Effect of Efficient Inventory Management on the Profitability of a Firm
Chapter One
Objectives of the study
The overall objective of this study is to examine the effect of efficient inventory management on the profitability of a firm. The specific objectives are to:
- Examine the effectiveness of the various tools and techniques (Economic order quantity or Economic Batch Quantity) used by manufacturing firms in inventory management.
- Ascertain the extent to which inventory control contributes to profitability in manufacturing firms.
CHAPTER TWO
REVIEW OF RELATED LITERATURE
CONCEPTUAL FRAMEWORK
Concept of Inventory Management and Control
Anichebe and Agu, (2013) opined that inventories are vital to the successful functioning of manufacturing and retailing organizations. They may consist of raw materials, work-in-progress, spare parts/consumables, and finished goods. It is not necessary that an organization has all these inventory classes. But, whatever may be the inventory items, they need efficient management as, generally, a substantial share of its funds is invested in them. Different departments within the same organization adopt different attitude towards inventory. This is mainly because the particular functions performed by a department influence the department’s motivation. For example, the sales department might desire large stock in reserve to meet virtually every demand that comes. The production department similarly would ask for stocks of materials so that the production system runs uninterrupted. On the other hand, the finance department would always argue for a minimum investment in stocks so that the funds could be used elsewhere for other better purposes, (Anichebe & Agu, 2013 citing Vohra, 2008:427).
Inventory refers to the value or quantity of raw materials, supplies, work in progress (WIP) and finished stock that are kept or stored for use as need arises (Kwadwo, 2015). Raw materials are commodities such as steel and lumber that go into the final product. Supplies include items such as Maintenance, Repair and Operating (MRO) inventory that do not go into the final product. Work in progress is materials that have been partly fabricated but are not yet completed. Finished goods are completed items ready for shipment. Inventory management is the art and science of maintaining stock levels of a given group of items incurring the least cost consistent with other relevant targets and objectives set by management (Kwadwo, 2015). Inventory is the availability of any stock or resources used in an organization. An inventory system is the set of policies that controls and monitors inventory level and determine what level should be maintained, how large orders should be made and when stock should be replenished. Inventory control is the supervision of the storage, supply and accessibility of items to ensure an adequate supply without excessive oversupply (Miller, 2010).
Inventories are basically stocks of resources held for the purpose of future production and/or sales. Inventories may be viewed as an idle resource which has an economic value. Better management of inventories would release capital for use elsewhere productively, (Ghosh & kumar, 2003). Hence inventory control implies the coordination of materials accessibility, controlling, utilization and procuring of material. The direction of activity with the purpose of getting the right inventory in the right place at the right time and in the right quantity is inventory control and it is directly linked to production function of any organization. This implies that profitability of any organization directly and indirectly is affected by the inventory management system operated (Miller, 2010). Inventory of goods has many reasons why organization should maintain it. It is economically unsound and physical impossible to have goods arrive in a system exactly when demands for them occur. Without stock at hand customers would have to wait for long period before their orders are fulfilled.
Inventory management is the control of materials used and stored in a company with the objective of providing exactly what is required where and when it is required employing a minimum of residual stock and thus incurring the least possible cost (Agha, 2010). Inventory management is primarily about specifying the size and placement of stocked goods. Inventory management 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. The scope of inventory management also concerns the fine lines between replenishment lead time, carrying costs of inventory, asset management, inventory forecasting, inventory valuation, inventory visibility, future inventory price forecasting, physical inventory, available physical space for inventory, quality management, replenishment, returns and defective goods and demand forecasting. Balancing these competing requirements leads to optimal inventory levels, which is an on-going process as the business needs shift and react to the wider environment (Ghosh & Kumar, 2003 in Ogbo & Wilfred, 2014).
