THE IMPACT OF INVENTORY MANAGEMENT AND CONTROL ON PERFORMANCE

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.