MATERIALS MANAGEMENT IN AN AGRICULTURAL MACHINERY MANUFACTURING COMPANY IN KERALA: STRATEGIES FOR ENHANCED PROFITABILITY AND COMPETITIVENESS

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1 MATERIALS MANAGEMENT IN AN AGRICULTURAL MACHINERY MANUFACTURING COMPANY IN KERALA: STRATEGIES FOR ENHANCED PROFITABILITY AND COMPETITIVENESS Dr. Manoj P. K. 1 ABSTRACT Materials management is cardinal significance in maintaining and improving profitability of any manufacturing industry, as materials typically constitute nearly two-third or more of the total cost of production of a product. Taking into account an agricultural machinery manufacturing company based in Kerala viz. KAMCO (or, Kerala Agro Machinery Corporation Limited) a public sector unit under the Government of Kerala. This paper analyses the impact of the performance in materials management on the overall profitability of the company, also considering the case of the whole industry (viz. Agricultural machinery) in India as well. Accordingly, strategies are suggested for enhanced profitability and competitiveness of the company based on the findings of the study. KEYWORDS Materials Management, Raw Material Turn Over, Profitability, KAMCO etc INTRODUCTION Agro-machinery industry in India has a cardinal role to play in the economic development of the country, given the primarily agrarian nature of Indian economy. Notwithstanding the reasonable growth rate in sales turnover of the industry and also the fact that the industry is getting fiscal support including tax incentives being a priority sector for the Central Government, the performance of KAMCO (Kerala Agro-Machinery Corporation Limited) a public sector unit (PSU) under the Government of Kerala, and one of the major players in the industry needs to catch up further in order to compete effectively in the market, particularly in view of the general pattern of declining sales, profitability etc. vis-à-vis the industry as a whole. The role of materials management in deciding the financial performance of KAMCO is sought to be analyzed here. RELEVANCE AND SIGNIFICANCE OF STUDY Materials management is of cardinal significance in maintaining and improving profitability of any manufacturing industry, as materials typically constitute nearly two-third or more of the total cost of production of a product. Taking into account a an agricultural machinery manufacturing company based in Kerala viz. KAMCO (or, Kerala Agro Machinery Corporation Limited) under the public sector (Government of Kerala) this paper analyses the impact of the performance in materials management on the overall profitability of the company, considering the case of the whole industry (viz. Agricultural machinery) in India too. Accordingly, the paper seeks to suggest strategies for enhanced profitability and competitiveness of KAMCO, based on the study findings. LITERATURE REVIEW AND RESEARCH GAP Previous studies in the area of materials management in respect of PSUs in Kerala are very scarce. A study by the present author has revealed the significance of materials management for enhanced operational efficiency and productivity of KAMCO (Manoj, 2009) [3]. However, this study was for the 6 years period FY 2002-FY 2007 when KAMCO was performing very well in the industry. Nevertheless, the scenario has changed now, particularly since FY Hence, the present study seeks to make a relook into the research problem using the latest data viz. for the 6 years period, FY OBJECTIVES OF STUDY To make an overall study of the presence of KAMCO in the agricultural machinery manufacturing industry in India and growth pattern of market share and profitability; To make a detailed study of the role of the effectiveness in materials management in deciding the profitability of KAMCO; and lastly To suggest suitable strategies for enhanced profitability and competitiveness of KAMCO based on the findings of the study. 1 Assistant Professor, Department of Applied Economics, Cochin University Science and Technology (CUSAT), Kerala, India, manoj_p_k2004@yahoo.co.in 953 P a g e

