Inventory Management In A Manufacturing Company Finance Essay
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This research work serves as a practical operating guide for those who wish to introduce effective inventory control in their organizations. More importantly, the research work studies the effect of inventory management on profitability, inventory and the associated costs as well as challenges encountered with keeping inventory.
The research work focused on the perspective of inventory control and management in Nigerite Nigeria Limited with a view to identifying lapses that may impact negatively on the performances of the manufacturing industry.
Questionnaires were administered to obtain data from the employees of the Nigerite Nigeria Limited for the purpose of analysis using some descriptive statistical techniques such as percentage. The result was further validated by using Statiscal Package for Social Sciences (SPSS)- Pearson Correlation.
The results from the data analysis showed that Nigerite Nigeria Limited keeps inventory of raw-materials, components parts, semi-finished and finished goods for the purpose of production and generate sales; categorizes inventory into fast-moving and special items, and applies continuous inventory counting as well as spot-check by auditors. It was also discovered that the inventory valuation technique in use in the company is first in first out (FIFO). Also, the company's replenishment procedure is Economic Order Quantity (EOQ) which minimizes the over all relevant inventory cost. The research concluded, based on the available data, that there is direct relationship between inventory management and final prices of products, the productivity of the company and the regular flow of materials. However, the study revealed that storage facilities constitute one of the major challenges of inventory planners. The company is thus advised to improve and monitor the condition of her storage facilities. This will ensure that orders are not outside the limit their storage capacity and ensure good condition of materials in store over a considerable. Similarly, the company is encouraged to adapt herself with the modern inventory forecasting techniques that would enable her to determine the future needs or demand of customers in order to determine the level of stock to keep.
TABLE OF CONTENTS
Title Page ------------------------------------------------------------------------------ i
Certification --------------------------------------------------------------------------- ii
Dedication ----------------------------------------------------------------------------- iii
Abstract -------------------------------------------------------------------------------- v
Table of contents ----------------------------------------------------------------------vii-ix
CHAPTER ONE: INTRODUCTION
1.1 Background of the study 1-3
1.2 State of the problem 3-5
1.3 Purposes/Objectives of the study 5
1.4 Significance of the study 6
1.5 Research Methodology 6-7
1.6 Scope of the study 7
1.7 Limitation of the study 7-8
1.8 Organization of the study 8-9
1.9 Definition of terms 9-10
1.10 References 10
CHAPTER TWO: LITERATURE REVIEW
2.1 Introduction 11
2.2 Brief History of P.Z. Industries Plc 11-12
2.3 Literature Review 13-14
2.4.1 Management of Inventory 14-15
2.4.2. Inventory Control 15-16
2.5 Importance of Inventory Management 16
2.6 Role of Inventory Management 16-17
2.7 Reasons for Carrying on Inventory 17-18
2.8 Cost of Inventory 18-20
2.9 Inventory Levels 20-24
2.10.1 The Basic Economic Order Quantity (EOQ) 24-27
2.10.2 Formation of the Model (Graphical Approach) 27-28
2.10.3 Stochastic Inventory Model 28-31
2.10.4 Production Run: Economic Batch Quantity 31-33
2.11 Inventory Control Method - ABC Analysis 33-35
2.12 Materials Pricing 35-37
2.13 References 37
CHAPTER THREE: RESEARCH METHODOLOGY
3.1 Introduction 38
3.2 Restatement of Research Questions and Hypothesis 38-39
3.3 The Population 39
3.4 Sample Size and Sampling Design 40
3.5 Data Instruments 40
3.6 Methodology for Data Analysis 40-41
3.7 Limitations of the study 41
3.8 References 41
CHAPTER FOUR: ANALYSIS OF DATA
4.1 Introduction 42
4.2 Presentation and Analysis of Data 42-56
SUMMARY OF FINDINGS, CONCLUSIONS AND RECOMMENDATIONS
5.1 Summary of Findings 57-58
5.2 Conclusions 59-60
5.3 Recommendations 60-61
5.4 Suggestion for Further Studies 62
REQUEST AND SPECIMEN OF THE QUESTIONNAIRE 64-69
BACKGROUND OF THE STUDY
Inventory figures in the balance sheet of companies, especially manufacturing firms, are of immense significance. Every naira (N) added or subtracted from the inventory value overstates or understates profit by the amount. Therefore, inventory management is of great importance to companies because it constitutes a vital and valuable item in the financial statement. This is because the inventory balance (value) in the financial statement has a direct effect on reported profit. (Pandey, 2004).
