THE EFFECT OF INVENTORY MANAGEMENT AND CONTROL ON THE PROFIT PERFORMANCE OF SELECTED MANUFACTURING COMPANIES IN RIVERS STATE
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THE EFFECT OF INVENTORY MANAGEMENT AND CONTROL ON THE PROFIT PERFORMANCE OF SELECTED MANUFACTURING COMPANIES IN RIVERS STATE
This study investigated the effect of the various inventory management and control methods on the profit performance of selected manufacturing companies in River State. Questionnaire and personal interviews were used in the collection of data. However, ten (10) manufacturing companies out of a population of fifty (50) registered with manufacturing association of Nigeria (MAN) Rivers State Brach were selected. One hundred and twenty (120) respondents from the ten (10) companies (that is, twelve (12) respondents for each of the companies were studied. The data collected were analyzed using the Spearman’s Rank order correlation Coefficient and Kruskal-Walls Rank Test (k). The findings indicated that inventory management and control and organizational effectiveness have a significant relationship. Also, inventory management/control factors (storage cost, carrying cost and ordering cost) and profit performance have a significant relationship. Furthermore, the differences in profit performance between manufacturing companies that sue the traditional inventory methods have a significant relationship. Consequently, it was recommended among others that the application of a consistent modern inventory method and good inventory management and control will help the companies to report high and consistent inventory method, will help manufacturing companies adequately the problems associated with bad inventory practices, as well as create and or boost their profit performance.
TABLE OF CONTENTS
Title Page i
Table of Contents vii
CHAPTER ONE: INTRODUCTION
1.1 overview of the study 1
1.2 statement of the problem 5
1.3 purpose/objectives of the study 6
1.4 research questions 7
1.5 research hypothesis 8
1.6 significance of the study 8
1.7 limitation of the study 8
1.8 definition of terms 9
2.1 introduction 12
2.2 historical sketch of inventory problems 13
2.3 Classification of inventory 15
2.4 reasons for holding inventory 16
2.5 inventory management 18
2.6 lot sizing techniques 32
2.7 inventory control techniques 37
2.8 inventory valuation method 46
2.9 summary 51
3.1 Introduction 53
3.2 research design 53
3.3 population of the study 43
3.4 sampling procedure and sample size determination 54
3.5 data collection methods 55
3.6 operational measures of the variables 56
3.7 data analysis techniques 57
4.1 Introduction 60
4.2 presentation of the research data 61
4.3 data analysis and interpretation of result 62
4.4 decision on hypotheses 74
5.1 Introduction 78
5.2 discussion on findings 78
5.3 conclusion 80
5.4 recommendations 81
1.1 OVERVIEW OF THE STUDY
Inventory management and control have become issue of serious concern in manufacturing organizations especially in the present economic dispensation. The relevance of inventory management and control in organizational performance cannot be overemphasized since they have direct impact on reported profits of organizations.
Inventory constitutes a greater percentage of the current assets groups, and in relation to other assets, it forms a good proportion of total assets in manufacturing companies. Over the years many organizations have not realized this important fact.
Consequently, adequate internal control measures seem not be given to inventory. Therefore, a lot of pilferage, damage to stock, obsolescence, stock outs, etc occurs which can be traceable to the absence or non-functionality of proper inventory management and control measures in the system.
Inventories according to Pandey (2004:884) are “stock of the product a company is manufacturing for sale and components that make up the product”. The various forms in which inventories exist in a manufacturing company are:
Raw materials, work in process and finished goods. Horngren (2000:712) defines inventory management as “the planning, coordinating and controlling activities related to the flow of inventory into, through and form the organization,”
While inventory control involves the procurement, care and disposition of materials. (Counsellors to American ‘s small business, internet).
It could be deduced from the foregoing definitions that profit performance of any manufacturing firm is largely dependent on the efficient management and control of the firm’s inventory.
In the context of inventory management, Pandey has summarized the objective of inventory management as follows:
i. To maintain a large size of inventory for efficient and smooth production and sales operations.
ii. To maintain a minimum investment on inventories to maximize profitability.
