The Impact Of Inventory Control On The Profitability Of Manufacturing Companies

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The Impact Of Inventory Control On The Profitability Of Manufacturing Companies


Abstract


This research examined the impact of inventory control on the profitability of manufacturing companies with reference to Nigerian Breweries Plc.

Survey design was adopted with the use of a well structured questionnaire. Respondents were selected based on simple random sampling technique. Fifty (50) staff of Nigerian Breweries were sampled.

Two hypotheses were formulated and tested with the use of Chi-Squre analysis. The analysis resulted to rejecting both null hypotheses and hence accepting the two alternate hypotheses.

Based on decisions of the tested hypotheses conclusions were reached that Inventory control contributes to the profitability of manufacturing companies, and Inventory control reduces cost

Recommendations were proffered to the management of Nigerian Breweries Plc and manufacturing industries in large.


Chapter One


Introduction

1.1 Background to the Study

Inventory control was not seen to be necessary. In fact excess inventories were considered as indication of wealth. Management by then considered stocking beneficial. But, today firms have started to embrace effective inventory control due to its strategic role. Inventory constitutes the major part of a Nigeria manufacturing firm’s current assets due to the big size of inventories kept by firm’s most part of an organization’s fund is being invested into it.

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 (Lwiki et al., 2013).

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. 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 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).

Nevertheless, the primary focus in this research will be on manufacturing oriented firms. Inventory control is pivotal in effective and efficient performance of a firm. It is necessary in the control of goods to be used for production, stored or exchanged for money. It also aids the firm to avoid holding too much or too little stock or to tie up capital, which in return have an adverse effect on performance of manufacturing firms. This guides against the incurring of cost such as storage, spoilage, pilferage and obsolescence and the desire to make items or goods available when necessary for the manufacturing firms to perform properly.

Thus, efficient inventory cost management is vital for the successful functioning of manufacturing and retailing organizations. Inventory consist of raw materials, work in progress, spare parts or consumables, goods in transit and finished goods. It is not necessary that an organization will have all these inventory classes, but whatever may be the inventory items, they need efficient management as, generally, substantial share of the company’s funds are invested in inventory (Lyndon & Paymaster, 2016). The inventory cost management of any organization represents an important decision making function at all stages of the product manufacturing, distribution and sales chain. Apart from being a major portion of total current assets of many organizations, inventory often represent as much as 40% of the capital of industrial organizations. Sawaya and Giauque (2006) also stated that inventory represents 33% of a company’s assets and as much as 90% of working capital. As inventory constitutes a major segment of a company’s assets, it is crucial that good inventory management practice is put in place to ensure the organization’s growth and profitability to sustain the business as a going concern. This means that the right materials are in stock in the right quantity, and are available at the required time. Proper and regular checks on stores inventory are conducted to avoid pilferage, wastage and loss of customers due to stock-outs. Making the right order for inventories (buying of stocks that are needed by customers) at all times would promote high turnover thereby improving the profit level of the organization.

Good inventory management in any manufacturing organization saves the organization from poor quality production, the displeasure of customers, loss of profit and good social responsibility which in turns have a direct effect in the performance of the firm (Temeng Eshun & Essey, 2010). 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. If inventory management is not adequately maintained, production cannot meet the aspirations of customers which is loss of revenue to the organization and makes the organization performance very low. Right from procurement to the time of processing, quality of raw material is the chief determinant of the productive efficiency of any manufacturing concern. It is against this backdrop that the study appraises the inventory management and control in manufacturing firms.


1.2 Statement of the Problem

Inventory is the life blood of any organization. This is because inventory contributes directly to the profitability of an organization more so the growth of any organization depends largely on its ability to manage its inventory effectively and efficiently.

The real problem therefore has been in the determination of the best inventory control method that fits into an organization very well and also to get the best inventory level at which money invested in inventory will produce a rate of return higher than it if invested in some other areas of the business (Amoako-Gyampah & Gargeya, 2011). Manufacturing firms are finding it challenging as to determination of how much of the inventory is the ideal stock as to maintain. If inventory level is high, capital is unproductively tied up. If the level of inventory is low, production will be affected.

However, this study aim to carry out an investigation on the relationship between inventory management control technique and performance of manufacturing firm and also find the extent to which inventory control has effect on performance of a manufacturing firm.

Poor inventory management involves poor planning, executing and controlling a supply and utilization of chain network inventory that is critical to the success of the organization. Inadequate control of inventory consist of lack of managerial skills relevant to proper inventory management exposes many organizations to many problems like overstocking, damage, deterioration and others.

Problem of deciding which item of inventory should be kept in stock and at what quantity lead to need for Economics Order Quantity (EOQ) in an organization. Some organization looses much due to their failure to keep with EOQ desirable for them, and this work throws more light to forestall this.

The problem of not implementing the inventory management systems; Many organizations do not keep abreast with inventory management systems due to poor or no knowledge about the inventory management and such organizations are bound to face several related problems that this work highlights on towards reducing them.
Also, in some manufacturing firms, they find it difficult to determine how much of the inventory to order and when to order; in order to meet customers demand and smooth flow of production process without unnecessary stoppage, idle time due to unavailability of inventory.


1.3 Objectives of the Study

The overall objective of this study is to appraise inventory management and control in manufacturing firms of some selected manufacturing firms.

The specific objectives are to:

  1. Examine the effectiveness of the various tools and techniques (Economic order quantity or Economic Batch Quantity) used by manufacturing firms in inventory management.
  2. 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:

  1. How effective are the various tools and techniques of inventory management in manufacturing firms?
  2. 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:

  1. 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.
  2. 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:

  1. 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.
  2. 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.
  3. 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:

  1. 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
  2. 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.
  3. 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.

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