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THE IMPACT OF INVENTORY CONTROL ON THE PROFITABILITY OF MANUFACTURING COMPANIES (A CASE STUDY OF NIGERIAN BREWERIES PLC)
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.
TABLE OF CONTENTS
1.1 Statement of the Problem
1.2 Aim and Objectives of the Study
1.3 The Research Questions
1.4 Statement of the Hypothesis
1.5 Significance of the Study
1.6 Scope and Limitations of the Study
1.7 Definition of Terms
2.1 Historical Background of the Case Study
2.2 Concept Clarification
2.2.2 Type of Inventories
2.2.3 Reasons for Holding Stock
2.3 Stock Movement and Documentation
2.3.1 Store Record
2.3.2 Stock Movement Receipt
2.4 Materials Issued in Excess of Requirement
2.5 Materials Purchase
2.6 Methods of Stock Valuation
2.7 Inventory Control
2.7.2 Objectives of Stock Control
2.8 Inventory Control Systems
2.9 Guide to Inventory Accuracy
2. 10 Shortened Lead Times to Increase Profitability
2.11 Break-Even Analysis
2.12 Manage Inventory to Meet Profit Goals
2.13 The Future of Inventory Control Systems
3.1 Research Design
3.3 Sample and Sampling
3.3.1 Probability Sampling Technique
3.3.2 Non Probability Sampling Techniques
3.4 Types of Data
3.5 Data Collection Instrument
3.6 Data Analysis Technique
3.7 Limitations of the Methodology
DATA PRESENTATION, ANALYSIS AND INTERPRETATION
4.1 Presentation, Analysis and Interpretation of Respondents Bio Data
4.2 Presentation Analysis and Interpretation of Research Questions
22.214.171.124 Liquidity and Profitability Ratios
4.3.2 Testing Hypothesis II
SUMMARY, RECOMMENDATIONS AND CONCLUSION
1.0 BACKGROUND OF THE STUDY
The environment, in which the organization finds itself, is dynamic, faced with competition from different sources. At the root of any firm's financial success is careful planning and control of its limited resources.
The past several decades have witnessed marked and steadily increasing changes in management disciplines, numerous planning and control activities formerly performed in a routine manner by clerks have evolved into sophisticated and strategic functions with far reaching effects on profitability.
An important decision in all organizations is the quantity of stock to hold on hand. Once the inventory levels are determined they become important components in the manufacturing system.
Inventories are stock of materials of any kind stored for future use, mainly in the production process. Thus, today's inventory is tomorrow's production. However, semi -finished goods awaiting use in the next process or finished goods awaiting release for sale are also included in the broad category of inventories. For a manufacturing organization aiming at operating at an optimal level, such must be sensitive to the management and control of its inventory because it constitutes a large proportion (about 60%) of the liquid and current assets of such an organization, consequently, having a significant effect on profitability.
Therefore, inventories are materials or resources of any kind having some economic value either awaiting conversion or use in the future.
Apart from these, there are also many indirect materials such as maintenance materials, fuel lubricants etc which are used in manufacturing organization. They are also classified as inventories of materials for future use, but they differ only in their use and classification from raw and other direct materials. All of then earn nothing, yet they are badly required to be stocked and used as and when the need arises.
Inventory control is the method of ensuring that the right quantity and quality of the relevant stock is available at the right time and at the right place. It is also the system used in a firm to control the firm’s investment in stock is available at the time and at the right place. It is also the used in a firm investment in stock this includes the recording and monitoring of stock levels, forecasting future needs and deciding when and how many to order. It involves those activities to be carried out to ensure effective receipts, holding and issue of stock.
Profitability on the other hand is the ability to sell goods and services above cost and earn reasonable returns on capital employed. It should be noteworthy that production does not need to be geared directly to sales. Large inventories allow efficient services of customer demands.
If a product is temporarily out of stock, present as well as future sales may be lost. Thus, there is an incentive to maintain large stocks of all three types of inventories.
The advantages of increased inventory then are several. The firm can affect economies of production and purchasing can fill orders more quickly. In short, the firm is more flexible.
The obvious disadvantages are the total cost of holding the inventory including storage and holding costs and the required return on capital tied up in inventory.
An additional disadvantage is the danger of obsolescence, because of the benefits. However, the sales manager and production manager are biased towards relatively large orders. It falls on the financial the temptation for large inventories. This is done by forcing consideration of the cost of funds necessary to carry inventories as well as perhaps the handling and storage costs.
Like accounts receivables, inventories should be increased as long as the resulting savings exceeds the total cost of holding the added inventory. The balance finally reached depends on the estimates of actual savings, the cost of carrying additional inventory ands the efficiency of inventory control. Obviously, this balance requires coordination of the production, marketing and finance areas of the firms in keeping with the overall objectives. We will explore the various principles of inventory control by which the various principles of inventory control by which an appropriate balance might be achieved inn this research work.
Conclusively, the study of the impact of inventory control on the profitability of manufacturing companies is worth pursuing that the results of this study will provide empirical evidence for the effective guidance of manufacturing companies.