One widely used measure or parameter for managerial performance relates to Returns on Investment (ROI), which is profit after tax divided by total assets. Because inventory represents a significant portion of the total assets, a reduction of inventories can result into a significant increase in Return on Investment. Excessive inventory on the manufacturing floor tends to conceal a wide variety of problems. Moreso, inventory storage costs are typically very expensive, averaging 30 to 35 percent of the value of inventory itself. And in some cases, especially when and where inventory management is not taken seriously, storage costs are much than the cost of inventory. (Shim and Segel, 1999).
Therefore, for an organization to achieve its profitability objectives, its inventory management must be effective and very strategic.
Pandey (2004) opined that inventory management is of great importance to companies in that the majority of their operations revolve around the inventory resources. Hence, the need for a close examination of this aspect becomes imperative. Inventory control constitutes an integral aspect of financial control. The amount of funds that inventories represent in recent years has led to a growing emphasis on the importance of inventory management and control.
Inventory refers to any stock of items used within the production system or in the operation of the business. They include such items as basic raw materials, supplies of components and parts, work-in-progress and finished goods that are ready for delivery to customers.
Shim and Siegel (1999) assert that inventory accounts for a sizable portion of firm's assets next to plants, building and equipment. It serves a definite function and if efficiently used, earns return like other assets. The return is expressed ultimately in terms of increased productivity, lower cost of production and avoidance of stock out costs which all translate to higher turnover and in turn higher profit for the organization.
Banjoko (2004) viewed inventory as the soul and livewire of any manufacturing organization. Poor inventory management can present a serious challenge to productive capacity. The overall objective of inventory management is minimizing the total cost associated with stock which in turn leads to higher profit. This is done by establishing two known factors: when to order and how to order. Also, different reasons have been advanced as to why an organization would want to hold on to a reasonable portion of its resources in the form of inventory.
Over the years, the study of inventory management has provoked a lot of interest from various groups including academics and industry practitioners. Consequently, a lot of models have now been developed to assist managers / organizations in planning and controlling their inventory. Thus, for large manufacturing concern with elaborate and complex inventory profile, models involving the use of computers are readily available while for relatively smaller ones, with simple inventory outlook, manual system involving normal recording would suffice.
It is pertinent to stress that whatever system of inventory management that is to be adopted, it should take the need of the organization vis-à-vis its cost - benefit relationship into account. A careful balance will result in the minimization of cost which ultimately would lead to the realization of the organizational objectives, that is, profitability and growth.
In a manufacturing company, the efficiency with which its inventory resources are managed is crucial to the attainment of its set objectives. Hence, it demands a great deal of attention from the management and all other levels of the organizational hierarchy.
1.2 STATEMENT OF PROBLEM
Inventory management is an essential factor in the satisfaction of customers needs at the right time. For an organization to achieve anticipated profit, it must satisfy its customers at all time.
This greatly depends on the adoption of effective and efficient inventory management policies that will help to lower production cost, and help the organization to meet customers demand at any point in time and smooth production runs of the firm, in order to achieve favourable profit level.
In recent time, failures of most organizations can be traced to poor inventory management and control because of the huge amount of funds that inventories represent on the balance sheet of organization.
It is the belief of the researcher to examine those factors which include, effective inventory management, that are imperative to organizational profitability.
1.3 PURPOSE OF STUDY
This study is concerned with effect of inventory management on profitability of organizations.
