The Need for Effective and Efficient Inventory Management in a Manufacturing Company
Chapter One
OBJECTIVE OF THE STUDY
The major objective of this study is to determine of the need for efficient inventory management in a manufacturing company. The specific objectives of this study are as follows:-
- To determine to what extent the ineffective management of inventory in Emenite limited has caused low productivity in the company.
- To examine the extent to which insufficient inventory of finished goods cause loss of sales to the company.
- To identify the degree to which poor inventory modern used by the company has resulted to low productivity in the company.
- To ascertain whether the company has suffered from poor management and control of inventories.
CHAPTER TWO
LITERATURE REVIEW
INTRODUCTION
A truly effective inventory management system will minimize the complexes involved in planning, executing and controlling a supply chain network which is critical to business success. The opportunities available by improving a company’s inventory management can significantly improve bottom line business performance.
Oftentimes, inventory is the largest items in a manufacturer’s or distributor’s balance sheet. As a result, there is a lot of management emphasis on keeping inventories down so that they will not consume too much cash.
CONCEPT OF INVENTORY
Inventories are vital to the successful functioning of manufacturing and retailing organizations. This is because many companies hold inventories as part of their business operation. Inventories make up the most significant part of current assets of most companies especially the manufacturing companies. The need for management to ensure inventory control if properly managed cannot be over emphasized. A firm neglecting inventory management will be jeopardizing its ling run profitability and it may end up failing in its business. The definition of inventory has been defined by many professional bodies and scholars in different ways. The Microsoft Encarta premium defined it as the quantity of goods and mateials on hand. A manufacturer’s inventory represents those items that are ready and available for sale.
According to Nwaorgu (2005:123), inventory can be defined as a tangible property held to resale in the ordinary course or business, in the production for sale, to be consumed in the production of goods and services According to Jain (1999:472), inventory is the aggregate of these items of intangible property which are held for sale in the ordinary cause of the business, held in the process of production for such sales to be currently consumed in the production of goods and services to be made available for sale.
According to Morse (1997:454), inventory is a general term describing goods which are held in the store house and stock yards, the bulk of which is usually intended for the connection with production or operation activities and also finished products awaiting dispatch to customers.
However, according to Ama (2000:209), inventory is the stock of goods a firm is producing for sale and the components that make up the goods.
A key decision in manufacturing and retail is how much inventory to keep on hand. Once an inventory level is established, it becomes an important input to the budgeting system.
TYPES OF INVENTORY
Vohra (2008) classified inventories according to the purpose for which they are held. He stated that inventories may be held for a variety of purposes, but in general these are five types of inventories that an organization can use for serving these purposes and they include:
MOVEMENT INVENTORIES
This is also called transit inventories. It is due to the fact that transportation time is involved in transferring substantial amount of resources for example, when goods are on transit they cannot provide any service to the customers.
BUFFER INVENTORIES
This is also known as reserve stock. This is a stock of basic commodity accumulated by a government when supplies are plenty, and prices low and held for use when supplies are short to establish the price. Buffer inventories are held so as to protect against the uncertainties of demand and supply. An organization generally knows the average and could well exceed it. To be able to handle this kind of situation, inventories may be held in excess of the average or expected demand. The lead time may be known but atimes unpredictable events could cause the lead time to vary.
ANTICIPATION INVENTORIES
These inventories are held for the purpose of the future demand for a product. This situation occurs when a company embarks on the production of some specialized items before the season for them set in for example.
CHAPTER THREE
RESEARCH METHODOLOGY
INTRODUCTION
This chapter covers the research design, the area of the study, the population of the study, the determination of the sample size, and the sources of data method of data analysis, validity of the test and the reliability of the test.
RESEARCH DESIGN
The research design adopted in this work is the survey design method which comprises of the use of questionnaires and oral interviews.
AREA OF THE STUDY
The area of the study is limited to Emenite limited located in Umuezeani village in the Amaeke Ngwo community of Udi Local Government Area of Enugu state in Nigeria.
POPULATION OF THE STUDY
The population of the study for Emenite limited has a total number of 500 employees but because of the nature of this work, the population will be reduced to a total number of 60 which consists of the production department, sales department and the marketing department.
CHAPTER FOUR
DATA PRESENTATION AND ANALYSIS
INTRODUCTION
This chapter deals with the presentation and the analysis of the data collected from Emenite limited. A total number of 52 questionnaires were distributed of which 40 were completed and returned. Relevant mathematical and statistical tool will be used in the presentation and analysis of data derived from the questionnaire.