1.1 STATEMENT OF THE PROBLEM
Inventory control involves putting in place every necessary requisite feature to impact favorably on manufacturing companies and to make it more effective and efficient.
In this context, a manufacturing company will be faced with the following problems:
· What quantity should the company re-order at what time?
· What level of work-in-progress should they have in order to keep the production smooth?
· What level of finished goods should they keep to meet customers demand?
· What level of stock is capable of safeguarding against damages" deterioration, pilferage, evaporation etc?
These problems could be summed up into two conflicting needs of the company that must be attended to. These are as follows:
To sustain a minimum investment III inventories to maximize profitability, which might lead to under trading?
To sustain a large size of inventory for efficient and smooth production operation, which might lead to overtrading?
For this research work, the main problems are;
· Ineffective stock management can lead to inadequate holding of stock, resulting in the inability to meet customers demand as at when due and loss of goodwill.
· Improper stock control can lead to drain in the resources of the company
· Determination of the stock level capable of guarding against Obsolescence of goods.
· Unqualified staff in the store department can affect the production •
1.2 AIM AND OBJECTIVES OF THE STUDY
The broad aim of this study is to critically assess the impact inventory control has on the profits of manufacturing companies.
Supportive objectives that will foster the achievement of the above aim are:
· To examine how material purchase procedures affects the rate of usage
· To analyze the relationship between inventory and profitability.
· To examine the effect inventory cost minimization has on profit maximization To examine various principles of inventory control by which an appropriate balance between carrying cost and ordering cost can be achieved
1.3 THE RESEARCH QUESTIONS
Research questions are interrogative statements 'that arise from the course of study. Such questions are meant to information to the study.
In order to arrive at a logical conclusion, questions relevant to this research will be asked, among which are the following:-
· Does inventory control reduce cost?
· Does inventory control increase tock available for sale?
· Is there any relationship between material purchase procedure and rate of usage
· Does inventory management and control contribute to the profitability of manufacturing companies?
· Is there a significant relationship between rate of usage, lead time and stock level?
1.4 STATEMENT OF THE HYPOTHESIS
A hypothesis is an assumption, a tentative statement made about the value of a parameter or the observed fact of a distribution put forward to be tested and proven, so as to reject or accept the preconceived concept. To provide answers to the research questions, arising from the study, the following hypothesis are postulated:
Ho: Inventory control does not contribute to the profitability of manufacturing companies.
HI: Inventory control contributes to the profitability of manufacturing companies.
Ho: Inventory control does not reduce cost
HI: Inventory control reduces cost
1.5 SIGNIFICANCE OF THE STUDY
In actual practice, the vast majority of manufacturing companies suffer excessive inventories than are necessary. The 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.
Manufacturers ignore the fact that inventories allows the company to be flexible. Raw materials inventory gives the firm flexibility in its purchasing. Without it, a company must exist on a hand to mouth basis, buying raw materials in keeping with its production schedule.
Conversely, raw materials inventory may be bloated temporarily because the purchasing department has taken advantage of quantity discounts. Finished goods inventory allows the firm flexibility in its product scheduling and its marketing.
The above situation has urged the carrying out of this research work in order to enlighten manufacturers, researchers, students and all other interested persons on the importance of inventory control so that it becomes easier to known when "Enough is Enough".
1.6 SCOPE AND LIMITATIONS OF THE STUDY
The premise on which this study is based is that profitability of manufacturing companies is dependent upon effective and efficient inventory control systems.
This study will therefore cover the inventory management and control system adopted by Nigerian Breweries Plc over a period of 2003 to 2007.
Nigerian breweries Plc is considered a fair representation of companies within the same industry carrying out similar activities or operations. Most of the information needed to carry out this research is from staffs of Nigerian Breweries Plc.
In the course of conducting this research work, it is expected that the following will constitute impediment to the effective conduct of this study.
· Availability of relevant literatures and textbooks
· Time constrains
· Financial constraints
· Inaccessible and inadequate database
· Inadequate information given by the case study firm.
1.7 DEFINITION OF TERMS
Economic Order Quantity (EOQ): This is the level of activity at which the cost of inventory control is minimized
Inventory: It can be referred to as stock. By stock, we mean raw materials, work -in-progress and finished goods
Inventory Control: This is a system used in a firm to control the firms
Inventory turnover: This simply shows how quickly inventory is being
Obsolete stock: a stock no longer in use i.e. outdated
Ordering cost: the cost incurred in placing the order up to the point of receiving the goods into the warehouse
Overtrading: This is a situation whereby a company performs excessive business operations than its capital can cope with.
Profitability: this is the ability to sell goods and services above costs and earn reasonable returns on capital employed.
Raw Material: these are those inputs that are converted into finished goods through the manufacturing process.
Re-Order Level: it is a fixed point between maximum and maximum stock levels where requisitions are raised for new purchases.
Shortage Cost: these are costs incurred when customers demand cannot be met because the tock is exhausted.
Under Trading: this is a situation whereby a company has much funds than necessary.