INVENTORY CONTROL AND IMPLICATIONS ON MANUFACTURING FIRMS

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INVENTORY CONTROL AND IMPLICATIONS ON MANUFACTURING FIRMS

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

In many businesses, inventory is a key area of concern as inventory is what is sold. Though, on the surface this may seem to be merely physical construct, inventory management principles easily extend to services or other intangible product offering. Perhaps, the first principle of inventory is that, inventory is money, or rather, a representation of invested capital that is listed on the balance sheet as a liability, a more accurate way to think of it is that, it is an asset on the waiting, Larson (1995:30). According to Etuk (1995:50), inventory refers to the stock of resources that posses economic value, held by an organization at any point in time. These resourceful stocks can be equipments, machines, capital goods or materials etc, at various scopes.

That is to say that inventory is primarily about specifying the size and placement of stocked goods that is required at different locations within a facility or within multiple locations of a supply network to protect the regular and planned course of production against the random disturbance of running out of materials or goods. Manufacturers, distributors, and wholesales inventory tends to Cluster in warehouses, retailers, inventory may exist in a ware house or in a shop or store accessible to customers.

According to Moskowitz and wright (1997:120), the scope of inventory also concerns the fine line, carrying cost of inventory, asset management, inventory forecasting, inventory valuation, inventory visibility, future inventory price forecasting, and physical inventory, available physical space for inventory, replenishment, returns and detective goods and demand forecasting. Balancing these completing requirements leads to optimal inventory levels, which is an on-going process as the business needs shift and react to the wider environment most manufacturing organizations usually divide their “goods for sale” inventory into:

a. Raw materials: materials and components that scheduled for use in making a product.

b. Work-in-progress (WID): materials and components that have begun their transformation into finished goods

c. Finished goods: goods ready for sale to customers are called finished goods. Although inventories are essential and provide an alternative to production/purchase in the future, it also looks up the capital of the organization. Large inventories do not lead to high volume of output, instead it hampers production. In other wards, inventory is reviewed as a necessary evil that cannot be eliminated. It is termed as evil because maintaining inventories lies up money that could have been used for alternative purposes and it also increases carrying cost (cost associated with holding goods in stock). However, it is considered a necessary investment to achieve a workable system of production, distribution and marketing of physical goods. Dervisiotis (1981:482).

Accountants often discuss inventory in terms of goods for sale, organization, manufacturers, service providers also have inventories (fixture, furniture, supplies etc). Inventories not intended for sale to customers or to clients may be held in any premises; most organization use stock tied-up cash and if not controlled, will be impossible to control them. For many small retailers, the largest asset on the balance sheet is inventory, however, without careful planning; inventory can easily get out of hand, resulting in heavy markdowns due to overstock and ultimately, serious cash flow problems. Homgren (1982:47).

Inventory management sample means keeping the overall costs associated with having inventory at efficient and effective level without creating unnecessary problems. It is an important part of any business to have a stock of products or items on hand.

Efficient inventory management is a delicate balance at all times between having too much and too little in order to maximize profits. The costs associated with holding stock, running out of stock, and placing orders must all be looked at, and compared in order to find the rigid formular for particular business. This is because it is impossible to have an unlimited supply on hand, for different reasons. Many businesses simply do not have enough money to keep excessively large inventories due to the costs associated with purchasing the items as well as storing them, and having too many products leads to further losses when they do not move off the shelves, damages and shortages become inevitable, Star (1962:76). At the same time, there are issues with inventory management when there isn’t enough stock on hand. One common problem is running out of inventory, which is caused by trying to reduce inventory costs too much. This is something that no business would like to experience, but it happens to virtually all of them at a given point in time. Even the largest stores run out of certain products from time to time when they sale or use more than they expected. This can cause financial losses when inventory is not available for customers to purchase. Part of inventory control is trying to minimize shortages so these are rare occurrences. Most businesses expect they will have shortages on occasion and they have calculated that the small loss is worth the money saved by not having an overview, Gerald (1996:63)