Other reasons are:
To determine the various types of inventory kept in Nigerite Nigeria Limited.
To determine reasons for keeping inventory in the company
To establish various costs associated with inventory and their effect on profitability.
To examine how inventory management affect productivity, production, sales revenue and profitability of manufacturing company.
To establish how inventories are categorized and stock taking is done in the company.
To determine what problems are associated with keeping inventory in the company.
To examine the forms of inventory control system adopted by Nigerite Nigeria Limited.
1.4 RESEARCH QUESTIONS
In attempting to establish a relationship between efficient inventory management and profitability of manufacturing companies, the following research questions were developed:
What types of inventory are kept in Nigerite Nigeria Limited?
Why is inventory kept in Nigerite Nigeria Limited?
How has inventory management affected profitability of the company?
What costs are associated with keeping inventory and their effect on profitability in the company?
What problems are associated with keeping inventory in the company?
How are inventory categorized in Nigerite Nigeria Limited?
What forms of inventory control system are used in the company?
1.5 SIGNIFICANCE OF STUDY
This study will bring to focus the benefits of having in place, an inventory management policy that would lead to profitability and growth of manufacturing companies. By extension, it will show the consequences of failing to pay attention to the management of inventory. It is expected that this study would produce greater awareness of inventory management within the manufacturing industry.
Finally, it also intended to alert actors in the manufacturing sector of the imperative of having a sound inventory management policy that will ensure the profitable existence of their organization. In doing so, it is intended that the economy will benefit since the growth of manufacturing sector is one of the indices for measuring the aggregate growth in the economy.
1.6 SCOPE OF STUDY
This study attempted to look at the effect of effective inventory management on the profitability of manufacturing companies in Nigeria. However, since it was difficult and cumbersome in terms of time, financial resources, logistics and other technical areas to examine the entire manufacturing companies in Nigeria, the researcher chose Nigerite Nigeria Limited. (a leading manufacturer of Building Roofing and Ceramic tiles in Nigeria) as a case study. Investigation has been restricted to concept of inventory management, motives for holding inventory, stock control, as well as problems associated with inventory management and how these impinge on production and consequently on profit.
1.7 DEFINITIONS OF TERMS
Cycle Time: This is the time between when an order is received and another order is placed.
Deterministic Model: This is a model which assumes complete certainty of situations. The values of all factors such as demand, usage, and lead time and so on are known exactly and there is no element of risk and uncertainty.
Downtime Production Cost: It is the cost incurred during the period production process was not in operation it is cost involved as result of disruption of operations. It is the cost of troubleshooting, reprocessing and restructuring.
Economic Order Quantity: It is a decision model that, under a given set of assumptions, calculates the optimal quantity of inventory to order.
Lead Time: This is the time between the time an order is made and the time the item is received.
Ordering Costs: These are costs of preparing and issuing purchase orders, receiving and inspecting the items included in the order, and matching invoices received, purchase orders, and delivery records to make payment.
Quality Costs: These are costs that result when features and characteristics of a product or service are not in conformance with customer specification.
Re-order Level: It is the fixed points between maximum and minimum stock levels where requisitions are raised for new purchases.
Review Period: It is the time between successive examinations of the inventory to determine what should be reordered.
Safety or Buffer Stock: This is a stock allowance to cover for error in forecasting the lead time or the demand during the lead time. The stock, in excess of average demand, is to compensate for variability in demand and lead time.
Stochastic Model: This is a model where some or all of the factors are not known with certainty and can only be expressed in probabilistic or statistical terms.
Stock Policy: This is a set of rules which determines how and when certain decision making concerning the holding of stock should be made.
Stock out Cost: These are costs involved when customers' demand cannot be met because the stock is exhausted. They are the opportunity cost of not having a stock item when there is effective demand.
