The Effect Of An Inventory Control System On Organizational Performances

Project and Seminar Material for Accountancy / Accounting

The Effect Of An Inventory Control System On Organizational Performances


Abstract


Inventory control is one of the basic functions of every business; economic success of any manufacturing company has a direct relationship with the efficiency of inventory control.

The major objective was set out to examine how inventory control system can be used to evaluates organization’s performance while its specific objective, cost objectives and smooth flow of goods through the production process.

The methodology used for data collection included collection of primary data through questionnaires and secondary data were also obtained from published materials by eminent scholars and professionals on the field of study. The targeted population of the study was forty (40) employees of Dunlop Nigeria Plc Lagos drawn from three departments that is, store, production and purchasing and supply department. The total of forty (40) questionnaires was administered in which thirty-five (35) were returned and only thirty three of the returned questionnaires were valid. Therefore the sample size of thirty-three was presented and analyzed for the study.

The data collected were analyzed using sample percentage and chi-­square test to test the hypotheses.

The findings concluded that there is significant relationship between inventory control and organizations performance in Dunlop Nigeria Plc lkeja, Lagos.

The study recommended among others, proper co-ordination and co­operation between various departments dealing in materials, proper classification and codification of materials, planning of material requirements, control of purchase of materials through budgeting and internal check for effectives inventory control.


Chapter One


Introduction

1.1 Background of the Study

Inventories are the soul and life wire of any manufacturing organization. It is also regarded as the next most current assets of an establishment after cash at hand or in the bank, this is so because, and it can be easily converted into cash, especially the finished goods, once it is sold and paid for.

Inventory control is an important and expensive activity which is often neglected and under-rated in many organizations both in the public and private sectors, and an efficient inventory control system could be used to advantage, in reducing costs and ensuring increased profitability for an organization.

Inventory could simply be defined as any idle resource of an enterprise. It is commonly used to indicate raw materials in process, finished, packaging, spares and others, stocked in order to meet an expected demand or distribution in the future.

Inventory control involves activities designed towards the effective management and control of all inventory items held n stock. Morrison (1982) defines inventory control as a means by which materials of the correct quantity and quality is made available, as and when required with due regard to economy in storage and ordering cost, purchase price and working capital.

From the above definition, it could be deduced that inventory control is a system aimed at maintaining a balance flow of materials by paper arranging in a continuous basis, receipts and issues, so that any given time, the stock balance are adequate to meet current operational requirement.

Inventory control however, involves the actual implementation and carrying out of policies which management has established, to regulate stock balance without excess or deficiencies.

In modern supply management, inventory control is the real control function; it encompasses all basic aims of the stores operation. The basic concept of inventory control is quite simple, the right material, in the right quantity and quality, at the right time and place. The element of cost in relation to inventory control also plays a vital role. All businesses require inventories, which are the substantial parts of the total assets.

Financially, inventories are very important to manufacturing companies. On the balance sheet, they usually represent from 20%, to 60% of the total assets; As inventories are used, their values are converted into cash, which improves cash flow and return on investment. There is a cost for carrying inventories which increases operating cost and decreases profit. It is common to lose some of them by ways of obsolescence, theft, physical deterioration, damages amongst others. It important that these assets must be well managed to ensure that only the required quantities are available, well stored and safely transferred into and within the organization. Control and management of inventories are crucial factors in the success of failure of manufacturing and non-manufacturing organizations. For example, insufficient inventory seriously disrupt the production distribution cycle that is so vital in survival of all manufacturing companies. Also, excessive stock cripple a firms cash flow and thus endanger its liquidity positive.

The availabilities and quantities of those inventories are the parameters for determining their efficiency. The investments in inventories usually are so high that proper and continuous surveillance should be put on them.

The essence of inventory control is to strike a balance between carrying to much stock and carrying too little. In today manufacturing environment many firm produce a wide range of products requiring many components, though the cost of materials, may vary from one industry to another. However, in many organizations, materials cost materials cost about 50% of the total value of finished goods. The consequences of these high magnitude is that the problem of planning and managing materials in these organizations are complex, but efficiency and effectiveness with which these firms do its buying, storing and issuing of materials might well determine the firms profitability and vice-versa.

Therefore, it is in recognition of these that the researcher has chosen the topic “An evaluation of inventory control system and its impact on organizational performance”. Though the term inventory control may have different meanings to different users. More often, the term is usually constructed to mean material control or stock control.


1.2 Statement of the Problem

In actual practices, the vast majority of manufacturing distribution companies suffer from lower customer and service, higher costs and excessive inventories than are necessary. Inventory control problems are usually the result of using poor processes, practices and antiquated support systems. The inventory management is much more complex than the uninitiated understand. Infact, in many companies the inventory control department is perceived as little more than a clerical function. The likely result of this approach to inventory control is lots of material shortages, excessive inventories, high cost and poor customer service.

It is also important to note that, inventory control, if poorly managed can contribute to increased expenses, lead to lose of profits to the firm due to stock outs, and deterioration of stock due to over stocking among others.

