The Need For Effective And Efficient Inventory Management In A Manufacturing Company

Project and Seminar Material for Accountancy / Accounting

Project and Seminar Material for Accountancy / Accounting


Abstract


As the topic depicts, that is “the need for effective and efficient inventory management in a manufacturing organization, one will then say that manufacturing organizations really face inventory management problems of which the research writer tried to analyze and bring possible recommendations to that effect.

The problems associated with inventory management includes: scarcity of raw materials, determination of optimal stock level, as well as the discrepancy between policy and practice in stock management.

In this research work, some questions were asked and this includes:

  1. Does the manufacturing companies appreciate the need for effective and efficient inventory management.
  2. Does overstocking introduce unnecessary carrying and ordering costs and trying down of capital?

In trying to answer the above research questions, a population size of forty employees which were drawn from thee departments viz marketing, production and financial were interviewed. The simple random sampling technique was used and the methods of data collection used were oral interviews, company’s journals, textbooks and questionnaire which were mostly structured.

Moreover, from the analysis of data gathered, it was revealed that the company makes decision about inventory management. The marketing, production, and financial departments act as sources of data for planning and controlling of stocks. It was observed that stock can be allowed to leave the store without proper requisition being made for it in order to meet up with emergency. It was gathered that inadequate information flow, rapid inflationary pressures as well as ill organized storage systems are factors militating against effective and efficient inventory management in the company. Stock budget, minimum maximum stock levels and economic order quantity were used as means of controlling stock.

Considering the above analysis carried out, the researcher then recommended that the company should set up stock management committee which should ensure that there is adequate information flow about inventory management and organize a perfect storage system for the stocks. There should be optimum level of stock to be maintained to avoid under or over stocking. Also market price of stock valuation is recommended in order to guide against inflation.

Although the company uses computer for stock control and management, the writer calls for an intensive computer operations as this will strengthen the stock management process in the areas of how much to buy or make and when to order.


Chapter One


Introduction

1.1 Background Study

According to James (1973) the objectives of most business include; survival and growth, fulfillment of social responsibilities and realization of satisfaction/profit. This level of returns enables the company to take advantage of business opportunities, undertake research and innovations which further makes for growth and survival in the long run, discharge its social responsibilities and its obligations to the owners. In order to maintain this status quo, it becomes important that positive effects be made to reduce operational costs of the business, increase production and boost the sales of their products. However, one of the efficient ways of attaining this desired goal is through reduction of operational costs to the basic minimal.

One major component of this cost in many manufacturing organization that deserves top management’s attention is the investment in “inventories” otherwise referred to as stock.

In most organizations, the inventory or stock figure is the largest single item in the current assets group. Excess or shortage of stocks can contribute to the failure of the business.

Inventories of a manufacturing company includes ” raw materials, work-in-progress (WIP) and finished goods. Raw materials are the basic imput materials that are converted into finished goods through the manufacturing process. Normally, the raw materials are purchased and stored for futute production. Work-in-progress or semi-finished goods represents products thatr need extra work before they became finished goods for sale. In an ideal process, stocks or raw materials and work-in-progress facilitates production while stock of finished goods kis required for marketing operations.

Considering the huge investments on the stock of raw materials, work-in-progress and finished goods, it therefore becomes very important that there should be efficient management of these resources so that profit margin of the firm will not be jeopardized. Any undertaking which tends to ignore the management of inventories will at the long run fail as its profitability level will always be on the decline. To check and fored stall this anomally, it is advisable that the company should install a sound management system.

Given the level of inventories needed for the most successful merchansizing opeation, the objectives of operational management is to achieve the lowest possible total cost of maintaining these inventoris. This means high labour and planned efficiency in the physical handling of inventories into and out of shortage.

There is an optimum level of inventory for any asset whether it be cash, physical plant or inventories. For example, the cash may be too large or too small. One of the reasons for havin too large cash balance might be the sacrifice of shareholders earnings. On the other hand, the reason for holding too low cash balance might be due to the poor credit rating of the firm. Therefore, for every assets, there must be that ideal or optimal level of investment such that when compared with the other asset classes, helps maximize longrun profit.

Horngren (1982) stated that the “optimum inventory level is somewhere between the two danger points”. The two danger points are inadequate inventories and excessive inventories. Inadequate inventories disrupt operations and may lead to loss of sales, and loss of goodwill. On the other hand, excessive inventories introduces uneccessary carrying costs and obsolence risks. Infact, the optimal level is somewhere between these danger points. One of the prime aims of this study is to x-ray the computation and maintenance of this level which guarantees the maximization of profit and this is the essence of efficient and effective inventory management.

Therefore, the primary focus of this research is on techniques of managing and controlling stocks for profit maximization as it is practiced in EMENITE, the emphasis being placed on cost. In tackling this problem, chi-square method will be used.


1.2 Statement Of The Problem

A critical look at the trend of business activities oversome years in Nigeria will reveal a consistent increase in cost and declining profitability.

One wonders why many manufacturing companies in the country have not been opeating efficiently. Is it because of scarcity of raw materials or is it due to managerial inability? But how can one reconcile these with abundant resources coupled with sessoned managers and vast market potentials for manufactured products in Nigeria.
The determination of the optimal level of stock is also one of the major problem in the stock management. The problem of overstocking and understocking is solved at this level. This is the level in-between understocking and overstocking. At this level, the cost associated with stocks are less and therefore, profitability is ensured or guaranteed. The optimal stock level varies from one company to another depending on the nature and volume of operation.