Central to the existence of any business undertaking, is the profit making motive. This is essential, if the business must survive and ultimately grow. The ability to realize this objective depends on how well available resources of the organization are effectively managed, and a critical component of these resources is the pool of inventory. Hence, it is logical to assert that the optimization in the use of inventory is a vital factor in the operational success of any firm and consequently, an important component of its management function.
The need for an effective control of inventories as a means of improving the performance of manufacturing companies cannot be over-emphasized. Inventory control, a vital element in the management of material is one of the most serious problems confronting modern organizations especially those organizations having a very high investment in inventory items. Effective and efficient inventory controls will therefore, no doubt, aid the organization by substantially improving its performance.
Effective inventory management requires the development of policies that will help to achieve an optimal investment in inventory. This can be achieved with the ability of the concerned managers to determine the optimal level of inventory necessary to minimize inventory related costs. The ability to determine this optimal lot size will bring about a competitive advantage for firms especially those operating under a much tensed environment. A good inventory management is essential to the success of a company because of the impact of inventory on the daily operations, and most importantly, the amount of money inventory represents in the budget of a company.
Over the years a great deal of literatures has been written on this aspect of management function. In this aspect, an attempt will be made to look through these literatures with a view to finding possible areas of application to the inventory management needs of Nigerite Company Limited and by extension the entire manufacturing sector.
2.1 THE CONCEPT OF INVENTORY
Inventory has been described "as idle resources". Some authors literarily put inventory as "money on the shelves". Banjoko (2004) posits that in an organization, the existence of these idle resources represents a sizeable proportion of its capital investment that is tied down. In a manufacturing firm, inventory refers to materials that contribute to or become part of a firm's product output. Like in any investment situation, the motive is usually profit oriented. Hence, firms are prepared to keep inventory at a cost in the belief that the alternative of not doing so will be more costly or less profitable. The need to plan the level of this idle resource has been the pre-occupation of inventory management theorists.
According to International Accounting Standard (IAS 2), an inventory is defined as a "tangible property":
Held for resale in the ordinary course of business
In the process of production for sale or
To be consumed in the production of goods and services.
Love (1983) defined inventory "as a quantity of goods or materials in the control of an enterprise and held for a time in a relatively idle or unproductive state awaiting its intended use or sale".
2.2 INVENTORY MANAGEMENT AND CONTROL
According to Davis, Acquilano and Chase (2003), Inventory Management can be defined as the mechanism used to provide organization structure and operational policies for maintaining and controlling the products to be stocked, the minimum quantity, as well as the period for reorder of stock. Omolehinwa (1991) views inventory management as a managerial function that is concerned basically with planning and control of materials.
Control is a process by which events are made to conform to a plan. Therefore, to control material, there must be a plan of action. Planning focuses on such issues as what to store, where to buy, when to buy and how to buy. To be successful, inventory management should be given top management attention.
To a warehouse manager, controlling inventory means controlling its physical storage, location, age, security from theft, fire, moisture and the likes and maintaining information which provides tractability and accurate quantity record.
To a quality assurance manager, controlling inventory means preserving its fitness for use, which involves similar security measures and record - keeping requirement. To an accountant or auditor, inventory is controlled through the use of cost of quality, information that enhances proper asset valuation, determination of net income and other financial indicators.
Battersby (1970) identified three people whose mental attitude can affect the general level of inventory in an average organization.
They are: (1) The sales manager
The production manager
The purchasing manager
In an attempt to achieve efficiency within their respective departments; the personalities may cause stock to go up. These differences however are not insurmountable. Most of the conflicts evaporate when examined in the light of sound economic judgment. Arriving at a level between too much and too little stock is the major challenge to management. Management is constantly pre-occupied with the challenge of resolving the conflict inherent in balancing the opposing costs of having an inventory and not having inventory.
Ibitoye (1985) noted that though the ideal situation is not to hold inventory, it has been seen that it is not possible to attain this ideal situation because of the uncertainties under which business operates. Hence, stock holding cannot be avoided. Inventory management systems vary from one organization to the other. In a particular organization, it may be formal or informal, cheap or expensive. Yet in another, control may depend on the effort of a large control staff while in another the responsibility may rest with the plant manager.
