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
ABSTRACT
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
Declaration ii
Certification iii
Dedication iv
Abstract v
Acknowledgement vi
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
CHAPTER
TWO
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
CHAPTER
THREE
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
CHAPTER
FOUR
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
CHAPTER
FIVE
5.1 Introduction 78
5.2 discussion
on findings 78
5.3 conclusion 80
5.4 recommendations
81
Bibliography 83
Appendix
CHAPTER ONE
INTRODUCTION
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.
Control
A
management action taken to ensure conformity with plan for attainment of
organizational objectives.
Stocks
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.
Stock Out
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.
Excessive Stock
This
refers to more items of stock held in store than is economically justifiable.
Lead Time
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.
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