Appraisal Of Inventory Control In A Manufacturing Company (A Case Study Of Seven Up – Bottling Company)

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Appraisal Of Inventory Control In A Manufacturing Company (A Case Study Of Seven Up – Bottling Company)


Abstract


This research work examined the appraisal of inventory control in a manufacturing company of a case study m seven¬-bottling company PLC, Lagos.

The finding after questionnaire were administered to the staff of seven up- bottling company PLC specifically accounts and warehousing department, showed that effective inventory control would not minimize total inventory costs in a manufacturing company and high inventory costs would not lead to a reduction in the profit of a manufacturing company.

However, solution and recommendations were proffered to the above identified problems to ensure a proper appraisal of inventory control in a manufacturing company in seven up-bottling company PLC, Lagos.


Table of Contents


Chapter One

1.0 Introduction

  • 1.0 Introduction
  • 1.1 Background to the Study
  • 1.2 Statement of Problem
  • 1.3 Objectives of the Study
  • 1.4 Research Questions
  • 1.5 Statement of Research Hypothesis
  • 1.6 Significance of the Study
  • 1.7 Scope of the Limitations of the study
  • 1.8 Historical Background of Seven-up Bottling Company
  • 1.9 Definition of Key Terms

Chapter Two

Literature Review

  • 2.0 Introduction
  • 2.1 Meaning of Inventory Management
  • 2.1 Control
  • 2.2 Inventory Record Keeping Procedures
  • 2.2.1 Bin Card
  • 2.2.2 Materials Requisition Note
  • 2.2.3 Materials Returned Note
  • 2.2.4 Materials TransferNote
  • 2.3 Inventory Control Method
  • 2.3.1 Perpetual Inventory Method
  • 2.3.2 Periodic Inventory Method
  • 2.3.3 Physical Inspection Inventory
  • 2.3.4 Just-In-Time (JIT)
  • 2.4 Inventory Costs
  • 2.4.1 Holding Costs
  • 2.4.2 Ordering Costs
  • 2.4.3 Stock-Out Cost
  • 2.4.4 Purchase Costs
  • 2.5 Control of Stocks Levels
  • 2.5.1 Maximum Stock Level
  • 2.6.2 Minimum Stock Level
  • 2.6.3 Re-order Level
  • 2.6 Control Models
  • 2.7.1.1 Economic Order Quantity (EOQ)
  • 2.7 Economic Order Quantity
  • 2.8 Analysis of Inventory Control System in Seven-up Bottling Company PLC.
  • 2.8.1 Ordering Procedure
  • 2.8.2 Receipt Procedure
  • 2.8.3 Recording Procedure
  • 2.8.4 Material Issues
  • 2.8.5 Materials Returns
  • 2.8.6 Stock Taking

Chapter Three

Research Methodology

  • 3.0 Introduction
  • 3.1 Research Approach
  • 3.2 Research Design
  • 3.3 Restatement of Research Questions
  • 3.4 Statement of Research Hypothesis
  • 3.5 Population of Study
  • 3.6 Sampling Techniques
  • 3.7 Sample Size
  • 3.8 Method of Data Collection
  • 3.8.1 Question Design
  • 3.9 Data Analysis Techniques
  • 3.9.1 Chi-Square
  • 3.9.2 Sample Percentage
  • 3.10 Limitation of Methodology

Chapter Four

Data Presentation and Analysis

  • 4.0 Introduction
  • 4.1 Presentation and Analysis of Data
  • 4.1.2 Table
  • 4.1.3 Table
  • 4.2 Inventory Cost Reduction
  • 4.2.1 Table
  • 4.2.3 Table
  • 4.2.4 Table
  • 4.3.1 Table
  • 4.3.2 Table
  • 4.4 Testing of Hypothesis
  • 4.4.1 Chi-Square (x2) Method
  • 4.4.1.1 Hypotheses Indicating Relevant Question in Questionnaire
  • 4.5 Contingency Co-efficient
  • 4.6 Research Finding

Chapter Five

Summary, Conclusion and Recommendations

  • 5.1 Summary
  • 5.2 Conclusion
  • 5.2 Recommendations
  • 5.2 Bibliography
  • 5.2 Questionnaire

Chapter One


Introduction

1.1 Background of the Study

In the real sense of economic development, the efficiency and effectiveness of a nation’s economy rests viably on its ability to meet with the demands of the populace of such an economy.

