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INVENTORY MANAGEMENT AND CONTROL POLICIES IN NIGERIAN ENTERPRISES
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUNDTO THE STUDY
Inventory plays a significant role in the growth and survival of an organization in the sense that ineffective and inefficient management of inventory will mean that the organization loses customers and sales will decline. Prudent management of inventory reduces depreciation, pilferage, and wastages while ensuring availability of the materials 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, effectiveness and distorted functionality (Koin, et al., 2014). A business, whether small, medium or large, is set to make profit. For profit making objective to be achieved, efforts are usually geared towards revenue maximization and cost minimization.
Overstocking and under-stocking of inventory are two of the problems affecting cost of manufacturing. There is overstocking when the quantity of materials or finished goods stored is too much, leading to high cost of storage and the possibility of part of inventory stored getting spoiled before the time of usage. There is under/stocking when the quantity of inventory stored is not enough to cope with the rate of usage which usually lead to unexpected production stoppages and idle time on the part of factory workers. Previous studies such as Adamu (2016), Ogbo and Ukpere (2014), Takim (2014) and so on, have related inventory management practices with various aspects of organizational performance such as financial and economic performance, and most of these studies have focused on external inventory management practices. In addition, most studies that attempted to focus on operational performance concentrated on solvency and operating performance of firms based in Kenya and India such as Kamau and Kagiri (2015), Oballah, Waiganjo and Wachiuri (2015), and Shafi (2014).
Very limited studies have been carried out on internal inventory management practices. It is therefore evident that knowledge gap exists on the specific relationship between internal inventory management practices and operational performance. This study intends to bridge this gap by determining the relationship between internal inventory management practices and operational performance of selected companies in Nigeria.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 consumer 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 effective inventory management goes a long way in successful running and survival of a business firm, when organizations fail to manage their inventory effectively they are bound to experience, stock out, the decline in productivity and profitability, customer dissatisfaction.
Every management problem is a decision problem. Decision is an important task that all organizations have to take. The allocation of resource is a common issue to all organizations. Organizations have to acquire, allocate and control the factors of production which are necessary for the achievement of the business objectives. Inventory management as one of the key activities of business logistics, has always been a major preoccupation for a company’s survival and growth (Siyanbola, 2014). The principal goal of inventory management involves having to balance the conflicting economics of not wanting to hold too much stock. Thereby having to tie up capital so as to guide against the incurring of costs, such as storage, spoilage, pilferage and obsolescence and, the desire to make items or goods available when and where required (quality and quantity wise) so as to avert the cost of not meeting such requirement (Cannon, 2008). Inventory management in an organization deals with identifying every item of stock. 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 (Cannon, 2008). Effective inventory management determined how profit of an organization can be maximized. Maximizing of profit depend on minimizing cost and maximizing revenue. Maximization is an efficient concept which requires increasing profit without increasing the resources used (Stierwald, 2010). Hence, the study tends to examine the inventory management and control policies in Nigerian enterprises.
1.2 Statement of the Problem
Letinka and Lee (2000) observe that difficulties with inventory heightened as a result of the industrial revolution together with improvement in technology which encouraged mass production faster and with improvement in quality of products. Colling (1990) observes that in the advanced countries such as America and other European countries, advancement in production was attained by cutting down manpower need per unit of output. Soaring manpower requirement was reasonable in order to produce per unit of output. Besides, it is observed that big production companies, such as the American Automobile Assemblers, procure more or less 60 per cent worth of materials it uses to produce its merchandise. What it means is that effective inventory is a sine qua non for output enhancement. In such a firm as the American Automobile Assemblers, poor inventory procurement could lead to shut down of operations. Mid 1980s, Japanese companies applied Just-In-Time (JIT) inventory model in their companies and they received a boost in terms of quality and quantity of goods and services. The fundamental objectives of businesses after industrial revolution were effectiveness and production of goods in large quantity coupled with enhanced satisfactory customer’s knowledge at the point of purchase. A group of experts in Harvard University in 1930s developed punch card for efficient stocks control. In the late 1940s and early 1950s, researchers fashioned the prototype of the contemporary bar coding device as they got to know vendors wanted an improved platform. In this case, ‘ultraviolet light-sensitive ink and readers’ are applied in making marks on materials for sale. The system was deficient in computation capacity necessary to ensure it worked; again it was burdensome.