Ogbo (2011) posits that the major objective of inventory management and control is to inform managers how much of a good to re-order, when to reorder the good, how frequently orders should be placed and what the appropriate safety stock is, for minimizing stock-outs. Thus, the overall goal on inventory is to have what is needed, and to minimize the number of times one is out of stock. According to Anichebe and Agu (2013) the cardinal objective of inventory management is the maintenance of an optimum level of inventory necessary to support the production system at any time and at the least cost possible. The attainment of this objective entails taking decisions with respect to the determination of an appropriate order quantity, when to place the order and how much inventory to carry per unit of time. These various decision variables will, at any time, dictate the behavior of any inventory system. Inventory ordering systems reflect part of the strategies available to an organization in meeting its inventory management objectives. Basically, there are three major inventory ordering systems, the fixed – order quantity system, the fixed-order interval system and the ABC inventory analysis system.
Inventory control is the supply of goods and services at the right time with the right quality and quantity. It is a reliable means in which businesses are been managed to ensure customers are satisfied and organization remains in operations via minimization of losses. Inventory management has been a problem to many business organizations in Nigeria. Inventories provide a significant link between production and sales of product, and constitute a large percentage of the cost of production. It is one of the most expensive and important assets of many manufacturing companies representing a considerable percentage of the total invested capital. At any level of a firm, inventory is among the largest investment made and therefore logically deserves to be treated as a major policy variable, highly responsive to the plans and style of top management. However, to date in most organization, both analysts and managers have been relatively unsuccessful in convincing top management to give this area the due consideration that it logically deserves (Ogbo, 2011). Inventory control means availability of materials whenever and wherever required by stocking adequate number and kind of stocks. The sum total of those related activities essential for the procurement, storage, sales, disposal or use of material can be referred to as inventory management. Inventory managers have to stock-up when required and utilize available storage space resourcefully, so that available storage space is not exceeded (Ogbo and Wilfred, 2014).
From the above analysis of the meaning of inventory management, it could be seen that managing inventory is encumbered with problems of cost reduction, the right time to order for inventory, the right quantity to order, how to maximize profits, satisfy the customers and produce at maximum capacity, among others. In this review, the following sub-topic is considered.
Evaluation of the kinds of inventories and methods of checking/supervising inventories for efficient inventory operations.
Quick Response Manufacture (QRM) involves application of computer to aid manufacture. In this case, computer is used to re-engineer the whole production process, reduce the waiting time, movement time, production process time, set-up time and avoiding rework and inspection that will not add direct values to the products produced.
So, in Nigeria where the above requirements of Just-In-Time are still finding their grounds, its full utilization involves using the concept (JIT) along side with other models like economic lot size.
The Quick Response Manufacture is a good inventory management and control innovation but still requires more aggressive pursuits of the development of Nigerian’s technology for its full maximization and this is why the companies apply it jointly with other models to achieve their desired goals.
Lastly, as Nigeria is trying to keep abreast of the other developed countries of the world, the manufacturing concerns operating in Nigeria are also following the pace set by their counterparts in the industrialized countries of the world.
CHAPTER THREE
METHODOLOGY
Research Design
This study adopted the ex-post factor and descriptive research design. This is because the study seeks to investigate the inventory management and control in manufacturing firms in Nigeria. The data for this study were obtained mainly from both primary and secondary sources which were collected from the audited annual reports and accounts of the selected manufacturing company in Nigeria. The justification for the adoption of this research design lies on the un-manipulability of data (Osuala, 2005).
Area of the study
The area of the study is manufacturing firms. Due to time and financial constraints two manufacturing firms were selected for this study i.e. Nigerian Breweries Plc. The study focuses on the appraisal of inventory management and control in manufacturing firms.
Population of the Study
Population in research statistics can be described as the entire number of people, objective, events and things that all have one or more characteristics of interest of a study. It is the target of the study for collection of data (Olakunori, 2000). The population of the study consists of the top management staff, middle Management staff and lower level management staff of the organization of the Nigerian Breweries Plc and some selected members of the public basically individual that patronize the firm. Population of eighty (80) respondents was used for the study.
CHAPTER FOUR
DATA PRESENTATION AND ANALYSIS AND INTERPRETATION
Introduction
This chapter involves data analysis and interpretation. From the sample size of the study above, a total of 80 questionnaire was distributed to entire respondents and only 72 were returned representing 90% returns.
