EFFECT OF LOGISTICS MANAGEMENT PRACTICES ON OPERATIONAL EFFICIENCY AT MUMIAS SUGAR COMPANY LIMITED, KENYA CHAPTER 1

EFFECT OF LOGISTICS MANAGEMENT PRACTICES ON OPERATIONAL EFFICIENCY AT MUMIAS SUGAR COMPANY LIMITED, KENYA

INTRODUCTION

Council of Logistics Management (1991) defined logistics as part of the supply chain process that plans, implements, and controls the efficient, effective forward and reverse flow and storage of goods, services, and related information between the point of origin and the point of consumption in order to meet customers’ requirements. Logistics system is made up of logistics services, information systems and infrastructure/resources. Logistics services is made up of activities such as warehousing and transportation that support the movement of materials and products from point of origin to point of consumption, and vice versa. Information systems include modelling and management of decision making, and more important issues are tracking and tracing. On the other hand, infrastructure comprises human resources, financial resources, packaging materials, warehouses, transport and communications (BTRE, 2001).

Logistics, previously viewed as a classical function, which involves adversarial relationships among suppliers, customers and transportation providers, is emerging as a key source of competitive advantage and a leading reason for strategic alliance relationship between companies and their logistics providers (Hai & Yirong, 2002). A logistical system is made up of a large number of stakeholders. They include the suppliers, manufacturers, wholesalers or distributors and retailers who have to be managed strategically in order to deliver final products in the right quantities at the desired time and quality at the right place and at a reasonable cost to the final consumers. Logistics strategy has three main objectives; cost reduction, capital reduction and service improvement. In the last two decades, product flow has been greatly improved due to better technology in communication and transportation. Increased variety of goods, globalization of marketing and seasonal variations are among the major challenges of logistics system which leads to the necessity of developing effective logistics strategies in the agricultural sector (Gebresenbet & Bosona, 2012). Fresh agricultural products logistics requires robust, fast, sensitive and reliable logistics management information network and market supply and demand information (Liu & Ke, 2012).

Sugar Industry in Kenya

Economically, the sugar industry provides a superb multiplier of economic growth. Not only does sugar consume a large number of items (example being fertilizer, fuel, spare parts, chemicals of various kinds), but it also provides business opportunities with regards to the transport of cane and sugar, merchandising and distribution opportunities. About 90% of the Sugarcane production is contributed by small scale farming while the remaining 10 % coming from large scale farmers and factory nucleus estates concentrated in the western part of the country. The sugar sub-sector is the third most important contributor to the GDP after tea and coffee. It supports directly or indirectly 6 million Kenyans. It’s a source of livelihood for about 170,000 farmers in western Kenya (Wawire et al. 2006 & Odenya et al. 2007). The industry employed about 500,000 people directly or indirectly in the sugarcane business chain from production to consumption. In addition, the industry saves Kenya in excess of USD 250 million (about KShs. 20 billion) in foreign exchange annually and contributes tax revenues to the exchequer (VAT, Corporate Tax, personal income taxes) (KSB, 2010). However, the output from this sub-sector has faced several challenges emanating from low adoption of agricultural technology, high cost of inputs and poor transport system (GOK, 2001; Wawire et al. 2006 & Odenya et al. 2007).

Currently, there are 10 active milling companies that support sugar processing in Kenya with Mumias Sugar Company being the largest, producing about 250,000 metric tonnes of sugar annually. The Company is supplied with cane from its own sugarcane estates and from registered out growers who number more than 50,000. Being an intensive venture, sugar manufacturing processes that involve cane development, sugar cane processing and packaging mainly attract major costs in factors of production such as labor and raw materials. These high costs and increased competition put companies such as Mumias Sugar Company under threat of making perpetual loses.

STATEMENT OF THE PROBLEM

Sugar is an important commodity and there are numerous challenges and opportunities that exist in Africa as a whole for this industry. Most Sub-Saharan Africa countries still heavily rely in the agricultural sector as a source of economic livelihood for most of its population. Hence, in an effort to improve the sector, various interventions have been adopted. (Miller, 2008).The Cost of producing sugar in Kenya is higher than those in other producing countries in East Africa and COMESA member states. The Kenya Sugar Industry Strategic plan (2010-2014) puts the cost of producing sugar in Kenya at 415-500USD/ton while that of Uganda and Tanzania are put at 180-190 USD/ton and 140-180USD/ton respectively. Report by The Kenya Sugar Industry Strategic plan (2010-2014) indicated the challenges such as irregular factory maintenance, low crushing capacity, low sugar extraction rates, slow adoption of new and appropriate technology, inadequate industrial research, high cost of sugar production, narrow product base, dilapidated processing equipment, inefficient factory operations and wastage in cane yard.

From 2012, Mumias Sugar Company has been experiencing low sugar output and decreased profits which have been blamed on internal inefficiencies and fall in cane supply. According to a forensic audit carried out by KPMG, the company registered a loss of up to Ksh. 1 billion in 2012. A further loss of Ksh. 2.7 billion was recorded in 2014.The challenges experienced by MSC majorly circulate around logistics management, processing, distribution and consumption. However, there has been knowledge gap as to whether these factors can affect operational efficiency. This study therefore opted to fill this gap by assessing how logistics management practices influence the operation efficiency of Mumias Sugar Company.

SCOPE OF THE STUDY

This study focused on Mumias Sugar Company, which provided an interesting case for analysis. Employees of Mumias Sugar Company, representatives of farmers who supply sugar cane to the company and officials in the Ministry of Agriculture and the Kenya Sugar Board were vital in providing data on the four logistics management practices; information flow, warehousing, transportation and physical distribution in assessing operational efficiency.

RESEARCH OBJECTIVES

i. To determine the effect of management of information flow on operational efficiency.

ii. To establish how warehousing management activities affect efficiency in the processing operations.

iii. To determine the effect of transportation management activities on operational efficiency.

iv. To examine the effect of physical distribution management on operational efficiency.

JUSTIFICATION OF THE STUDY

The recommendations of this study would enhance competiveness in the industry in order to transform it into a leaner low cost industry as improve operational efficiency hence contribute to increased profitability in the industry. The findings and recommendations of this study will be useful to the procurement professionals and operations managers in understanding logistics management practices and their contribution in operational efficiency which improves logistics management decisions.