In order words, the effectiveness of an economic is vested on the manufacturing sector. This is because, the indices by which the development and progress of an economy is measured is predicated on the goods and services so produced by the out fits in such a sector which could either be consumed locally or be exported for exchange of foreign currency.

Furthermore, the distinguishing factor between productive and unproductive economies lies in the production capacity in relation to the importation capacity which directly affects the economy. However, the afore-mentioned positive outcomes/results are based on the” effective management of the manufacturing industry in terms of its capital (Financial resources) ,inventory, labour (Human resources) among other things, so as not to bring about negative results such as costs resulting from overstocking, loss resulting from capital tied down and loss goodwill as a result of stock outages.


1.2 Statement of the Problem

Inventory plays an essential role in any organization. The larger the inventory size, the easier it is to reduce costs of purchasing, manufacturing and shipping as well as provide prompts customer’s service. However, a larger inventory stock requires a higher investment of money, higher carrying cost such as storage handling risk of obsolescence and data processing. These costs must be balanced off against any advantages in holding inventory.

The study tends to look at certain problematic issues in manufacturing companies as Seven- Up Bottling Plc it relates to inventory management. Such issues are:

  1. Stock are managed, that the level of stock held are neither more than nor less than requirement for a given season.
  2. Most companies fail to appreciate the role inventory management plays in the survival of their business.
  3. Accurate information on the cost of stock is necessary for management control of working capital requirement.

1.3 Objectives of the Study

The main objective of this study is to conduct appraisal of inventory control in a manufacturing company.

Specifically, the study intends to:

  1. Present inventory control system in the selected company.
  2. iExamine the checks and balances in the inventory control system.
  3. Determine the effects of the organization’s inventory control system on the operating expenses and profit levels of the organization.
  4. Ascertain the effectiveness and efficiency of the organization’s inventory control system.
  5. Make suggestions for improvement to bring about further enhancement of efficiency in the company’s inventory so as to improve the overall performance.

1.4 Research Questions

  1. Will effective inventory control minimize total inventory cost in a manufacturing company?
  2. Will high inventory control lead to reduction in the profit of manufacturing company?
  3. Will effective inventory control prevent frequent stock out in a manufacturing company?
  4. What are the sources and quality of raw materials that are available to sevenup Bottling Company PIc?
  5. How long does it take to procure the raw materials?
  6. What storage techniques do the organizations use in storing their raw materials?
  7. Identify the inventory management practices and policies that are being used by the organization?
  8. What are the inventory management problems of the organization?

1.5 Statement of Research Hypothesis

For the purpose of this study, the hypotheses available are as follows;

  1. Ho: Effective inventory control would not minimize total inventory cost in a manufacturing company.
    Hi: Effective inventory control would minimize total inventory cost in a manufacturing company.
  2. Ho: High inventory cost would not lead to a reduction in the profit of a manufacturing company.
    Hi: High inventory cost would lead to a reduction in the profit of a manufacturing company.

1.6 Significance of the Study

Inventory is an essential tool in any manufacturing organization. It constitutes a large proportion of the total operating cost and has direct effect on operational smoothness and profit level of an organization.

It is hoped that, this study would provide useful information that will enhance management ability to carry adequate inventory at a minimized cost.

Also, it will serve as a reference point for future researchers who wish to probe further into efficient management of inventory in the manufacturing sector of the economy.


1.7 Scope and the Limitations of the Study

This research intends to cover various processes involved in controlling and managing inventory in Seven-Up Bottling Company.


1.8 Historical Background of Seven-Up Botting Company Nig. Plc

Seven-Up Bottling Company Nig. Plc was incorporated as a private limited liability company on the 25th day of June, 1959 the company was until 1979 wholly owned by the El-khail family. It was converted to a public limited liability company on the 27th of December, 1978 and listed on the main board of the Nigerian Stock Exchange in 1985.