From the above out of 80 questionnaire distributed, 72 were returned. Therefore, the analysis is based on 72 returned questionnaire.
CHAPTER FIVE
SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS
Summary of findings
Based on the above finding, the study empirically came out with the followings:
- That the various tools and techniques of inventory management adopted in manufacturing firms are effective since the significance value (p-value) of 0.046 < 0.05, meaning that the model is significant.
- That inventory control has contributed significantly to the net profit of manufacturing organization(Nigeria Breweries plc) since the significance value (p-value) of 0.005 is less than 0.05 meaning that the model is significant.
- That inventory control has not contributed significantly to the net profit of manufacturing organization(Unilever Nigeria plc) since the significance value (p-value) of 0.897 is more 0.05 meaning that the model is not significant.
Other findings of the study are:
That some of the reasons why organization evolve inventory control management system include the need to smoothening operational requirements; maintain accountability and transparency, the need to optimize resources and meeting up operational requirement.
The study also found out that flexibility in inventory control management is an important approach to achieving organizational performance. Flexible inventory services are associated with minimizing stock holding cost, minimizing waste and encouraging high inventory utilization.
In addition, it was found that organizations benefits from inventory control management by way of easy storage and retrieval of material, improved sales effectiveness and reduced operational cost.
Conclusion
Inventory Management is very vital to the success and growth of manufacturing firms. The entire profitability of manufacturing firms is tied to the volume of products sold which has a direct relationship with the quality of the product. Management does a lot to present a good organization to the public in terms of quality production. Good inventory management in any manufacturing organization saves the organization from poor quality production, disappointment of seasoned customers, loss of profit and good social responsibility. This is done by ensuring timely delivery of raw materials to the factory and distribution of finished goods, in order of production to the warehouse.
Thus, if inventory management is not adequately maintained, production cannot meet the aspirations of customers which are loss of revenue to the organization. Right from procurement to the time of processing, quality of raw material is the chief determinant of the productive efficiency of any manufacturing concern. This varies from organization to organization. This study concludes that the various tools and techniques of inventory management adopted in manufacturing firms are effective and inventory management has significant impact on manufacturing company.
Recommendations
Based on the findings of the study, the researcher made the following recommendations:
- The manufacturing firms should diversify their inventory system to suit specific needs of production and at the same time ensure that maximum attention is paid to inventory management so as to avoid or reduce the amount of loss that would be gotten from damaged goods in inventory
- Inventory management should maximize space and timely delivery to avoid staying off production and closely monitor and manipulate their inventory system to maintain production consistency for organizational profitability and effectiveness.
- Nigeria manufacturing firms should not take the issues of inventory management lightly because it has the power to make or mar the future of the organization liquidity position.
Contribution to knowledge
The study has contributed to body of literature by providing empirical evidence on appraisal of inventory management and control in manufacturing firms using the following variables Effective management tool, Inventory management, Profitability and Productivity. In line with this, it has to a very large extent achieved the following objectives: effectiveness of the various tools and techniques used by manufacturing firms in inventory management; significant consequences of inefficient inventory management on the productivity of manufacturing firms in Nigeria and extents to which inventory control contribute to profitability in manufacturing firms.
Suggestion(s) for Further Studies
The study established the fact that inventory management and control is essential for smooth and effective running of manufacturing firms in Nigeria. The implication is that it is a vital tool in improving asset productivity and inventory turns, targeting customers and positioning products in diverse markets, enhancing intra and inter-organizational networks, enriching technological capabilities to produce quality products thereby imparting effectiveness in inter-firm relationships. Proper inventory management even results in enhancing competitive ability and market share of small manufacturing units. It is based on this that this study suggest that other research should take up the responsibility to broaden the scope of this study by looking at the effect of inventory valuation management on manufacturing firm performance which this study is limited to as the findings in this study might not be generalized to other firms. Other sub variables such as risk management, tax written off and cost of borrowing (Inventory valuation management) and profitability, productivity and sales (firm performance).
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