Effect Of An Efficient Inventory Management On The Profitability Of A Firm
Effect Of An Efficient Inventory Management On The Profitability Of A Firm
Abstract
In this project work titled effect of inventory management on the profitability of a firm with particular reference to Nigerian Breweries Plc. The researcher examined the effect of inventories on the net profit after tax of Nigerian Breweries Plc. The extent at which inventories influences the return on asset of Nigerian Breweries Plc. The effect inventories on retained earnings of Nigerian Breweries plc. Data for the study was sourced through the bank’s Annual report and journal articles related to the subjects matter. The data collected was analyzed using SPSS. The results of the study shows that calculated t-statistics (t = -0.675) for inventory is greater than tabulated t-statistics at 0.05 level of significance. The regression equation also revealed that Net profit after tax accounted for -0,422 unit for every decrease in inventory. The coefficient of determination (R2) 0.568 indicating that 57% of variation in inventory decrease is caused by variation Net profit after tax. The relationship between inventory and Net profit after tax is high, positive and statistically significant at 0.05 level (r=0.754, p<0.05). The overall regression model is statistically significant in terms of its overall goodness of fit (f = 0.439, p < 0.05). As a result of this the study accepts the alternative hypothesis meaning that inventories has significant effect on the net profit after tax of Nigerian Breweries Plc. It was also observed that inventories influences return on asset of Nigerian Breweries Plc to a large extent. The researcher also discovered that inventories has significant effect on retained earnings of Nigerian Breweries plc. Based on the findings the researcher recommends that ii. The company should employ the economic order quantity method when placing orders. The economic order quantity model puts into account the relevant costs associated with ordering and carrying inventory. Every business organization aims at reducing cost to the barest minimum and one of the avenues by which this could be achieved is adopting the economic order quantity method of placing order. Sufficient stock should be held in order to avoid stock-out so that when the ordering level is high; there will be enough stock to be delivered.
Chapter One
Introduction
1.1 Background of the Study
Inventory constitutes a major portion of current assets especially in manufacturing companies and retail/trading firms. In order to maintain inventory levels of such magnitude, huge financial resources are committed to them (Mittal, 2014). As such, inventory also constitutes a major component of working capital. To a large extent, the success or failure of a business depends upon its inventory management performances. Inventory management, therefore, should strike a balance between too much inventory and too little inventory (Gupta & Gupta, 2012). The efficient management and effective control of inventories help in achieving better operational results and reducing investment in working capital. It has a significant influence on the profitability of a concern thus inventory management should be a part of the overall strategic business plan in every organization (Gupta & Gupta, 2012).
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). Efficient and effective management of inventories also ensures business survival and maximization of profit which is the cardinal aim of every firm. More so, an efficient management of working capital through proper and timely inventory management ensures a balance between profitability and liquidity trade-offs (Aminu, 2012). Specific performance indicators have been proved to depend on the level of inventory management practices.
Inventory management is recognized as a vital tool in improving asset productivity and inventory turns, targeting customers and positioning products in diverse markets, enhancing intra and inter-organizational networks, enriching technological capabilities to produce quality products thereby imparting effectiveness in inter-firm relationships. Proper inventory management even results in enhancing competitive ability and market share of small manufacturing units (Chalotra, 2013). Well managed inventories can give companies a competitive advantage and result in superior financial performance (Isaksson & Seifert, 2013). Management of inventory is also fundamental to the success and growth of organization as the entire profitability of an organization is tied to the volume of products sold which has a direct relationship with the quality of the product (Anichebe & Agu, 2013).
Inventories are the current assets which are expected to be converted within a year in the form of cash or accounts receivables. Thus, it is a significant part of the assets for the business firms. Actually, inventories are the goods that are stocked and have a resale value in order to gain some profit. It shows the largest costs for the trading firms, wholesalers and retailers. Normally, it consists of 20-30% of the investment of the total investment of the firm. Thus, it should be managed in order to avail the inventories at right time in right quantity. Inventory refers to the stock of the resources which are held to sales and/or future production. It can be also viewed as an idle resource which has an economic value. So, better management of the inventories would release capital productively. Inventory control implies the coordination of materials controlling, utilization and purchasing. It has also the purpose of getting the right inventory at the right place in the right time with right quantity because it is directly connected with the production.
1.2 Statement of the Problem
Previous studies have shown that organizations have continuously ignored the potential savings from proper inventory management, treating inventory as a necessary evil and not as an asset requiring management. Some of the problems of inventory management in an organization standardizing data: Some companies have been tripped up by having too many definitions for the same data, such as purchase orders and product categories. Standardizing data definitions is a necessary step in building an architecture that works across departments and locations.
Choosing just the demand planning and inventory management modules that suit your business: The unique nature of your demand will determine which components you need. Goods can be expensive to ship overseas and delays can squash revenue gains, so a well-honed demand planning tool updated with real-time sales numbers is essential. But if your sales typically come from large deals, inventory management software merits more attention.
Integrating specialized demand and inventory planning software together, and to related systems such as ERP, is both an opportunity and a need not adequately addressed by the industry. Vendors admit they spend significant time integrating their software into existing supply chain management (SCM) systems.
