry to Kwara bakers. This would bring about economies of scale to the industry which invariably would convey multiplier effect on the employment rate in the state.