Any enterprise wishing to exercise maximum control of its material recourses is always confronted with problem of lack of precision in stock valuation and accounting procedures. This does not mean a lack of precision in actually counting the number of items in stock. In virtually all medium scale business, errors in checking the quality of material in stock is very common. There will be human errors unless everything is doubt checked and the cost of doing this is often not worthwhile for items of small value. Then there will be defects in such aids to checking quantities as weighing machine or liquids measures, even though the margin of error may be very small. The real lack of precision exists in giving one indisputable value to the total quantity of stock.
Quite often than not, these common errors and lack of precision in material accounting influences the ascertainment of total material stock available to an organization and require for production process. It is against the background therefore that the study is conducted to examine the type of inventory management and control policies that are adopted by the surveyed medium – scale enterprise to facilitate effective material resource management towards the attainment of organization goals and objectives.
1.3 OBJECTIVES OF THE STUDY
The objective of this study embraces the following:
. To assess the fundamental techniques of inventory management and control policies in manufacturing establishment in the state.
. To examine how effective the techniques adopted by these establishments have been in ensuring optimal inventory cost
. To ascertain the problems that confronts proper inventory management and control in medium scale enterprises in the state.
. To proffer recommendations for effective inventory management and control in medium scale enterprises.
1.3 RESEARCH QUESTIONS
What are the techniques of inventory management and control policies used by your establishment? To what extent can you say that the techniques used by your establishments have been cost effective / optimal? What are the problems of inventory management and control policies that confront your organization? What recommendation are available towards enhancing effective inventory management and control in medium scale enterprises?
1.4 STATEMENT OF HYPOTHESES
HO: There is no significant effect of inventory management and control policies on the performance of medium scale manufacturing establishments in the state.
HI: There is significant effect of inventory and control policies on the performance of medium scale manufacturing establishment in the state
HO: The policies or techniques adopted by these establishments have not been cost effective in meeting organizational goals.
HI: The technique adopted by these establishments have been cost effective in meeting organizational goals.
1.5 SIGNIFICANCE OF THE STUDY
It is hope that the research will provide a yardstick for measuring the firm’s performance, productivity and effectiveness. This will be possible when the firm will appreciate the level of inventory that will minimize excessive tying up of working capital in form of inventory and balance this cost with a possible stock out cost. Also, this study will add to the existing stock of literature on this field. In addition, this study will be useful to students of territory institution wishing to carryout further research in related topic in the future. Moreover, it will provide a guide to management practitioners in the private and public sectors of the economy in their drive to exercise proper inventory management and control policies that would enhance effective and efficient material and non-material management towards the attainment of predetermined goals and objectives.
1.6 SCOPE AND LIMITATION OF THE STUDY
This work is designed to assess inventory management and control policies in Nigeria enterprise. A case study of selected medium scale enterprises in Uyo. the medium scale enterprises in Uyo under reference include Plasto Crown Nigeria Limited, Akwa Feeds Limited, Champion Breweries. Le Meridian Hotel and Golf Resort and Mr. Biggs. The scope of this study would have been extended but for financial and time constraints. It is not worthy that the scope of inventory management cannot be discussed exhaustively in a hurry. Hence this research does not claim to have covered all nitty gritty of the subject matter. In the same vein, there is no claim that this piece of work contained hundred percent (100%) quality presentations on inventory management and policies in medium scale enterprises. This is due to the possibility of noticing obvious data collection problem, which may affect the quality of this work positively or negatively.
1.7 DEFINITION OF TERMS
Leader Procurement Time: This is the period expressed in days, weeks and months between orderly and replenishment, is when the goods and available for use.
Economic order Quantity: This is a calculated ordering quantity which minimize the balance of costs between inventory holding costs and re-order costs
Physical Stock: This is the number of items physically in stock at a given time.
Free Stock: This is the physical stock plus outstanding replenishment order minus unfulfilled requirements.
Buffer Stock or minimum Stock: This is the amount of inventory or stock kept to the any delay in delivery time or to satisfy any increased demand during lead-time.
Maximum Stock: A stock level selected as the maximum desirable which is used as an indicator to show when stocks, have risen too high.
Re-Order Level: This level of stock at which a further replenishment order should be placed. The reorder independent upon the lead time and the demand during the lead time.
Re-Order Quantity: The quantity of the replenishment order or this is the level of inventory at the quantity of items ordered at a time.