Also counselor, to America’s small business has summarized the reasons for inventory control as follows:
i. Helps balance the stock as to value, size, color, style, and price line proportion to demand or sales trends.
ii. Helps secure the best rate of stock turnover for each item
iii. Helps reduce expenses and markdowns.
iv. Helps maintain a business reputation for always having new, fresh merchandise in wanted sizes and colors.
Both excessive and inadequate inventories are not desirable as either of the conditions affect reported profits. These are two danger points within which the firm operates. The objective of the inventory management should be to determine and maintain optimum level of inventory investment. The optimum level of inventory will no doubt lie between the two danger points of excessive and inadequate inventories.
Some manufacturing firms very often than not found themselves in a situation of over investment or under investment in inventories. The major dangers of over investment according to Pandey (2004:886) are;
i. Unnecessary tie up of the firms funds and loss of public
ii. Excessive carrying costs
iii. Risk of liquidity
The excessive level of inventories consumes funds of the firm, which cannot be used for any other purpose, and thus, it involves an opportunity cost.
The carrying costs such as the cost of storage, handling, insurance, recording and inspection, also increase in proportion to the volume of inventory. These costs affect the firm’s profitability further.
On the other hand, maintaining an inadequate level of inventories is also dangerous. The consequences according to Pandey (2004:887) are:
1. Production hold-ups and
2. Failure to meet delivery commitments
Inadequate raw materials and work in progress inventories will result in frequent production interruptions. Similarly, if finished goods inventories are not sufficient to meet the demand of customers, regularly, they may shift to other competitors, which will amount to a permanent loss to the firm.
Therefore, an effective inventory management should:
1. Ensure a continuous supply of raw materials to facilitate uninterrupted production.
2. Maintain sufficient stocks of raw materials in periods of short supply and anticipate price change.
3. Maintain sufficient finished goods inventory for smooth sales operation, and efficient customer service.
4. Minimize the carrying cost and time and
5. Control investment in inventories and keep it at an optimum level.
A critical examination of the above points brings to focus the concept of Economic Order Quantity (EOQ), that is, the quantity which minimizes total ordering and carrying costs.
It must however be pointed out here that though the economic order quantity minimizes ordering and carrying costs, it does not emphasizes on zero inventory, that is, the elimination of waste which is defined as anything that does not add value to a product.
The lead or cycle time involved in manufacturing and selling a product consists of:
i. Process time;
ii. Inspection time;
iii. Queue time; and
iv. Storage time
The Economic Order Quantity still has costs associated among others to inspection activities (time) and storage activities (time) which affects reported profits. Hence, the need for other inventory management methods that will enhance the profit performance of manufacturing companies, like Just In Time, Total Quantity management and ABC methods upon which this study will dwell.
1.2 STATEMENT OF THE PROBLEM
Over the years, the profit performance of some manufacturing company has been very poor due to lack of adequate attention and control on inventory. Attention seems to be focused more on cash and bank balance than on inventory. Consequently, this seldom results in the alarming rate in which some of these manufacturing companies wind up shortly after commencement, and some that are operating, do so inefficiently.
This poor profit performance due to inefficient management of inventories in manufacturing companies that adversely affect reported profits many be traceable to some of the following:
1. High cost of ordering and carrying cost of inventories under emergency situations.
2. High cost of storage/holding cost of inventory
3. Too much inventories held in store at year end due to absence of stock levels.
4. Inadequacy of inventory needed for production/distributions.
5. Non availability of inventory (raw materials) when needed for production.
6. Delay in replenishment of inventories.
This work seeks to address these problems enumerated above, with a view of proffering solutions that will go a long way in improving the profit performance of manufacturing companies in Port Harcourt, Rivers State, and Nigeria in general.
1.3 PURPOSE/ OBJECTIVES OF THE STUDY
The main purpose of this study is to evaluate the effect of inventory management and control on the profit performance of selected manufacturing companies in Rivers State.
