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THE IMPACT
OF INVENTORY MANAGEMENT AND CONTROL ON PERFORMANCE
ABSTRACT
This
research work is an attempt to look into the impact of inventory management and
control on performance using a
manufacturing company. It was conducted using Tower Galvanized Products
(GTP) Ltd Kaduna. The research work was carried out with the intention of
examining the pit falls of manufacturing companies in carrying out necessary
management and control of their inventories. For this purpose the study was
divided into five chapters. Chapter one introduced the research topic, the
objective of the study was also define which include to access and highlight
the different methods of inventory, planning and reeducation and the most
appropriate one. Chapter two was concerned with the review of related
literature and points like objectives of inventory management which include to
maintain minimum investment in inventories to maximize profitability were discussed.
Chapter three dealt with the methodology used in collecting data. In this
chapter the random sampling technique was adopted and questionnaire were used
to collect the data. Chapter four has to do with the analysis of the various
data collected using the mean. In chapter five, summary of the research work
was don and conclusion were drawn to give recommendations in that a
manufacturing companies with a view to profit maximization and cost reduction
should adopt and maintain an effective inventory management and control system
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Inventories constitute the most
significant part of current events of a large majority of companies in Nigeria
and indeed many other part of the world. Because of the large size of
inventories maintained by firms, a considerable amount of fund is required to
be committed to them. Therefore, the efficient and effective management of
inventories becomes imperative in order to achieved unnecessary turnover or to
minimized the cost associated with keeping inventories. The neglect of
inventory management and control by a firm will amount to jeopardizing its long
run profitability and may even cause the firm to fail ultimately.
Inventory is
defined as the stock of any item or material used in an organization.
Therefore, an inventory management is the set of policies and control that
monitor levels of inventory and determines the following:-
i. What level should be maintain
ii. When stock should be replenished.
iii. How large order should be
However,
inventory can include input such as human resources, financial, equipment e.t.c
and output such as parts or component.
It is
possible for a company to reduce its level of inventories to a considerable
degree without any adverse effect on production and sales by using inventory
planning and control techniques.
The
reduction in excessive inventory carries a favourable impact on company
profitability (Pandey 1999) in doing this however, care should be taken to
avoid under stocking which directly affect production causing stoppage, loss of
sales, loss of good will. etc.
Inventory
forms a link between production and sales of a product. A manufacturing company
must maintain a certain level of inventory in the form of raw materials, work
in progress and finished goods. Raw materials inventory gives the firm
flexibility in its purchase, without it, a manufacturing company must exist on
a hand-to- moth basis buying raw materials in keeping with its production
schedule. Work-in- progress are items of stock that are subjected to further
processing to produced the finished product. finished goods inventory allows
the firm flexibility in its production scheduling and in its marketing thus
there is on incentive to maintain large stocks of all three types of inventory.
In an
inflationary environment like Nigeria, there is the need to adopt a realistic
inventory valuation method in order to give correct value of inventory in the
profit and loss account and in the balance sheet which would have otherwise
show an appropriate financial position of the organization and thus negating
the purpose of accounting which is the provision of accurate financial
information to investors, shareholders, management, government and her agencies
and other related interested parties in order to assist them in taking decision
about the organization.
It is in
view of this that the need arises for an appropriate management and control
measure to maintain the most accurate level of stock that will assist
management of the organization carryout business in such a way that it does
not portray the organization in bad shape.
1.2 STATEMENT OF THE PROBLEM
The wide
distance between the source of raw material and factories in Nigeria today has
posed a great problem to management. Thus the management may not predict with
certainty to delivery date of materials. How then does the management ensure
that there is no hitch and delay in the supply of raw material to satisfy their
day to day requirements without necessarily keeping excessive stock of raw
materials and finished goods which represent investment from which no return is
expected immediately.