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATION
SUMMARY OF FINDINGS
The main objective of this research work is to highlight the need for effective and efficient inventory management in a manufacturing company, specifically Emenite limited. Relevant related literature on inventory management was received to find out the extent of work already done. The instrument used for data collection was questionnaires which were subjected to reliability and validity before it was being administered to the respondents.
The sample size used for this study was 52 out of 500, using a systematic random sampling. However, having analyzed the data the following are the findings which were deduced from this study:
Emenite limited, the company used as the case study makes formal inventory policies. This is supported by table 4.5 in chapter 4 which shows that all the respondents agreed that the company makes formal inventory policies. This is a clear indication that the company attached some degree of importance to the management of inventories.
It was discovered that the company makes use of replenishment model and the re-order date is not fixed rather, minimum and maximum levels are set. When stock is depleted to the minimum level, an order for replenishment is placed to bring the stock to the maximum level. It was also discovered that the company monitors the stock levels through the perpetual stock taking methods so that they can know when to re-order for stocks.
There is a divergence between policies and the practices of those policies made in the company under this study because it was observed that the company does not adhere strictly to her inventory policies. This was confirmed by the responses in table4.7 of the questionnaire where 25 of the respondents agreed that the company does not adhere strictly to her inventory policies. In order words, policy decisions are made by the company, but sometimes it fails to follow such procedures or policies made.
A number of reasons were given by the respondents that constrain effective management of inventories in the company, they are as follows:
Inadequate flow of information:
This was the reasons given as result of the occasional depletion of materials below the re-order point before a replenishment procedure is initiated. Sometimes information as to the issue of materials by the sales department are not given promptly, thereby leading to inadequate update of inventory records as a result of inadequate flow of information.
Inflationary pressures:
This is a general problem as was stated by the various respondents in the various departments. This according to them destabilizes their plans and causes them to invest more than planned on inventory since prices of materials are increasing rapidly. This means that sometimes the company exceeds her stipulated maximum stock level because it expects increases in prices in the future.
Scarcity of materials:
These like inflationary pressures causes the company to exceed her stipulated maximum stock level, the respondents when interviewed explained that since some of the materials which are being used are scarce, they are bought in large quantities so that they can be used for future purposes thereby exceeding re-order level.
- It was also discovered that the company runs out of stock from time to time and when asked why, the researcher was made to understand that although minimum stock is maintained, the reasons for stock out was attributed to unexpected delay in delivery or exceptionally high consumption during the lead time.
CONCLUSION
During the course of the study on the effectiveness of inventory management in a manufacturing company, it was discovered that inventory is the bedrock in the existence of any manufacturing firm and effective management of inventory will lead to effective control of the organization. However, whatever system or technique of inventory management, it much be channeled towards the reduction of stock to the barest minimum. These inventory techniques should be monitored to ensure its effectiveness. Therefore, from the results of the data analysis it is right to conclude that inventory management has not been very effective in Emenite limited and this is as a result of the fact that inventory policies are not strictly adhered to. Therefore, efforts are needed to be made in order to improve on these present situations.
Therefore, the researcher highlighted some recommendations which if implemented, Emenite limited will have its profitability improved as a result of reduction in cost which will enable it to reduce price and increase its turnover thereby spreading its overhead costs over increased output which will in turn result in reduced cost of reduction.
RECOMMENDATION
Having carried out a study of inventory management in a manufacturing company with a specific focus on Emenite limited, the following are some recommendations given by the researcher which if implemented, will have its profitability improved as a result of reduction in cost to enable wider gross margin of the company:
- The company should try by all means to adhere to inventory polices made. A situation is a case whereby materials or items are allowed to leave the stores without proper requisition, this shows that the internal control is weak. In order to ensure that the company adheres to inventory policies, under no circumstance should items of inventory be allowed to leave stores without proper requisition.
- The company should employ the economic order quantity method when placing orders. The economic order quantity model puts into account the relevant costs associated with ordering and carrying inventory. Every business organization aims at reducing cost to the barest minimum and one of the avenues by which this could be achieved is adopting the economic order quantity method of placing order.
- Sufficient stock should be held in order to avoid stock-out so that when the ordering level is high; there will be enough stock to be delivered.
- The flow of information should be increased and should be circulated adequately in order to enhance adequate updates of inventory records.
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