There is also problem of discrepancy between policy and practice in stock management in the company under study. Stocks or inventories are sometimes allowed out of the stores without proper requisition being made. This is a divergence between stock policy which prohibits stocks leaving the stores without the proper requisition in practice.


1.3 The Objective Of The Study

The prime objective of the writer in going into this research work are:

  1. To highlight the immense importance of efficient stock management in manufacturing companies.
  2. Finding the likely consequencies of overstocking and understocking in the manufacturing company and the benefits attributable to having stocks at its optimal level.
  3. Finding solutions to the problems of managing and controlling stocks in teh manufacturing company.
  4. Finding out whether there is a divergence between policy and practice in the stock management at EMENITE.

1.4 Significance Of The Study

From the standpoint of securing capital, inventory is to a high extent less liquid than receivables and therefore is usually a less desirable form of collateral for a bank loan.

Umoren (1987) said that “the objective of any management in the area of inventory management is to achieve the greatest return for the business for carrying inventories in relation to the total cost of retaining them”.

The importance to this study to EMENITE in particular is to find solution to this pressing problems; how much can the business afford to invest in stocks or inventory without adverse financial effects on the company’s profitability. Since companies have some other areas of operations where money is needed, investing too much on stocks means that there will be little or no funds to meet up with the expenditures on those operations. Therefore there is need for the manufacturing companies to invest wisely on stocks.

The study will also help the manufacturing companies to guard against risk of losses through the following:

Deterioration and evaporation:

Materials which easily deteriorate should be properly stored to avoid loss of money and where necessary, special containers to prevent deterioration should be used for storage.

Change in taste and fashion:

Care should be taken not to overstock items that can be easily rendered useless due to fashions change as this result to heavy losses to the company.

In this present age of hyper-inflation the stock holding can be ascertained through the changes in prices of stocks. Stocks are built in the prices are anticipated to be high. Similarly, any expected fall in price will be to the management to reduce the stock level.


1.5 Scope And Limitation Of The Study

This study is to analyze the need for efficient stock management of manufacturing companies in general but with particular reference to EMENITE. This is with the view of finding out how the company has been able to manage her stocks in time with the achievement of her objectives. The writer focused on the investment in stocks. The stocks comprises of stock of raw materials, work-in-progress and finished goods.

Limitation

This study did not go into comparism with other building material companies, this was as a result of time and financial constraints. The management of the company regards some information as being private and exclusive; therefore, the writer was denied the access to these information. Because of this, the researcher could not carry out as much detailed analysis as he would have like into inventory management at the company.


1.6 Definition Of Terms

The researcher used some technical terms which are purely related to the topic in his research work. For easy comprehension, the explanation of these words are given below:

Ordinary cost

Ordinary cost usually consists of clearical costs of preparing a purchase order or production order as well as special processing and receiving costs relating to the number of orders processed.

Carrying cost

Carrying cost of a desired rate of return on the investment in inventory and costs of storage, breakage, obsolence, deterioration, insurance and personal property taxes.

Economic order quantity

Economic order quantity (EOQ) is that size of inventory that will result in minimum total annual costs of the item in question.

Re-order level

This is the point or level that automatically triggers on new order. It is dependent on expected usage during lead time.

Lead time

This is the stock set aside to meet the demand of the customers in case of sudden rise in demand. In the case of raw materials, the safety stock serves as a buffer stock when there is sudden usage before the normal usage. The essence is to ensure that the company does not run out of stock at any time.

Stock

A quantity of something that is kept or stored for use as the need arises; especially a quantity of raw materials, wor-in-progress, finished goods and supplies.

Stock control

Activities, process or study of stock ensuring that quantities of stocks (eg of materials, supplies or finished goods) are such that satisfactory service level is maintained for all stock-keeping units while holding costs are minimized.

Stock holder

A firm or person who has a specified type of stock (eg wholesaler that has stock of a praticular manufatured goods).

Stock holding cost

The cost incurred because of a stock of something is kept for a time. E.g. the rent of storage spaces, the wages of a store-keeper, the cost of stock records.

Stock level (inventory level)

The magnitude of stock of something.

Stockout

A state of having no stock of some stock-keeping unit.

Stock card

This is the card made for each item of inventory held.

Stock taking

Measuring or cheching the quantities of items of stock an enterprise has in order to obtain accurate list of it.

Stock turnover

The ratio of the sales revenue of a firm for a period to the average value of its stock in-trade or stocks of finished gods during the period.

Value analysis

Consideration of the function of all parts of the design of one of a firm’s products to see whether any changes in materials manufacturing methods or design will increase the products value to the firm.


1.7 Research Question

The research question are as follows;

  1. Does manufacturing companies appreciate the importance of efficient inventory management?
  2. Does overstocking introduce unnecessary carrying and ordering costs as well as tying of funds or capital?
  3. Is inventory management of any importance to a manufacturing company?

1.8 Research Hypothesis

Noah (1981) defined hypothesis as a ‘proposition part forward as a basis for rezoning a supposition formulated from proved data and presented as a temporary explanation of occurrence as in science in order to establish a basis for future research”.

To come out with a useful result, the following hypothesis were formulated:

Ho: efficiency in production is a function of effective stock management.

Hi: manufacturing companies have fully appreciated the importance of efficient stock management.

Ho: overstocking introduces unnecessary carrying and ordering costs and there are risks and tying down of funds.


The Need For Effective And Efficient Inventory Management In A Manufacturing Company


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