According to Lucey (1993:89), another important element of inventory management is called reorder point. Businesses need to think ahead and calculate the best time for reordering products, doing so too soon may cause financial difficulties or running out of stock. On the other hand, waiting too long to reorder will result in a shortage and running out of inventory before the next shipment arrives. When figuring out a reorder point, it is necessary to calculate how long it will take the shipment to arrive and the amount of demand for a particular item. The over head costs, fees and shipping expenses of ordering large versus quantities should also be looked at. He went on to say that inventory management is an ongoing process that is rarely, if ever, executed perfectly. It can break a business if it is executed poorly, because either expense will be too high or customers will get tired of dealing with shortages and find another place to spend their money. For instance, stores or warehouse can make good estimates about how many of the specific product they will order for a sale, but things still go wrong from time to time. Experienced experts in the field of management have introduced several inventory management techniques to help organizations make the best decisions regarding stock, but there are still issues with performance (company turnover at the end of the day). It appears there is still a stone left unturned, and this is what the researcher brings to unravel in its own capacity and scope.

1.2 STATEMENT OF THE PROBLEM

Inventory is the life blood of any organization. This is because inventory contributes directory to the profitability of an organization and such, the growth of any organization depends largely on its ability to manage its inventory effectively and efficiently.

Based on this fact, the researcher seeks to find out the problems that any manufacturing firm places when and once there is no efficient and proper inventory management.

Poor Inventory Management: These are problems that are involved in poor planning, executing and controlling a supply and utilization of chain network inventory that is critical to the success of the organization.

Inadequate Control of Inventory: lack of managerial skills relevant to proper inventory management exposes many organizations to many problems like overstocking, damage, deterioration etc. In this regards, the researcher tries to find out the possible way of reducing such.

Problem of deciding which item of inventory should be kept in stock and at what quantity portrays the improper Economics Order Quantity (EOQ) in an organization. Some organization looses much due to their failure to keep with EOQ desirable for them, and this work throws more light to forestall this.

Problem of not IMPLEMENTING the Inventory Management Systems:

Many organizations do not keep abreast with inventory management systems due to poor or no knowledge about the inventory management and such organizations are bound to face several related problems that this work highlights on towards reducing them.

Also, in some manufacturing firms, they find it difficult to determine how much of the inventory to order and when to order; in order to meet customers demand and briefs about easy and smooth flow of production process without unnecessary stoppage, idle time etc due to unavailability of inventory.

1.3 PURPOSE OF STUDY

1. To ascertain if manufacturing firms have formal policies, methods and procedures for inventory management.

2. To examine the effectiveness of the various tools and techniques used by manufacturing firms in inventory management.

3. To assess the impacts of efficient inventory management on manufacturing firms.

4. To assess the consequences of poor book-keeping and store management on the inventory management of manufacturing firms.

5. To assess the significant consequences of inefficient inventory management on the productivity of manufacturing firms in Nigeria.

1.4 SIGNIFICANCE OF THE STUDY

This research work can be of great help to those who have a little or no knowledge in manufacturing business. It will be valuable to people who are interested in the manufacturing business and wish to make it their career.

The research work can also help the management of Anambra Motor Manufacturing Company (ANAMMCO) to appreciate areas where improvement is needed in her inventory operations so as to boost her profitability and consequently increase her shareholders wealth. Indeed, this will in no little way have favorable effects on the national growth and development of Nigeria manufacturing sector in particular and economy at large.

Finally, this work will be of immense benefit and use for the future researchers and ourselves in particular.

1.5 SCOPE OF THE STUDY

The scope of this study revolves around the effects and appraisal of efficient inventory management on the performance of business organization and manufacturing firms in particular.

Also, many areas such as inventory management systems, contributions of efficient inventory management towards profitability, material usage, cost minimization and economy of operation; and the impacts of efficient inventory management especially as it concerns the area of study etc; are given precise explanations as time and scope constraints permit the researcher.

1.6 RESEARCH QUESTIONS

1 Does manufacturing firms in Nigeria have formal methods, policies and procedures for efficient inventory management?

2 How effective are the various tools and techniques of inventory management in manufacturing firms?

3 What are the impacts of efficient inventory management in manufacturing firms?

4 What are the consequences of poor book-keeping and store management on the inventory management of manufacturing firms?

5 Are there significant consequences of inefficient inventory management on the productivity of manufacturing firms?

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