The Effects Of Inventory Management In Manufacturing Company

Project and Seminar Material for Accountancy / Accounting

The Effects Of Inventory Management In Manufacturing Company


The technique of inventory control is indispensable going by their impact in contributing, promoting and ensuring efficiency and effectiveness in any organization. In actual practice the vast majority of manufacturing companies suffer excessive inventories than are necessary. Therefore, inventory control process is much more complex than the uninitiated understand. In fact, inventory control is perceived as little more than a clerical function. This has resulted into lots of material shortages, high costs and loss of profit. This study provides a basis for implementing inventory control policies by service companies, professional managers, especially manufacturers.

The aim of these research works is to critically assess the impact inventory control has on the profits of manufacturing companies. Relevant literature on inventory management and control by various authors were reviewed.

Both primary and secondary sources of data were used in the course of study. Primary source of data used was questionnaire while the secondary sources used are, text books and journals. The chi-square formulae, person product moment correlation co-efficient, test of significance were employed for effective analysis of data collected. Data was collected through the distribution of 50 questionnaires to the staffs of Tower Aluminum Nigerian Plc.

The two hypothesis formulated were subject to thorough tests and all two hypothesis tested were accepted. The respondents agreed that inventory control is a contributory factor to the profitability of manufacturing companies and as such proper control of inventory of manufacturing companies and as such proper control of inventory reduces the overall cost. Conclusion and recommendation were also made as to the acceptance of the alternative hypothesis such as putting in place all necessary features that inventory control needs to effectively achieve its purpose in a manufacturing organization.

Chapter One


1.1 Background of the Study

There is a growing emphasis on the importance of inventory management in the attainment of organizational goal. In manufacturing companies where stock of raw materials and other component parts consists of many different items, the task of maintaining a stock management on every individual item is obviously difficult if not impossible.

The focus of this project is therefore the impact of effective inventory management in Tower Aluminum Nigeria Plc. This study is aimed at identifying the overall impact of proper and accurate management of stock items together with the recording and monitoring of stock level, forecasting future demand or production run and deciding when and how to place the order and how many inventory to carry per unit of item in other to satisfy the needs and wants of potential customers in essence of maximizing profit for the organisation.

Inventory refers to the stock of resources that possess economic value, held by an organization at any point of time. These resources stocks can be manpower, machines, capital goods or materials at various stages.

According to wise Greek, inventory is total amount of goods and /or materials contained in a store or factory at any given time. It’s necessary for business manager of an organization to know the precise number of items on their shelves and storage area in order to place orders or control losses.

The word inventory “can refer to both the total amount of goods the act of counting them. Many companies take an inventory of their suppliers on a regular basis in order to avoid running out of popular items. Others take an inventory of to insure the number of items or ordered matches the actual number of items counted physically. Shortages or overages after an inventory can indicate a problem with theft (called shrinkage in retail circle) or inaccurate accounting practices in an organization.

Inventory simply means a quantity of goods and materials in the control of an organization held for a time in a relatively idle or unproductive stage “GREAT MAN”. Management is concerned with the process of achieving objectives through efficient use of resources and the planning, organization, coordination, direction, and control of the activities of people. It is the sum total of all the activities involved in the organizing men, machines, materials, and money and the maintaining, directing, coordinating, supervising, and controlling them to produce or provide for a profit, goods and services which benefit members of the society. “Dr. ADE Oyedijo 2009, Essential of Mgt”

Other functions of management are;


Leading here means influencing people so that they can contribute positively towards achieving the goal of maintaining stock at minimum cost.


Coordinating here means each department contributing towards the organization goal of keeping the inventory at minimum cost


Directing here means harmonization of individual objectives with that of the organization so that the goal of the organization to maintaining stock at minimum cost is achieved.

Inventory Management:

Is very important having direct relationship with production, marketing, purchasing, maintenance, and financial policies. In view of this, many firm attempt to control stock in scientific basis by considering the financial effect of all relevant cost of inventory. Scientific control of inventory is the use of economic order quantity (EOQ) model.

The overall objective of inventory management is to maintain stock level so that

combined cost of inventory will be minimal. The optimum level of the stock depends upon a variety of factor arising from the interest of the different department involved and the management should establish an overall policy for stock after considering the interest of the organization as a whole. Whether as a result of deliberate policy or not, stock represents an investment to the organization and as with other investment, cost of holding stock must be released to the benefit to be gained from holding the stock.