The specific objectives of this research work include:
1. To determine the extent to which inventory management/ control enhances profit performance in the manufacturing firms in Rivers State.
2. To determine the extent these major factors (storage cost, carrying cost and ordering cost) influence profit performance in the manufacturing firms in Rivers State.
3. To determine the extent of differences in profit performance between manufacturing firms that use the traditional inventory methods and the ones that use modern method in Rivers State.
4. To determine the extent to which inventory management/control is used by manufacturing firms in Rivers State.
5. To determine the constraints and effectiveness in inventory management/ control among manufacturing firms in Rivers State.
1.4 RESEARCH QUESTIONS
In research study, the following questions were posed and answered:
1. To what extent does inventory management/control enhance profit performance of manufacturing firms in Rivers State?
2. To what extent does this major factor (storage cost, carrying cost and ordering cost) militate against profit performance of manufacturing firms in Rivers State?
3. Is there any difference in profit performance between manufacturing firms that use the traditional inventory methods and the ones that use the modern methods in Rivers State?
4. To what extent do the manufacturing firms in rivers state apply inventory management/control?
5. To what extent is inventory management/control effective in the manufacturing firms in Rivers State?
6. What are the major constraints in the application of inventory management/control among manufacturing firms Rivers State?
1.5 RESEARCH HYPOTHESES
The following hypotheses will be tested in the course of the study:
1. There is no significant relationship between inventory management/control and organizational effectiveness in manufacturing firms in Rivers State.
2. There is no significant relationship between these major factors (storage, cost, carrying cost and ordering cost) and profit performance in manufacturing firms in Rivers State.
3. There is no significant difference in profit performance between manufacturing firms that use the traditional inventory methods and the ones that uses the modern methods in Rivers State.
1.6 SIGNIFICANCE OF THE STUDY
This study will be relevant to the following
1. Management of manufacturing companies for planning.
2. It will also be useful to the government for planning and policy making.
3. It will be useful to students, scholars in business schools.
4. It will also be useful to employees/workers of manufacturing companies.
1.7 LIMITATION OF THE STUDY
Some of the limitations of this study include amongst others:
a. Scope and attitude of respondents
b. Time frame
c. Meager financial resources.
This study is limited to the scope it covers and the poor attitude of the respondents in disclosing relevant data for the study for fear of being linked to such information disclosures which might cause loss of employment.
Secondly, the time frame within which this study is expected to be concluded is too short and could not encourage the extension of the study to all the manufacturing companies in Port Harcourt, Rivers State.
Another constraint is the meager financial resources of the researcher which is contested for, by other needs in competition with cost of financing this research the way it should have been. This was of great burden, and as such finance as a constraint could not be ignored.
Again, all the questionnaires were not returned in their numbers, and this will affect the reliability of the data so generated for the study.
1.8 DEFINITION OF TERMS INVENTORY
This refers to items of value held for use or sales by an enterprise and usually comprises raw materials and supplies used in production work in progress and finished goods.
A management action taken to ensure conformity with plan for attainment of organizational objectives.
These are items of value held for use or sale by an enterprise and usually comprise finished goods. It is also referred to as inventory.
This is a term used to refer to the unavailability of finished goods on store when demanded by customers or raw materials when needed by the production department for continuous or increased production to meet up with customers’ demands.
This refers to more items of stock held in store than is economically justifiable.
This is the time lapse between placing an order and receiving the ordered goods i.e. replenishment the goods.
Just In Time (JIT)
This is a manufacturing method which satisfied the management objective of responding adequately and meeting of the customers’ requirements of a firms product, in a competitive market environment; just exactly as at when necessary and needed. It is also a system which aims to co-ordinate the supply of materials so that they arrive just when they are needed, not before and afterwards, but in time.
Total Quality Management
Is the process of involving and integrating all employees in a total quality management strategy aimed at enhancing organizational performance and the customer’s requirements (satisfaction) which must be achieved at minimum cost.