The El-Khail was franchise for Nigeria by Seven-Up International Plc, under which it is entitled to bottle and market Seven-Up (7-up), the world’s leading lime and lemon soft drink. In its attempts to widen its product range, the company obtained franchise for Nigeria in 1966 from crush international (USA) Inc; under which it is entitled to bottle and market all “crush” flavor predominantly “orange crush”. The franchise was however sold to Nigerian Breweries PIc in 1995.

In its bid to achieve a “Mega Bottler” status the company further acquired three franchise for Nigeria in 1989 from Pepsi-Cola International under which it is entitled to bottle and market Pepsi (Cola flavor), Mirinda (Orange flavor) and Teem (Lemonade flavor).

The company was launched in 1st of October, 1960, the day Nigeria obtained her independence. The first bottle of 7 -up was rolled out at Ijorathe same day.

In order to ensure availability of its product throughout the nation, six additional plants were established at Ibadan in 1980, Kano in 1985, Kaduna in 1988, Aba in 1989, Ilorin in 1989 and Benin in 1993.

Ijora plant was however relocated to Ikeja in 1981 because of the down turn in the economy arising from political and economic crisis, theIlorin and Benin plants were closed down in 1994. Benin plant was later re-opened in 1986. Apart from the plants, a large network of depot was spread all over the country to ensure constant supply of brands all over the country. At present, the company has thirty two depots.

The company under the management of Faysal El-Khalil in an attempt to increase sales eliminated wasteful expenditure and turned losses into profit. . He also introduced many thrilling promotion packages such as money shower in 1987, 7-up express in 1992 and 7-up Hi-life in 1994. This marketing strategy was part of the short-term plan to reward customers and attract them to 7 -up products. The strategy yield huge returns to company at a very high cost.

However, consumers who built great expectation and did not win became frustrated and began to challenge the credibility of the company. This was largely due to the inability of consumers to estimate the probabilities of winning. As they become more educated on the realities, the exaggerated view of what was possible to win sometime turn into exasperation.

It also woke up the sleeping giant-Nigerian Bottling Company Plc, bottler of Coke from a deep slumber.
The management of company has since then adopted various strategies that can stand the test of time in order to ensure that the success of the aggressive sales promotion which has made the company’s product a household to name would not be lost.

Some of the strategies currently put in place are repositioning its products, rationalization exercise and cost reduction techniques (including effective inventory control).


1.9 Definition of Key Terms

Carrying or Holding Cost:

This 1S the cost of keeping, carrying or maintaining inventory. It is usually expressed as a percentage of naira value of inventory per unit of time. The major components are insurance cost, interest charges, property tax and storage cost and cost of deterioration, obsolescence, spoilage, pilferage and depreciation.

Economic Order Quantity (EOQ):

The economic order quantity is the amount of a product, which should be purchased or manufactured at one time in order to minimize the total cost involved.

Lead Time:

The time lag between placing an order and the delivery of the order. It may be constant or variable.

Inventory Catalogue:

Abook that identifies all materials of inventory carried by name, manufacturer’s part number,cross indexed by user’s identification number if necessary and classified for indexing purpose.

Maximum Inventory:

That level of inventory beyond which inventory must not rise. It is the sum total of the re-order end order quantity less the minimum anticipated usage during the lead time.

Minimum Inventory:

That level of inventory below which inventory must not fall. It is the difference between the re¬order and the average for the average usage for the average lead time.

Ordering Cost:

The cost of generating and processing and order and its related paper work, It may include the cost of telephone calls, postages, stationeries etc.

Over Stock Cost:

The cost of carrying more than the required inventory that is the cost of over stocking.

Re-order Level:

The inventory level at which an order for replenishment is placed.

Re-Order Quantity:

The quantity ordered each time a replenishment order is placed.

Set-Up Cost:

The out of pocket costs associated with machine set-up that would increase with the number of set¬up.

Stock-out Cost:

The marginal profit lost on each items demanded but not immediately available in stocks or costs resulting from failures to have sufficient goods on hand to fill or satisfy orders.

Inventory Policy:

It is a set of rules which determine how and when certain decisions concerning the holding of stock should be made.