Training users of demand planning: For some people, forecasting will be an entirely new discipline. Companies that have successfully implemented inventory management software stress the importance of teaching the underlying methodologies before handing out the software.
Webinars, slide shows, and classroom instruction can spread the gospel about your company’s new planning processes. A train-the-trainer approach is one of the quickest, least-expensive ways to make people comfortable with inventory management software.
Ease of use should be high on your list of criteria when deciding among vendors, but don’t ask people to take on too much at once. Let them start with basic functions and build from there.
Dumping those old spreadsheets and paper: Inventory managers can be reluctant to give up their familiar ways. You might have to forbid the use of spreadsheets, for example, to get people to switch to new inventory management software. To ease the transition and build trust, sit down with users and demonstrate the benefits. Ironically, it might help to simulate the software in Microsoft Excel for those who have never made the transition from paper. Executive champions in the IT and business sides and easy-to-use software can also further buy-in that enables cultural change.
1.3 Objectives of the Study
The overall objective of this study is to examine the effect of an efficient inventory management on the profitability of a firm. The specific objectives are to:
- Examine the effectiveness of the various tools and techniques (Economic order quantity or Economic Batch Quantity) used by manufacturing firms in inventory management.
- Ascertain the extents to which inventory control contribute to profitability in manufacturing firms.
1.4 Research Questions
The study will be guided by the following research questions:
- How effective are the various tools and techniques of inventory management in manufacturing firms?
- To what extent has inventory contributed to profitability in manufacturing firms?
1.5 Research Hypothesis
The under-stated hypotheses will be tested in the course of this study:
- Ho1: Economic order quantity (EOQ) and Economic Batch Quantity (EBQ) techniques of inventory management adopted in manufacturing firms are not effective.
HA: Economic order quantity (EOQ) and Economic Batch Quantity (EBQ) techniques of inventory management adopted in manufacturing firms are effective. - Ho2: Inventory control has not contributed significantly to the net profit of manufacturing organization.
HA: Inventory control has contributed significantly to the net profit of manufacturing organization.
1.6 Significance of the Study
Future Investors:
This research work can be of great help to those who have a little or no knowledge in manufacturing business. It will be valuable to people who are interested in the manufacturing business and wish to make it their career.
Manufacturing firms: The research work can help the Manufacturing Company to improve in areas where it is needed in their inventory operations so as to boost their profitability and consequently increase their shareholders wealth, and to assist the organizations to maximize their profits and reduce their risk of liquidity.
General Public:
Indeed, this will in no little way have effects on the national growth and development of Nigeria manufacturing sector and economy at large. Customers’ goodwill towards the organization will be maintained as it enables delivery committed to be met all the time.
Future Researches / Academia:
This work will be of immense benefit and use to the future researches as reference document and will provide a base for other research works that might be carried out on stock management in any other sector.
1.7 Scope of the Study
The scope of this study considers appraisal of inventory management and control in manufacturing firms. Also, this study will consider inventory management systems, contributions of efficient inventory management towards profitability, material usage, cost minimization and economy of operation; and the effect of efficient inventory management for organizational growth and performance.
1.8 Limitations of the Study
In conducting this research work, the researcher encountered some difficulties such as the following:
a. Hoarding of Data:
Manufacturing firms held tightly their methods and data generated from their operations because they argued that they operate in a competitive industry and would not want to release their secret to their competitors.
b. Paucity of Relevant Literatures:
The researcher found it hard in obtaining relevant literatures while conducting this research. Nevertheless, the researcher was able to surmount the above hurdles and at the end put up a research work whose output is reliable, testable and verifiable at any standard.
1.9 Definition of Terms
Management:
Management consists of the interlocking functions of creating corporate policy and organizing, planning, controlling, and directing an organization’s resources in order to achieve the objectives of that policy.
Inventory:
Inventory is the raw materials, work-in-process products and finished goods that are considered to be the portion of a business’s assets that are ready or will be ready for sale. Inventory represents one of the most important assets of a business because the turnover of inventory represents one of the primary sources of revenue generation and subsequent earnings for the company’s shareholders.
Control:
Control is a systematic effort to set performance standards with planning objectives, to design information feedback systems, to compare actual performance with these predetermined standards, to determine whether there are any deviations and to measure their significance, and to take any action required to assure that all corporate resources are being used in the most effective and efficient way possible in achieving corporate objectives.
Inventory Management:
Inventory management is the management of inventory and stock. As an element of supply chain management, inventory management includes aspects such as controlling and overseeing ordering inventory, storage of inventory, and controlling the amount of product for sale.
Inventory Control:
Inventory control, also known as stock control, involves regulating and maximizing your company’s inventory. The goal of inventory control is to maximize profits with minimum inventory investment, without impacting customer satisfaction levels. Inventory control is also about knowing where all your stock is and ensuring everything is accounted for at any given time.
Manufacturing Organization:
This is organizations that primarily produce a tangible product and typically have low customer contact. They produce physical, tangible goods that can be stored in inventory before they are needed.
