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Full Project – IMPACT OF INVENTORY MANAGEMENT SYSTEM ON ORGANIZATION PERFORMANCE

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CHAPTER ONE

INTRODUCTION

1.0 Background to the Study

Inventory management is a critical management issue for most companies-large companies, medium-sized companies, and small companies. Impactive inventory flow management in supply chains is one of the key factors for success. The challenge in managing inventory is to balance the supply of inventory with the demand of the products which the inventory is used to produce. A company would ideally want to have enough inventories to satisfy the demands of its customers so as not to experience lost sales due to inventory stock-out. On the other hand, the company does not want to have too much inventory staying on hand because of the cost of carrying inventory. Enough but not too much is the ultimate objective of inventory management. The role of inventory management is to ensure faster inventory turnover which results in greater sales.

Inventory management is necessary at different locations within an organization or within multiple locations of a supply chain, to prevent companies from running out of materials or goods. Adequate inventories kept in manufacturing companies will smooth the production process. The wholesalers and retailers can offer good customer services and gain good public image by holding sufficient inventories. The basic objective of inventory management is to achieve a balance between the low inventory and high

as at when required (Ogbadu, 2009).

Inventory management is critical to an organization’s success in today’s competitive and dynamic market. This entails a reduction in the cost of holding stocks by maintaining just enough inventories, in the right place and the right time and cost to make the right amount of needed products. High levels of inventory held in stock affect adversely the procurement performance out of the capital being held which affects cash flow leading to reduced efficiency, impactiveness and distorted functionality (Koin, Cheruiyot , and Mwangangi, 2014)

An efficient and impactive inventory control policy is always an improvement requirement for the successful management of manufacturing companies. Usually, such policy depends on the type, size and technique to be adopted. Perhaps, the level of profitability of a firm depends solely on the efficient and impactive policy (Adeniyi, 2014).

Manufacturing companies are the major tangible value adding economic units of any society. Many of these companies however started as retailing units or intangible services providers and eventually accommodated a backward integration with an end to controlling inventories for a better efficiency and profitability. Among the challenges they face are stock or inventory management of which raw materials are said to be the largest components. But there is a cost to holding inventories. Interest is lost on the money that is tied up in inventories, storage must be paid for, and often there is spoilage and deterioration. Therefore production managers try to strike a sensible balance between the costs of holding too little inventory and those of holding too much.

Asaolu and Nasal (2012), state that the principle requirement is that “stock levels should be optimal, that is, neither too large nor too small and that we should be aware, in general terms, of the penalties for a business lying divergence from the optimum”. While the trade-off between the benefits and cost of liquidity is one essential part of cash management, the other part is making sure that raw materials are readily available in the right quantities as quick as possible and that is the role of inventory management. Cash is just another raw material that you require to carry on production. An efficient working capital management policy means that financial manager should equally keep an eye on the amount of cash he is keeping just as production manager does on the stock of inventories he is holding to maintain steady uninterrupted operations. Conversel

rials (work-in- progress) and finished goods so that adequate supplies are available and the costs of over or under stocks are low. It is one of the important key aspects of business logistics. Because of its role in manufacturing organizations, Lewis, (2011) identifies it as one of the most important instruments of logistics planning and control. On a similar projection, Wood (2009) are of the opinion that inventory typically represents the second largest component of logistics next to transportation and according to Adeniyi (2014), inventory is a significant asset in most organizations. Its impactive management therefore is a key task within the auspices of operations.

Similarly, Lewis (2011) views inventory control as the means by which materials of the correct quantity and quality is made available as at when required with due regard to economy in terms of storage and costs (both ordering and working Capital). The optimal management of inventories is therefore a primary objective for all firms manufacturing and stocking finished goods in the considerations of the market dynamics.

Inventories constitutes the most significant sizeable proportion of a manufacturing company’s current asset. On average, inventories are approximately 60% of current assets in private and public manufacturing companies in Nigeria. State

However, Olowe (2012) defined inventory control as “science based act of controlling few amount of Inventory held in various form within business to meet economically the demanded placed upon that business”. Therefore impactive inventory control will act as a tool for improving the performance of manufacturing industries. Today, only few companies can boast of surplus liquidity of capital and most of them need to take great care to remain solvent. It is therefore important to keep cost to required minimum in order to be able to boast of profitability and have successful business operation. Finally, inventory control will enable the manufacturer to be aware of the quantity of each kind of merchandise on hand, it will also guide the manufacturer on what, when and how much to buy each size and brand.