Inventory having the greater’ part of the working capital of most organization, should be managed effectively, failure to do so will lead to high carrying cost, lost of goodwill high rate of obsolescence, excess tied up capital, interruption of work schedule in production, idleness of machine and personnel which leads to low profit and consequently leads to winding up.

Though the objective of inventory management is to ensure that stock is kept at optimal level. Nevertheless departmental managers view this from different

Perspectives From financial point of view, the aim is to minimize stock holding cost, while adequate stock level that will facilitate continuous production run is of interest to the production manager.

To purchasing, the aim is to take advantage of special buying offer, but this will lead to increase average level of stock and sales department will want to be able to satisfy all customer order which will mean high stock of finished goods to provide a buffer against uncertainty in demand.

It can be seen from the above that departmental manager’s perspective of viewing inventory management are different but they are all channeled towards organization efficiency.

As aspect of inventory management that cannot be overlooked is the number of

aluminum manufacturing company should have and how they should keep the product to maintain these aluminum products. In this country today where every big manufacturing company rely almost or more than 70% of its source of power on generator, since generators are expensive to buy and production run and efficiency in production process. The decision to buy wholly or jointly remain the decision of the top management of each organization.

1.2 Statement of the Problem

Inventory management is very essential in any organization setting, because holding stock is just like holding cash, and cash is life blood of the firm. Also in the context of inventory management, the organization is faced with the problem of reconciling two conflicting need; to maintain a large inventory for smooth production run and to maintain a minimum inventory to maximize profitability by having the lowest carrying cost.

And the problem associated with the decision on when and how to order materials for smooth run of the (business) production.

1.3 Objectives of the Study

The primary aim of this project is to examine the effect a well managed inventory has in a manufacturing company. Other objectives of the study are as stated below:

  1. To determine the effect of inventory management in the manufacturing company especially Tower Aluminum Nigeria Plc.
  2. To enhance the performance of inventory management in an organization.
  3. To reduce risk that are facing inventory management.
  4. To determine whether there is a problem facing the inventory management in Tower Aluminum Nigeria Plc.
  5. To map out strategies to train good store keepers who will manage the stock.

1.4 Research Questions

These are the research questions:

  1. Could effective inventory management help to meet variation in product demand?
  2. Could effective inventory management enhance uninterrupted flow of production?
  3. Could the stock be controlled in a way that it will not tie down the capital in an unprofitable venture?
  4. Could effective inventory management has impact in manufacturing companies?
  5. Is there anything to be done so as to ensure judicious use of company’s resources?

1.5 Statement of Hypothesis

For the purpose of this study, the following hypotheses are formulated:

Hypotheses One
  • Ho: Inventory control does not contribute to the profitability of manufacturing companies.
  • HI: Inventory control contributes to the profitability of manufacturing companies.

Hypotheses Two

  • Ho: Inventory control does not reduce cost
  • HI: Inventory control reduces cost

1.6 Scope of the Study

This study will be concerned with Tower Aluminum Nigeria Plc. – And will cover people in production, purchasing, marketing, store, maintenance, and account departments. The study will cover various kinds inventory such as raw materials, work in progress, finished goods, maintenance and repair, it will also find out the reasons for holding stock.

1.7 Limitation of the Study

In carrying out this study, these limitations were encountered by the researcher:

  1. Time: Time will limit the conduct of this study and this has impact on the sample study and the questionnaire. If enough time is on the side of the researcher, this study would have chosen more companies in different sectors of the economy for study.
  2. Financial Constraints: The researcher was faced with financial constraints which had far reaching effect on the running around for questionnaire, obtain necessary information and cost typing and binding the project since only the researcher will bear the cost of getting the research done.
  3. Lastly some of the respondent will not give the right information.

1.8 Significance of the Study

This project study at examining the impact of effective inventory management in Tower Aluminum Nigeria Plc. It is therefore believed to be of great benefit to manufacturing companies that deal with large inventories.

The study will also enable the researcher to know more about inventory control. The management of Tower Aluminum Nigeria Plc. will benefit immensely from the study in the sense that it will give them insight into knowing more about effective inventory management.