Costing Techniques (Methods):
Costing techniques are methods for ascertaining cost-for-cost control and decision-making purposes. They can be applied to make-or-buy decisions, negotiation, price appraisal and assessing purchasing performance.
Cost Centre:
A cost center is a department within an organization that does not directly add to profit but still costs the organization money to operate. Cost centers only contribute to a company’s profitability indirectly, unlike a profit center, which contributes to profitability directly through its actions.
Economics Order Quantity (EOQ):
The Economic Order Quantity (EOQ) is the number of units that a company should add to inventory with each order to minimize the total costs of inventory—such as holding costs, order costs, and shortage costs.
Just-in-Time (JIT):
Just-in-time (JIT) is an inventory strategy companies employ to increase efficiency and decrease waste by receiving goods only as they are needed in the production process, thereby reducing inventory costs.
Ordering Cost:
Ordering costs are the expenses incurred to create and process an order to a supplier. These costs are included in the determination of the economic order quantity for an inventory item.
Stock-out Cost:
Stock-out Costs is the cost associated with the lost opportunity caused by the exhaustion of the inventory. The exhaustion of inventory could be a result of various factors. The most notable amongst them is defective shelf replenishment practices.
Chapter Five
Summary of Findings, Conclusion and Recommendations
5.1 Summary of Findings
Based on the above finding, the study empirically came out with the followings:
- That the various tools and techniques of inventory management adopted in manufacturing firms are effective since the significance value (p-value) of 0.046 < 0.05, meaning that the model is significant.
- That inventory control has contributed significantly to the net profit of manufacturing organization(Nigeria Breweries plc) since the significance value (p-value) of 0.005 is less than 0.05 meaning that the model is significant.
- That inventory control has not contributed significantly to the net profit of manufacturing organization(Unilever Nigeria plc) since the significance value (p-value) of 0.897 is more 0.05 meaning that the model is not significant.
Other findings of the study are:
That some of the reasons why organization evolve inventory control management system include the need to smoothening operational requirements; maintain accountability and transparency, the need to optimize resources and meeting up operational requirement.
The study also found out that flexibility in inventory control management is an important approach to achieving organizational performance. Flexible inventory services are associated with minimizing stock holding cost, minimizing waste and encouraging high inventory utilization.
In addition, it was found that organizations benefits from inventory control management by way of easy storage and retrieval of material, improved sales effectiveness and reduced operational cost.
5.2 Conclusion
Inventory Management is very vital to the success and growth of manufacturing firms. The entire profitability of manufacturing firms is tied to the volume of products sold which has a direct relationship with the quality of the product. Management does a lot to present a good organization to the public in terms of quality production. Good inventory management in any manufacturing organization saves the organization from poor quality production, disappointment of seasoned customers, loss of profit and good social responsibility. This is done by ensuring timely delivery of raw materials to the factory and distribution of finished goods, in order of production to the warehouse.
Thus, if inventory management is not adequately maintained, production cannot meet the aspirations of customers which are loss of revenue to the organization. Right from procurement to the time of processing, quality of raw material is the chief determinant of the productive efficiency of any manufacturing concern. This varies from organization to organization. This study concludes that the various tools and techniques of inventory management adopted in manufacturing firms are effective and inventory management has significant impact on manufacturing company.
5.3 Recommendations
Based on the findings of the study, the researcher made the following recommendations:
- The manufacturing firms should diversify their inventory system to suit specific needs of production and at the same time ensure that maximum attention is paid to inventory management so as to avoid or reduce the amount of loss that would be gotten from damaged goods in inventory
- Inventory management should maximize space and timely delivery to avoid staying off production and closely monitor and manipulate their inventory system to maintain production consistency for organizational profitability and effectiveness.
- Nigeria manufacturing firms should not take the issues of inventory management lightly because it has the power to make or mar the future of the organization liquidity position.
5.4 Contribution to Knowledge
The study has contributed to body of literature by providing empirical evidence on appraisal of inventory management and control in manufacturing firms using the following variables Effective management tool, Inventory management, Profitability and Productivity. In line with this, it has to a very large extent achieved the following objectives: effectiveness of the various tools and techniques used by manufacturing firms in inventory management; significant consequences of inefficient inventory management on the productivity of manufacturing firms in Nigeria and extents to which inventory control contribute to profitability in manufacturing firms.
5.5 Suggestion(s) for Further Studies
The study established the fact that inventory management and control is essential for smooth and effective running of manufacturing firms in Nigeria. The implication is that it is a vital tool in improving asset productivity and inventory turns, targeting customers and positioning products in diverse markets, enhancing intra and inter-organizational networks, enriching technological capabilities to produce quality products thereby imparting effectiveness in inter-firm relationships. Proper inventory management even results in enhancing competitive ability and market share of small manufacturing units. It is based on this that this study suggest that other research should take up the responsibility to broaden the scope of this study by looking at the effect of inventory valuation management on manufacturing firm performance which this study is limited to as the findings in this study might not be generalized to other firms. Other sub variables such as risk management, tax written off and cost of borrowing (Inventory valuation management) and profitability, productivity and sales (firm performance).
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