1.1 Statement of the Problems

Inventory is a vital part of current assets mainly in manufacturing concerns. Huge funds are committed to inventories as to ensure smooth flow of production and to meet customer demand. However, maintaining inventory also involves holding or carrying costs along with opportunity cost. Inventory management, therefore, plays a crucial role in balancing the benefits and disadvantages associated with holding inventory. Efficient and impactive inventory management goes a long way in successful running and survival of a business firm. When organizations fail to manage their inventory impactively, they are bound to experience stock out, the decline in productivity and profitability, and customer dissatisfaction (Wood 2009). The impact of inventory management on profit analysis of a business cannot be over-emphasized because different components of inventory contribute differently to performance. As a result of various legislations of government lot of restrictions has been placed on importation. This therefore increase the cost of goods made from imported materials. To this end, it has been noticed that: The determination of Economic order quantity (EOQ) may be difficult due to the impacts of the uncontrollable environment factors.

Most organisations face problems of over Inventorying of inventory or problems of under Inventorying of inventory due to undecided policy of their inventory management decisions. The determination of appropriate inventory control system and method of valuation may be difficult due to inflation and prevailing economic recession (Adeniyi, 2014). Therefore, failure to provide edge against inflation and deflation will arise. As such, cost of production tends to be undervalued and profit overstated or production cost overvalued and profit understated. Thus the study seeks to investigate the impact of inventory management on the performance of the manufacturing firm.

1.2 Objectives of the Study

The specific objectives were to

To ascertain the extent at which inventory management affects organization performance
To determine the relative contribution of each components of inventory to performance

1.3 Research Questions

With the above objectives in focus, the study seeks to find answers to the following questions

To what extent does inventory management affect organization performance?
What is the relative contribution/impact of the components of inventory to performance?

1.4 Research Hypotheses

H₀: Inventory management does not significantly affect organization performance

H₁: Inventory management significantly affects organization performance.

H₀: Components of inventory contribute relatively to the performance of manufacturing company

H₁: No component of inventory contributes differently to the performance of manufacturing company.

1.5 Scope of the Study

This research mainly focuses on the impact of inventory management system on organization performance. The company of study is chosen from Nigerian Stock Exchange listed and quoted companies, which is Dangote Groups of Company Limited, Apapa, Lagos. It seeks to evaluate the impactiveness of inventory management system of consumer goods producing companies.

1.6 Significance of the Study

The outcome of the study will assist the store manager in the arrangement of the stores, movement of inventories and records keeping and in the maintenance of adequate inventory level to avoid too much of inventory and / or too little that lead to stock out situation. It will also assist the organization in developing its policy on inventory control system and procedure. This research is to know how inventory contribute impactively to the performance of companies. It will also highlight the benefits and problems associated with the management of inventory to the following parties:

To manufacturing company: It will enable the company to evaluate its efforts with regards to stock control and maintaining production capacity and profitability.
To reader: To give researchers better understanding of the importance and relevance of good inventory management to the success of operation.
To general public: To create awareness to the general public on the importance of inventory to the overall performance of an organization in terms of quality product.

1.7 Definition of Terms

Inventory: This refers to the stock on hand at a particular time comprising raw materials, goods in the process of manufacturing and finished goods.

Inventory management: This refers to the activities involved in planning and controlling of inventory cost at its minimum.

Re-order level: This is the level of inventory at which order must be placed such that stock level would not exceed the maximum level or fall below minimum during the lead time.

Carrying cost/Holding cost: This is the cost which a firm actually incurs for carrying the inventory. It includes interest on capital, storage cost and allowance for spoilage.

Ordering cost: This include the managerial, clerics material, transportation and receiving costs associated with a purchase or production order.

Purchase/Item cost: This represents the selling price of a unit of stock.

Economic order quantity: This is the quantity per order to fulfill annual demand and leave total inventory costs at its minimum. It is the quantity level at which total carrying cost equate total ordering cost.

Maximum stock level: The maximum stock is the upper level of the inventory and the quantity that must not be exceeded.

Minimum stock level: This is the stock level to which the inventory should be allowed to remain.

Stock out cost: It is the stock level necessary to cater for a given rise of stock out.

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