INVENTORY MANAGEMENT AS A TOOL FOR ENHANCING PROFITABILITY IN MANUFACTURING ORGANIZATION

CHAPTER ONE

INTRODUCTION

          1.1       BACKGROUND OF THE STUDY

Inventory in the form of raw materials, work in progress and finished goods constitute significant proportion of assets of most organization. But why is it pertinent to keep any eye on these items in other words, why do we engage in inventory management?

Inventory items cost money to acquire, they cost money to store and to look after, which means storage facilities has to be provided so as to make sure that these materials or items do not get spoilt until they are turned into sellable goods, they do not produce money. When stock are held, it means tying down capital that would have been used in other areas, so it all represent cost and should be managed properly to acquire efficiency.

We must however, hold stock to meet production needs and sales needs. This is because if we do not hold stocks in sufficient quantities, we stand the risk of running out of stock.

Similarly, if we are short of finished goods, we may disappoint our customers. Inventory shortages in both of these forms will likely lead to loss of customers and money. For the organization not have the above problems, they should strike a balance between carrying too much stock (over stocking) and carrying too little stock (under stocking).

This is essentially the importance of inventory management. Managing assets of all kinds is basically an inventory problem, the same methods of analysis applies to cash and fixed assets as to inventory themselves.

First of all, a basic stock must be on hand to balance in flows and outflows of items. The size of the stocks depends on the pattern of flows whether fast moving or regular items, slow moving or irregular items.

Secondly, because the unexpected may occur, it is necessary to have safety stock on hand representing, extra stock to avoid the cost of not having enough to meet current needs.

Thirdly, additional amount may be required to meet future growth needs these are called anticipation stocks, related to anticipation stocks, is the recognition that, these are optimum purchases sizes defined as economic order quantity (EOQ).

In borrowing money, for buying raw material for production or purchasing plants and equipment, it is cheaper or more economical to buy more than just enough to meet immediate needs.

Manufacturing firms generally have three kinds of inventories:

a)   Raw material

b)   Work in-progress

c)   Finished goods

(a) The level of raw materials; inventory is influenced by anticipated production, seasonality of production, reliability of sources of supply and efficiency of scheduling purchases as well as production operations.

(b) Work in-progress inventory is greatly influenced by the length of the production period, which is the time between planning raw material in production and completing the finished products. Inventory turn over can be increased by increasing the production. One means of accomplishing this is to perfect engineering techniques there by spreading up to manufacturing process. Another means is to buy rather than make them. The level of finished goods inventory is a matter of coordinating production and sales.

Holding stock in whatever form cost money. The capital tied down by the stock itself has to be serviced by the payment of interest and the land or warehouse needed for the stock has to be bought or rented. The handling of the securing of the stock and any quality deterioration that occurs also cost money. The sample type of stock control system used in most organizations is two, the bin system of stock control and is of two quantities.

The first quantity is the stock level below which is new order is to be placed. Under this system, the units of stock are held in two: one and two stock is taken from bin as required until this bin is empty.

More are then order by the quality being determined by the rate of usage or consumption rate; comprehensive inventory, planning and control system have been successfully installed or established in many organizations. The major objectives of inventory management is to discover and to optimum level of investment in the inventory. Inventories may be too high or too low, if too high there are unnecessary carrying cost and risk of obsolescence. If too low, production may be disrupted or sales permanently lost and loss of good will, reputation, and customers to other firms in the same industry.

The optimum inventory level is that which minimize the total cost associated with inventory.

          1.2       STATEMENT OF GENERAL PROBLEM

The life blood of any organization both private and public sector is material and this has been neglected long ago by various business concerned. The survival of any business set up depends upon sufficient application of material functions, policies involved and recognition according to the function.

Up till now inventory management has not been able to occupy it rightful position due to one reason or the other. There has been infringement on the right of inventory management personnel. They are often restricted to mere clerical work in many organizations.

The lack of recognition for inventory management function in many organizations has caused so many havoc.

For instance where the function is forced to be recognized and established because of the demand to manage the affairs of various activities. To compound these problems, the functions responsible for the manpower operations have few or no plans for the low level personnel to benefit from the staff training programmes which would have enhanced the basic skills professionally.

          1.3       AIMS AND OBJECTIVES OF THE STUDY

The aims and objectives of this research work are to take a general look at inventory management as a tool for enhancing profitability in manufacturing organization.

The project is also aimed at providing information on how effective inventory management can enhance profitability.

Furthermore, the project is geared towards analyzing how issues of inventory is done as well as its inspection and stock taking in the organization and how it affects inventory management. The project also tends to reveal to the management of the organization their proper implementation of inventory can reduce wastage cost and filferages will be minimized. Therefore, this research work seeks to focus on the following questions:

1.   Where is good delivered to in the organization?

2.   Does the organization always keep store records for accountability?

3.   Where does purchase requisition originated?

4.   How are goods located in the warehouse?

          1.4        STATEMENT OF HYPOTHESIS

He following are the hypothesis developed to guide this research work

Ho: Effective inventory management will not reduce material wastage/cost and hence cannot improve profitability.

Hi: Effective inventory management will reduce material wastage/cost and will improve profitability.