Chapter Five


Summary, Conclusion and Recommendations

5.1 Summary

This project work was embarked upon purposely to evaluate the impact of effective inventory control system in manufacturing company using seven¬up Bottling Nig.Plc as a reference point.

Different definitions of inventory by various writers were considered. In all, inventory is seen as embracing goods awaiting sale (the merchandise of a trading concern and the finished goods progress) and goods to be consumed directly or indirectly in production (raw materials and supplies)

The study also looked into the need to kept inventory and the extent to which it should be kept. This was done by looking at the effect of over and under stocking. Various costs associated with the keeping of inventory were also analyzed.

The research went further to show the management of venous manufacturing concerns how best to determine quantity to be ordered and when to place an order. This was done by the by showing how to arrive at the minimum total relevant cost.

It also emphasized those procedures to be adopted by the management when placing an order, receiving supplied and issuing stock from the store.

In addition, various methods of ensuring safety to stock items were looked into and prominent among these are adequate record keeping of stock movement and physical inspection to confirm identity, ownership, quantity and saleable condition of the items.


5.2 Conclusion

It is evident from the study that effective inventory control by manufacturing companies is very important. It is being viewed critically now than before because of its significant effects on the performance of a company.
Despite its importance, many manufacturing concerns have not being able to reap the full gains of effective inventory due to their continuous application of crude methods.

Hence, the need to employ many scientific techniques of stock control mentioned in this project cannot be over-emphasized, these techniques have been tested and found very useful in the industrialized nations of the world. The need to apply them is much more relevant now than ever because of high cost of raw materials.

These techniques will assist the management to control its stock in a better way and promote cost reduction. It is through this that organizations can formulate optimum stock control and on ‘the long run achieve the primary objective of ever going into business, that is, maximization of wealth


5.2 Recommendations

A close study of the inventory control on raw materials in Seven-up Bottling Company Nig. PIc seems to be good enough but there for improvement in the following areas.

1. Re-Order Level and Quantity

The current system of estimation based on sales is not good enough to stand the test of time. This usually contributes to scarcity of the company’s products in the market when there exists fluctuation in the market demand for example during festival periods. Hence, a more scientific technique of determining re-order level and quantity as shown in this project should be adopted.

2. Audit Trail

To enable better result from the computerization of the inventory, the audit trail should be sent to store on daily basis and comprehensive reconciliation between the stores balances and computer balances at the end of each period should be carried out.

3. Sources of Raw Materials

As efforts are being made to sources bottles, plastics and some chemicals locally, management should put in placea development plan that will enable or afford the company some self- reliance in terms of other raw materials which are imported. This will reduce the overall cost of raw materials and at the same time solve the replenishment problems associated with importation of goods.

4. Stock Adjustment

Before approving any adjustment to stock balance whether negative or positive, a more detailed investigation should always be carried out by the management.

5. Control of Stock Movement

After every stock count (period end), the physical quantity should be agreed with the quantity reported by the stockholding and usage report, the stock card and the bin- card.

To further enhance objectivity in allocating purchase order to suppliers and at the same time help in training subordinates, there is need to introduce supplier performance record, such record should have the following headings:

  1. Supplier’s name
  2. Materials supplied
  3. Purchase order number, date and quantity
  4. Release order date and quantity supplied
  5. Delivery date (when it started and ended)
  6. Rejections/complaints/remarks

Finally, management planning ability on raw materials will be better enhanced if the preparation of annual report in form of ratios showing key indicators of performance is religiously adhered to and should be compared with previous years.

  1. Inventory turn over
  2. Number of times out of stock as a percentage of number of times requisitioned.
  3. Production losses due to non-availability of materials as a percentage of annual production.
  4. Stores handing cost as a percentage of total value of stores receipts and issues.
  5. Losses in stores on percentage of stores receipt and issues.
  6. Number of requisition delivered on time as a percentage of total number requisition
  7. Discrepancies in stock taking as a percentage of number of items checked.
  8. Value of scrape lying indisposed-off as a percentage of scrap disposed off.
  9. Area of storage space used as a percentage of total space available.

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