NORMALIZED RATIO MODEL FOR AVAILABLE BUDGET ALLOCATION FOR EQUIPMENT PROCUREMENT IN MANUFACTURING INDUSTRIES [FIIRO AS A CASE STUDY

Abstract

The challenges that used to come up as a result of project failure have to do with improper planning. This is looking into the future of what can occur based on present events. In financing equipment or machinery, the capital in hand is a critical factor that determines equipment procurement strategies. There is need for an optimum model to control the available budget to be put in place. This study identified the financial strategic decisions for machinery, developed mathematical models for the identified strategic decisions, test and evaluate the performance of the developed models. In allotting the available budget to procurement, this study considered four principal strategic decisions which are: machine, accessories, spare parts/consumables and miscellaneous costs. Model for each strategic decision was developed. This study made it known that not all these strategic decisions will be required every year at times, machine may not be required for one year or two nor accessories, these led to eleven (11) scenarios of applying the developed model. However, the manager can decide to step down any of these scenarios if it is not required. A company that is not newly established will concentrate on other pressing needs apart from purchasing new machines for the current year. Information from the past procurement made by Federal Institute of Industrial Research, Oshodi (FIIRO) was used as available budget to test the developed models for decisions making. Thirteen (13) years equipment procurement cost data was collected from this institute. Software was also developed for easy processing of this data using Visual Basic programming language because of its versatility and friendliness. Application of this model for allotting available ₦5,500,000 (US $33,950:62) under Scenario 1 (stepping down machine cost) since machine procurement is not required in the current year. The amount was allotted to accessories, spare parts and miscellaneous in this ratio: Accessories, Ac = ₦2176853.66 ($13437.37); Spare part, SPc = ₦2863878.677 ($17678.26); Miscellaneous, MIc = ₦459267.6623 ($2834.99). This model is a strong decision tool for allocating available budget in the period of financial scarcity where equipment procurement for production needs must be carried out. This model is highly recommended to any manufacturing company, small, medium, and large scale that equipment procurement affects their production in developed and developing countries.