1.0 Introduction
1.1 Background of Study
Inventories constitute the most significant part of current asset in a large majority of manufacturing companies indeed, most manufacturing companies required to maintain a large size of inventories ought to amount of funds are committed to them. It is absolutely imperative therefore that inventory ought to be efficiently and effectively managed to prevent unnecessary investment by tying up funds in them. Any manufacturing company which chooses to neglect the management of the inventories may be jeopardizing its profitability in the long run. As well as reducing the efficiency of production, if as a result of stock out production is held up which may also lead to the dissatisfactions of customers and consequent loss of goodwill.
According to Pandey (200L: 884), inventories are stock of products as company is manufacturing for sale and components that make up the product the various forms in which inventories are raw materials, work in progress and finish goods”. Raw material inventory and work in progress inventory represent products need further processing before they become finished goods for sales while finish goods are completely manufacture products which are ready for sale. Raw materials and work in progress inventory facilitate production while finished goods are required for smooth marketing operation.
According to Van Horne (1992:437), inventories forms a link between production and sale of the product, maintaining inventories involves tying up the company funds and also incurring storage cost.
Why do firms maintain inventories?
According to Starr and Miller (1962:17), three motives for holding inventories can be identified, namely:
1. Precautionary Motive:
This necessitates holding of inventories to guard against the rest of unpredictable change in demand and supply forces and other social economic variables.
2. Transactionary Motive:
This emphasizes the need to maintain inventories to facilitate a smooth production and sales operations and
3. Speculative Motive:
This influences the decision to increase or reduce inventory levels to take advantage of price fluctuations.
Basically, firms are faced with two needs in inventory management namely,
- The need to maintain a large size of inventory for efficient and smooth production and sales operation.
- To maintain a minimum investment in inventories so as to minimize cost and maximize profit.
Both excessive and inadequate stock of inventories is not desirable. Hence, a proper inventory control modeling should help determine and maintain an optimum level of investment in inventory.
1.2 Statement of Problem
Inventories comprise or significant proportion of the asset of many business organizations. In view of this, a business organization will be doing well in the area of its stock management if it can meet its material input at the right time and at the lowest possible cost. However, this is often difficult due to the following problems.
- Inability to determine correctly the exact period of replenishing stock and are economic order quantity.
- Inadequate planning and effective control of stock.
- Unfavourable internal and external factor which influence stock management.
- Inability of the inventory managers to predict with certainty into the future of the customer demand.
- Poor accounting documentation of stock.
- Shortage of funds available to business managers and the need to resolve the quality and profitability conflict.
1.3 Purpose of the Study
This research work intends to find an appropriate means of avoiding or at least minimizing losses due to inefficient stock management practices within manufacturing concerns.
The following shall be carefully examined.
- The determination of adequate replenishing period and economic quantity to order.
- The examination of the tools and techniques for effective inventory management.
- Investigation of internal and external factor which influence inventory management.
- Evaluation of inventory manager's ability to predict and forecast into the future accurately determining demand and fluctuation in supply schedule.
- Careful examination of accounting documentation for stock control.
- The future role of inventory management within a dynamic economic environment.
1.4 Research Questions
It is widely acclaimed that all active inventory management leads to cost minimization and profit maximization. There are pertinent questions that need to be asked in order to be sure that suggestion outlined in this work will really help.
- Do the changes in the level of inventory maintained affect the profitability of a firm?
- Do the changes in the level of inventory maintained influence the operating cost of the firm?
- Do the changes in the level of inventory maintained favour its liquidity position?
- What should be the desired quantity in a given replenishment order?
- What are the problematic areas that the stores personnel needs to pay more attention?
- Does accounting documentation affect inventory control?
Hypothesis
From the above research, we formulate the following hypothesis for the research study;
- Ho1: Variations in the level of inventory does not affect the operating cot of a firm.
- HO2: There is no relationship between the level of the inventory maintained and the profitability of the firm.
1.5 Scope of the Study and Limitations
This research work attempts to examine the methods and importance of inventory management in a manufacturing company. In discharging the work we would evaluate its effects on achieving sales target, liquidity objective, cost minimization and enhancement of profit performance of the company. This study will be limited to a case study of NICHBEN PHARMACEUTICAL INDUSTRIES. This study was extensively carried out to involve several other enterprises but has been limited to just one company due to the following constraints.
Time Constraints:
The time available for this study is quite short, so the project tends to be limited to the examination of just one company.
Financial Constraints:
High expenses involved in prosecuting the project bring about a limitation in scope.
Attitude of the respondents to the questionnaires presents yet another limitation to the project. The respondents handled the questionnaire with carefree attitude and are very sluggish in returning their responses to the questions.
1.6 Significance of the Study
In majority of manufacturing companies, inventories stock of goods represent a significant investment funds (Osaze and Anao 1990:98) as with any other investment, the cost of holding stock must be related to the benefit gained.
The findings and recommendations consequent upon concluding this research will be of immense benefit to the manufacturing sector of the economy. It will broaden the knowledge of the impact of the inventory control and management on the profit performance of a business enterprise the findings of this research will also be of great importance to students who will engage in this line of research in future.
Financial analysis and the academic society as long as inventory still forms a crucial part of the firms working capital investment. Above all this study will equally be beneficial to other sectors of the economy and enlarge the existing literature on inventory management for practitioners and professionals.
1.7 Definition of Terms
1. Inventory:
This is the stock of a product a company is manufacturing for sale and the components that make up the product. The inventory of a particular firm are made up of raw materials, work in progress and finished goods. A fourth kind of inventory classified as supplies may also be maintained. These items are held by the company to ensure that sales operations are not disrupted or production schedule go on smoothly.
2. Lead Time:
This refers to the period of time expressed. In days, weeks, months etc between ordering and replenishment.
3. Economic Order Quantity (EOQ):
The economic ordering quantity which minimizes the balance of cost between inventory holding cost and re-order cost. It is also known as the economic batch quantity.
4. Physical Stock:
This is the number of items that are physically in the stock at a given time.
5. Buffer Stock:
This is a stock allowance to cover errors in forecasting the lead time or the demand during the lead time. It is held as a safety stock in order to guard against stock out.
6. Stock Out:
A situation where the expected level of inventory falls to zero while there is positive customer demand.
7. Maximum Stock:
A stock level selected as the maximum desirable which is used as an indicator to how when stock have risen too high.
8. Re-Order Level:
This is the level of stock which a further replenishment order should be placed.
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