In line with
this, the major problem face by management is the determination of what stock
to be kept, when to reorder, of what cost to reorder, what the production level
should be, how work in process and stages involved should be controlled,
movement of finish goods from point of production into the market. The
disadvantages associated with huge investment in inventory (tying down of
capital, increase in holding/carrying cost etc) act as a detriment in
management in committing huge sum of funds in inventory. Conversely making
little investment will be disastrous as it will lead to frequent stock out and
consequent disruption of production system and incurring additional cost
resulting from frequent ordering.
Since no
company especially a manufacturing company can operate without keeping stock,
it is necessary to check the occurrence of pilferage depletion, damages,
breakages, obsolescence etc. among other things.
1.3 OBJECTIVE OF THE STUDY
The primary
objective of this research work is to consider inventory control system as
described and discussed by different authors. This will be taken as a standard
against which the inventory system of the company under study will be appraised
to determine its efficiency and suitability in the peculiar environment it
operates.
The
objectives of this study includes:
1. To determine an optimum level of
inventory to be maintain by the company under study.
2. To assess and highlight the different
methods of inventory planning, control and valuation and the most appropriate
one for a manufacturing company.
3. To highlight the need for and nature
of inventory.
4. To make viable recommendations on the
basis of the out come of the research.
5. Effect on delivery date with
certainty.
1.4 SIGNIFICANCE OF THE STUDY
The significance
of a proper and efficient inventory control and management cannot be over
emphasized. Its effect is not only on the individual company but on the economy
as a whole.
This study
is meant to find solutions to the itching problems of Tower Galvanized Products
(TGP) Nigeria limited Kaduna in inventory management and control.
The study
will also be of immense benefit to the owners and management of the company
under study, their creditors and prospective shareholders who might wish to invest in the company. This is so
because managing inventories efficiently and effectively will help the company
to avoid unnecessary investment. It helps the management in quick and accurate
decision making. It will also help to build-up the goodwill of the current
asset of many companies.
Finally, the
knowledge required from this study will broaden the existing knowledge in this
field and aid researcher in applying it to other companies or organizations.
1.5 RESEARCH QUESTION
With
reference to the statement of the problem highlighted above and considering the
scope and limitations of this study the following research questions are
formulated.
1. How does the company determine the optimal
level of stock to be maintain?
2. How appropriate is the valuation method
given the present inflationary situation?
3. What determine the level of control to be
maintain on various types of stock?
4. What practical problems are in the ways of
progress of inventory management and control in the area under study?
5. How does the effect of large investment
inventory affect the management (holding cost).
1.6 SCOPE OF THE STUDY
This
research work is focused on inventory management and control in Tower Galvanize
Product (TGP) Nigeria
limited,
Kaduna during the year 2001-2006 as it affects the full implementation of the
basic concepts of inventory management. Associated issues like inventory procurements,
storage and physical distribution policy of the company will also be examined.
1.7 LIMITATIONS OF THE STUDY
1. Lack of corporation from subjects leading
to the use of smaller than the anticipated number this can affect the quality
and the generalization of the findings.
2. Inability to use correct data gathering
instrument due to ignorance about their availability
3.
Low return rate of questionnaires
4. Using less then fair representative sample
due to inability to research subjects.
1.8 DEFINITION OF TERMS
- Inventory: This is the list of items
held in stock by a company at any particular time.
- Stock: This consists of all goods and
materials stored by an organization. It is a supply of items which are kept for
future used.
NB for the
purpose of this research work, stock and inventory are sometimes used
interchangeably
- Lead time: This is also known as reorder
period or delivery. It is the period of time between ordering and reception of
goods ordered for.
- Re-order level: This is the point at
which it is necessary to initiate purchase requisition for new supply of
materials.
- Minimum stock level: This is the level
below which stocks should not normally be allowed to fall. It can be said to be
buffer or safety stock which makes allowances to cover for error in forecasting
the lead time or the demand during the lead time.
- Maximum stock level: This is the level
above which stock should not normally be allowed to rise.
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