          1.5       Rationale of the study

The study is aimed at having a look at inventory management as a tool for enhancing profitability and come out with some problems associated with the function and necessary ways of solving such problems. The researcher choose zarewa aluminum and plastic limited as its case study.

It is equally an attempt to disabuse the impression of manufacturing organization that inventory is not a profit generating center but to see inventory management as a managerial function which need to be accorded a proper attention than merely treating it as a dumping ground.

The work can be very useful and helpful to those engaged in inventory management function in organization and to students studying production operation management in various institutions of higher learning. The study is also a partial fulfillment for the award of higher national diploma in all colleges of technology and polytechnic. The study is also to improve the function of inventory management in the organization under study and the entire manufacturing industry at large.

          1.6       SCOPE AND LIMITATION OF THE STUDY

Inventory management being a complex and dynamic concept, has a wider area of coverage, so it is obvious that research of this nature can not hold without a problem, which serves in most cases as problems. As such the work is limited to these areas, the researcher feels are crucial or relevant to the problem under investigation that “inventory management as a tool for enhancing profitability in manufacturing organizations”.

The following are some of the problems that limited the extent of the study:

Time constraint: This is very important for one to get accurate and up to date data, it is important to have enough time. But for a researcher to spend as much time as possible collecting information (being a student) and at the same time battling class room work, coupled with assignment it is infact not easy within available time.

Another problem  is restriction to vital information and documents by the organization under study due to secrecy. The organization is so strict with their documents and did not allow vital information to be revealed for fear of leaking management secrets to competitors, this operated a non chalant attitudes by some staff towards the research.

Another constraints is that of finance. To conduct a research of this nature, one needs money to enable one to travel to different organization at different geographical locations.

But it is factual that there is nothing like enough money” in the country again. The researcher therefore restricted the study to only the Kaduna branch of the organization under study.

          1.7       HISTORICAL BACKGROUND OF ZAREWA ALUMINUM AND PLASTIC

Zarewa aluminum and plastic limited was established on 25^th of May 2007. It was also commenced its commercial activities in June, 2007 since then PVC ceiling production has been growing within Kaduna and other part of the country. Through hard work and determination, the company has been able to expand its plants and distribution network to some parts of the country. Its greatest period of growth actually started in July, 2007 with the opening of the branch, solely for corrugation of long span roofing sheets, the third branch which is in Jalingo, Traba state was opened in October, 2009 for corrugation of long span roofing sheets also.

The company’s vision statement is “to be the most admired and innovative company in Nigeria by the year 2020”. The Kaduna branch engaged in production of PVC ceiling, cornice which include angle, seven and join cornice, rubber pipes both small and big ones. The Kaduna branch has a thirty (60) number of employees and it was headed by the general manager.

The activities of the Kaduna plant is headed by the general manager and coordinated under four major section namely:

1.   OPERATIONS DEPARTMENT: This can be seen as the largest department or unit in the organization headed by the factory manager. It comprises three departments, quality control, production and engineering.

2.   ADMINISTRATIVE DEPARTMENT: This handles all administrative matters. It encompasses the following department, accountants, human resources and computer (management information system or MIS).

3.   MARKETING DEPARTMENT: This is charged with the responsibilities of managing sales distribution, merchandising and product warehousing. It also handles marketing issues of the following department, marketing and sales.

4.   INVENTORY DEPARTMENT: This handles the aspects of plant material inventory. It encompasses the stores and warehouse departments and is headed by the inventory manager.

          1.8       DEFINITION OF TERMS

INVENTORY: Items usually held in stock by organization. This can be in form of raw material, finished goods, work-in-progress, furniture, capital, equipment etc.

RAW MATERIALS: Are items which are to be processed through production process to obtain the defined finished goods.

STORE HOUSE: This is a building where materials or items held in stock are kept and protected against unauthorized removal. It is also a place where materials are received. Stored, accounted for, recorded, replenished when due.

FINISHED GOODS: These are the new products of the whole production process.

LEAD TIME: This connotes the number of days, weeks, months, which lapses from point of placing an order to the time the goods ordered for are received.

INVENTORY MANAGEMENT: This is a system used in the firms to control the firms investment in stock.

STOCK CONTROL: Is the means by which materials of the correct quality and quantity is made available as and when required with due regards to economy in storage, ordering cost, purchasing prices and working capital.

STORE: Items to be held in stock.

RE-ORDER LEVEL: This is the point between the maximum and minimum stock level at which time is essential to initiate purchase requisition for fresh supplies of materials. The point is usually higher than the minimum stock level to cover emergencies. Such as abnormal usage of materials.

ECONOMIC ORDER QUANTITY: This is the size of the order, which minimizes the total cost of acquiring and holding stock. It is the quantity that is most economical to order at a time, taking into consideration the cost of ordering and carrying.

SAFETY STOCK: This is the quantity of items which provides a buffer against variation in lead time.

MAXIMUM STOCK LEVEL: Is that level above which stock should not normally be allowed to rise except in special circumstances to avoid both storage problems and over investment in stocks.

MINIMUM STOCK LEVEL: Is that level below which stock should normally be allowed to fall. If it goes below there is danger of shortage of supply which may result to stoppages in production.

AVERAGE STOCK LEVEL: The average stock investment is a useful parameter for indicating to management the extent to which the actual investment on average has influenced from the target.

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