2 METHODOLOGY OF STUDY The data required for the study are collected from authentic sources like the published (audited) financial statements of KAMCO, the electronic database of CMIE (Centre for Monitoring of Indian Economy) viz. CMIE Prowess, and other secondary and primary sources (personal visits for collection of data from Official records). The data so collected are analyzed using popular statistical and mathematical tools to arrive at meaningful conclusions. These findings are used for formulating suitable strategies for KAMCO, for its enhanced profitability and competitiveness. Presence of KAMCO in the Agricultural Machinery Manufacturing Industry in India Agricultural machinery and equipment have revolutionized the agricultural industry worldwide. In India, there has been constant growth in the sales turnover of the agricultural machinery manufacturing industry (Table I). Though there are about 15 companies in the industry, the largest 4 to 5 companies control bulk of the market share, shares of the rest being very small. The growth pattern of the industry, along with that of KAMCO and its market share are given in Table I. Table-I: Presence of KAMCO in Agricultural Machinery Manufacturing Industry KAMCO (Mn) Agricultural Machinery Industry (Mn) Share of KAMCO (Percentage) Statements of KAMCO for FY 2008 to 2013 Figure-I: Growth Trends of KAMCO Vs. Industry (Agricultural Machinery)(FY ) Sales (Industry) (Bn): y = 5.488x R² = Sales (KAMCO) (Mn): y = x R² = Sources: Based on Table I From Table I and Figure I, it is noted that market share of KAMCO was the rise till FY 2010, after which there has been a gradual decline throughout the period till FY 2013). However, for the industry there has been constant sales growth throughout the period of study (FY 2008-FY 2013). Profitability Pattern of KAMCO Vs Agricultural Machinery Manufacturing Industry It is noted that profitability, in terms of net profit to sales ratio, of the agricultural machinery industry in India is growingly under pressure. As already noted, there is a constantly growing trend in respect of sales of agricultural machinery industry, notwithstanding the fact that sales of KAMCO shows a reversal of trend towards a consistently declining trend since FY 2010 (Table I, Figure I). However, in respect of profitability there is a constantly declining trend not only for KAMCO, but also for the whole industry. It is noted that the decline in profitability of the industry is at a relatively slow pace (-0.149) while that of KAMCO is at a very rapid pace (-1.03). (Figure II). 954 P a g e

3 Table-II: Profitability of KAMCO vs. Industry (FY ) Profit after Tax (PAT) (Industry) (Bn) Profit after Tax (PAT)(KAMCO)(Mn) PAT-Sales Ratio (Industry) (Percent) PAT-Sales Ratio (KAMCO) (Percent) Figure-II: Profitability of KAMCO vs. Industry (FY ) PAT to Sales (%) (Industry): y = x & R² = 0.60 PAT to Sales (%)(KAMCO): y = x & R² = 0.82 Sources: Based on Table II Cause for Low Profitability of KAMCO: Role of Materials Management Effectiveness In this section, an effort is made to analyze as to how the effectiveness in materials management has contributed, if any, to its problem of constantly declining profitability at a fast rate. Here, the effectiveness in materials management has been assessed using Raw Materials Turnover (RMTO) ratio defined in terms of the ratio of cost of raw materials consumed to sales. Sales are taken instead of cost of goods sold (COGS) because of the non-availability of COGS data at the industry level. It is noted that RMTO of the industry shows a constantly increasing trend, which suggests growing agility in materials management, and is desirable. On the other hand, in respect of KAMCO, there is a constantly declining trend showing growing levels of funds blocked in the shape of materials. This is not at an advisable in respect of materials management. (Table III, Figure III). Table-III: Raw Material Turnover Ratio (RMTO) of KAMCO vs. Industry (FY ) RMTO (KAMCO) (times) RMTO (Industry) (times) Figure-III: Raw Material Turnover Ratio (RMTO) of KAMCO vs. Industry (FY ) RM Turnover (Industry): y = x R² = RM Turnover (KAMCO): y = x R² = Sources: Based on Table III 955 P a g e