1.8 Research Methodology

The essence of research methodology is to explain the framework under which this project will be carried out. Both primary and secondary data are to be used in this study. The primary data would be based on the opinion sought by questionnaire, which will be administered on the sample selected for the purpose.

The secondary data will include facts to be extracted from the published works and the history of the organization to be obtained from the company (textbook, journals, annual reports and articles relevant to the field of study).

In analyzing and evaluating data collected, hypothesis will be tested based on the information gathered from the questionnaire that will be administered.

ECONOMIC ORDER QUANTITY (EOQ) METHOD shall be implored in determining the most advantageous order quantity from the analysis of all relevant cost associated with quantity.

1.9 Definition of Terms

(i). Buffer Stock:

The extra stock that should be kept to allow for the possibility that demand may increase or supply may be delayed

(ii). Carrying Cost:

These are cost incurred in storage space and physical handling and protection of inventory.

(iii). Control:

This is the management and utilization of resource in such a way that the objective is attained under the condition laid down.

(iv). Inventory:

This includes all the stock of goods and materials which a company owns and uses in the process of manufacturing

(v). Lead Time:

The period between the time an order is made and the time the order is received.

(vi) Ordering Cost:

These are the cost incurred in the process of obtaining or ordering raw materials component or part from the suppliers. The ordering decrease as the order size increases

(vii). Optimal Level:

This is the keeping of stock at the most favourable level. (viii). Raw Materials: These are goods or materials for sale or later use or item yet to be manufactured or refined.

(ix). Stock:

These are goods or material stored for sale or later use.

(x). Stock out Cost:

These are the cost of running out of cost

1.10 Historical Background of Tower Aluminium Nigeria Plc.

Tower Aluminum Nigeria Plc. Began its operation in Nigeria in 1959 and has today grow into a leading aluminum manufacturing industry, which is second to none. The company was incorporated as Tower Aluminum Nigeria Limited and later to a public limited company in 1991 due to being privatized, it was quoted on the Nigeria stock exchange and has division and subsidiaries in more than ten states of the federation among which are Tower extrusion Aluminums industries Pl. In Imo state, and Nigeria Association Battery manufacturing company in Ikeja Lagos state to mention a few. The company registered office is located at Oba Akran Avenue, Ikeja Lagos state.

Corporate Social Responsibility And Community Relation Activities

As a good and responsible corporate institution, the company contributes to development of youths by supplying kitchen utensils to various motherless babies home to improve their standard of living, making donation to its various social organization school and colleges in areas of sports and educational development.

Chapter Five

Summary, Conclusion and Recommendation

5.1 Summary

This study was carried out to examine the effects of inventory management in manufacturing companies. The study adopted the descriptive survey method and reviewed some related and related literatures.

The findings from the study reveals that proper inventory management contributes to the profitability of manufacturing firms. Furthermore, a good inventory management reduces cost and eliminates the challenge of stock out. Effective production also have a smooth course due to accurate inventory management.

5.2 Conclusion and Recommendation

It was revealed that production inventory is the most inventory management system used at Tower company. Production Inventory plays a very big role in the performance of any organization in this age characterized by total quality management. Production inventory management effectiveness adds value to the organization by allowing decision to be made faster and allowing production without hindrances as much as possible.

The efficiency of any control technique ensures that resources of the organization are managed with the least cost. The performance of any organization therefore depends on the achieved production targets, how much capital is held in stocks which can be achieved by a well managed inventory technique used.

The company also experience high holding costs that lead to loss of production which leads to reduction customer good will, decline of profits and misplace of stock.

5.3 Recommendations

The following were the recommendations on how Tower Aluminum company could improve its productivity by managing its inventory properly:

  1. The company should establish a central data base for archiving the inventory records to enable easy monitoring, decision making and proper inventory management.
  2. Inventory management procedures should be put in place to allow Proper management of inventory in a cost effective manner.
  3. The company should have an inventory retention schedule; this would Help in retaining active and useful inventory and the disposal of an unwanted inventory and that of low or no value to the company.
  4. The company should establish a policy of asset disposal and management of low value or unwanted assets to reduce the amounts of capital held up in these un-used assets caused by the effect of technological advancement.

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