However, despites its importance, theoretical development, and popularity in the business and academic press, there is little empirical research that clearly defines inventory management and investigates its impact on the firm as a whole consequently more information is needed to understand successful inventory management and problems encounter therein.


1.3 The Objectives of the Study

The major objective of the study is to examine how inventory control system can be used to evaluate organizational performance. Therefore, its specific objectives include the following:­

  1. Cost objective, to minimize sum of relevant cost.
  2. Services objective, desired customer services levels significantly affect inventory levels.
  3. To find and tract down all the processing data-s in an inventory system repository.
  4. To define a procedures, by which assets are identified and maintained in the inventory system.
  5. To smooth the flow of goods through the production process.
  6. To provide protection against the uncertainties of supply and demand.
  7. To obtain a reasonable utilization of people and equipment.

1.4 Research Questions

To expand the frontiers of the objectives, the following research questions are raised.

  1. What constitute inventory control?
  2. What constitute organizational performance?
  3. What is the relationship (if any) between inventory control and organizational performance?

1.6 Significance of the Study

The necessity of the study is to determine, whether inventory control system can be used to evaluates an organizational performance. The outcome of the study will assist the store

manager in the arrangement of the stores, movement of stocks and records keeping and in the maintenance of adequate stock level to avoid too much of stock and / or too little that lead to stock out situation. It will also assist the organization in developing its policy on inventory control system and procedure.


1.6 Definition Of Operational Terms

This provides sources of the definitions:

Inventory:

This refers to the stock on hand at a particular time comprising raw material, goods in the process of manufacturing and finished goods. Jhingan and Stephen (2004).

Inventory Management:

This refers to the activities involved in planning and controlling of sock levels and turning of order to leave inventory cost at its minimum. Magge et al. (2004).

Re-Order Level:

This is the level of stock at which order must be placed such that stock level” would not exceed the maximum level or fall below minimum during the lead time.

Carrying Cost / Holding Cost:

This is the cost which a firm actually incurs for carrying the stock. It includes interest on capital, storage cost, and allowance for spoilage. Jhingan and Stephen (2004).

Ordering Cost:

This include the managerial, clerics material, transportation and receiving costs associated with a purchase or production order. Datta (1986).

Purchase / Item Cost:

This represents the selling price of a unit of stock.

Economic Order Quantity:

This is the quantity per order to fulfill annual demand and leave total inventory costs at its minimum. It is the quantity level at which total carrying cost equate total order cost.

Maximum Stock Level:

The maximum stock is the upper level of the inventory and the quantity that must not be exceeded. Jhingan and Stephen (2004).

Minimum Stock Level:

This is the stock level to which the inventory should be allowed to remain. Jhingan and Stephen (2004).

Minimum Stock Level:

This is the stock level to which 4-he inventory should be allowed to remain. Jhingain and Stephen (2004).

Stock out Cost:

It is the stock level necessary to cater for a given rise of stock Out.


1.7 Organization Of The Study

  • Chapter one deals with the introduction / background of the study, the problem statement; the objective of the study, research questions, formulation of hypotheses, limitations of the study, justification of the study, definition of operational terms and organization of the study.
  • Chapter two entails the theoretical framework and literature reviews and taking into consideration the reviews and contributions of eminent scholars on the field of the study.
  • Chapter three includes the methodology of the study using appropriate instruments.
  • Chapter four captures data presentation analysis and findings,
  • Chapter five deals with the summary conclusions recommendations.

Chapter Five


Conclusion and Recommendation

5.1 Conclusions

This research studied the effect of inventory management on organizational performance of Dunlop PLC Lagos. The analysed research study revealed that firm’s performance is positively significant to inventory management, but that efficient management leads to profitability of manufacturing firms in Nigeria. Thus, incomprehensible to the expectancy of the study. Our findings deviate from the results of Prempeh (2016), Mwanzi (2016), Eneje et al., (2012) and Farah and Nina (2016) but confirm to that of Fosu (2016) that inventory management have no significant impact on firm’s performance. The results of this study stipulate that inventory management and conversion period of inventory is a significant variable that have a positive relationship on the performance of firms in Nigeria.


5.2 Recommendations

Adequate inventory management enhances firm performances as its settles the bottlenecks in production of firms in Nigeria. To achieve this, firms must encompass as a procedure to train and re-train its staff to keep them updated on inventory management practises of contemporary times and technological advancement. The study also recommends that practices such as just-in-time, optimal inventory holding, and material requirement planning should be adopted for an effective inventory management. This is because they will help minimise cost and improve firm performances. The study further recommended that inventory managers of manufacturing firms in Nigeria should focus on improving firm size and growth levels. As growth is negatively related to firm performance variables such as profitability and operating cash flow, this will enable firms to stand the test of time and be able to withstand mitigating circumstances that may impair growth and associated economies of scale. The study recommends that a further study can be done on the impact of inventory management on firm performance using other variables such as gross profit margin instead of profitability and operating cash flow.


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