4 Table-IV: Correlation between RMTO and Profitability of KAMCO vs. Industry Particulars RMTO-KAMCO Profitability-KAMCO RMTO-Industry Profitability-Industry FY FY FY FY FY FY Correlation Co-efficient KAMCO: 0.90 (Positive 90 Percent) Industry: (Negative 75 Percent) From Table IV, it is noted that there is a 90 percent positive correlation between the materials management performance of KAMCO and its profitability. That is, the poor performance in materials management (constantly declining trend) is almost fully reflected in the poor performance in profitability (constantly declining trend) as well (Figure II and III). Thus, the very strong positive correlation of 90 percentages is as expected. In respect of industry as a whole, however, there is a 75 percent negative relationship between materials management performance and profitability. Here, it may be noted that in spite of constantly improving (ie. rising) trend in RMTO for the industry as a whole, there has been falling trend in its profitability (Figure II and III). The opposite trend in these two variables might have resulted in a strong negative correlation of 75 percent as noted above (Table IV). However, there may be other factors influencing profitability, because the same in respect of industry is not positive here, but rather negative. In short, there is a strong relationship between materials management effectiveness and profitability of KAMCO. Thus, the performance of KAMCO in materials management needs to be closely monitored. Suggestions for KAMCO in this regard are given in the next paragraph. Suggestions for Enhanced Profitability and Competitiveness of KAMCO In the light of the foregoing analyses, one of the major causes for low profitability of KAMCO being identified as poor materials management effectiveness, the following broad strategies (along with sub-strategies) have been suggested for enabling KAMCO to enhance its profitability, cost competitiveness and hence to improve its market share. (Table V). Table-V: Competitive Strategies Suggested for KAMCO Basic Problem Broad Strategies Sub-strategies / Specific Suggestions High material costs Lower sales growth Sources: Authors Compilation Focus on Cost Reduction, Usingmodern tools of strategic cost management, like, JIT. Focus on Sales growth to offset the profit margin pressures and also to improve market share. LIMITATIONS OF THE STUDY AND SCOPE FOR FURTHER EXPLORATION Careful Strategic Planning, with good top management support is essential for success of JIT and Adhoc (Temporary) approaches at middle level be avoided. Complete employee involvement and supplier development are also important. As the initial steps to be taken, (i) training, (ii) task force formation, (iii) re-layout and (iv) pilot study are suggested. A well-diversified portfolio is essential for survival and growth in the long run. Competitors like VST and TAFE (both private) are diversified firms and their market shares are growing fast. Thus, KAMCO should also diversity its portfolio to include tractors. Though the present study could identify one major cause for the poor profitability of KAMCO and its strong relationship with poor materials management, there are some limitations for this study. These are (a) factors other than materials (eg. capital employed, labour, energy etc.) are ignored, and (b) cause-effect relationship between the two major variables (preferably other variables also, like, capital, labour etc.) is not established using advanced techniques like regression. Besides, just one company (viz. KAMCO) alone has been studied, the competitive dynamics among the major competitors (like, VST) needs to be included for more meaningful conclusions and strategies. In view of these, there is enough scope for further exploration of this study to such broader but allied areas as (i) analysis of competitive structure and pattern of the industry, (ii) regression analysis (say, using Cobb-Douglas Production function) for finding the determinants of profitability etc. CONCLUDING REMARKS Adoption of the strategies, as suggested above, for more effective materials management and improving sales turnover alone are enough to improve significantly the current status of constantly declining profitability and sales turnover of KAMCO over the last few years. Other strategies, like those targeted at enhanced labour productivity, energy efficiency, return on capital etc. can be suggested only after more detailed studies as pointed out in the last paragraph. 956 P a g e

5 REFERENCES 1. Audited Financial Statements of KAMCO for FY 2008 to FY Mahadevan, B, Are Indian Companies Ready for Just-In-Time?, Management Review, July Sept.1997, pp Manoj P K, "Toyota Methodology for Problem Diagnosis and Strategy Formulation: A Case Study of KAMCO", International Journal of Emerging Technologies and Applications in Engineering Technology and Sciences (IJETAETS), Vol. 2, Issue 2, July-Dec. 2009, pp Chandra, S., Justification of Just-in-time manufacturing systems for Indian industries, Integrated Manufacturing Systems, Vol. 9, No.5, 1998, pp Iyer, A, Kandaswami, K., et al., Manufacturing s New Dawn: Can India Overcome the Challenges to become a Global Powerhouse?, Indian Management, All India Management Association, New Delhi, Vol.46, Issue 7, July 2007, pp Competitiveness through Localization, MUL s Way, The Hindu, (Kochi) dt. 27 th April Electronic Database CMIE Prowess, Centre for Monitoring of Indian Economy (CMIE) ***** 957 P a g e