2.3 MOTIVES FOR HOLDING INVENTORY
Different authors have advanced various reasons why business organizations hold inventory. Lucey (1996) gives the following reasons which, he said, are based on deliberate decision by management.
To ensure that sufficient goods are available to meet anticipated demand.
To absorb variation in demand and production
To provide a buffer between production processes. This is applicable to work-in-progress stocks which effectively decoupled operations.
To take advantage of bulk purchasing discounts
To meet possible shortage in the future.
To absorb seasonal fluctuations in demand
To enable production processes flow smoothly and efficiently.
As a necessary part of the production process
As a deliberate investment policy particularly in times of inflation or possible shortages.
Alternative reasons given by the author for stock accumulation which he described as less praise worthy are:
- Poor or non-existent inventory control resulting in over-large orders, being out of phase with production.
- Inadequate or non-existent stock records
- Poor liaison between the production control, purchasing and marketing departments.
Hadley and Whitten (2002) said that the fundamental reason why organizations carry inventories is that it is either physically impossible or economically unsound to have goods arrive precisely when demand for them arises. Without inventories, customers would have to wait until their orders are fulfilled from source or where manufactured. However, customers will not and cannot be allowed to wait for long period of time, for this reason alone the carrying of inventories is necessary to almost all organizations that supply physical goods to customers.
Olowe (1997) is of the opinion that if products are available and customer's demand is immediately satisfied, prospective customers will not go elsewhere. However, if the firm is out of stock and cannot meet customer's demand, there would be loss of customers' goodwill. Loosing customers' goodwill whether in trading or manufacturing setting is bad for business.
According to Drury (2002), the motive for holding inventory can be considered along the Keynesian postulates of the reasons for holding money. These are:
Transactions Motive: It occurs whenever there is a need to hold stocks to meet production and sales requirement and it is not possible to meet this requirement instantaneously.
Precautionary Motive: This is when a firm might decide to hold additional amounts of stocks to cover the possibility that it may have underestimated its future production and sales requirement. It only applies when future demand is uncertain. It is the need for production against uncertainty since we cannot predict demand with sufficient accuracy.
If goods could be obtained immediately and at no excess cost, then no inventories greater than those needed to satisfy the transaction motive would be required. This implies that if no cost is associated with stock out, then no safety or precautionary stocks are required. However, it should be noted that transaction stock must be supported by precautionary stock to ensure customer satisfaction.
Speculative Motive: When it is expected that future input prices may change, a firm might maintain higher or lower stock levels to speculate on the expected increase or decrease in future prices. This is of interest in terms of rapid price rise as well as if there is known change in cost or in the possibility of sales within a foreseeable time.
The possibility of profit through changes in prices, interest rates or other supply and demand conditions is as pertinent to stock of goods as it is to money. In general, quantitative models do not take into account the speculative motive.
2.4 PROBLEMS ASSOCIATED WITH THE MANAGEMENT OF INVENTORY
The strategic importance of inventory in an organization demands that necessary attention should be focused on its management. However, in the process of controlling cost, managers are constantly faced with a variety of problems which are associated with inventory management. Davis, Acquillano and Chase (1999) present some of the problems of inventory management as follows:
Forecasting inventory requirement. This represents a delicate phase in inventory planning. It requires the inputs of various functional units such as finance, marketing, production and purchasing departments to enable management come out with a forecast that will ensure that inventories are neither too little nor too much. It is necessary to make some estimate of future consumption to act as a guide and help the organization to plan its order.
Most organizations have storage problems due to lack of adequate storage facilities and this affects the quantity of inventory they carry. Management should ensure that the size of their storage facilities is considered during inventory planning to ensure that orders are not outside the limits of their storage capacity. The suitability of storage facilities in relation to orders demands critical consideration. This is to ensure that goods which require covered storage are not exposed to the air as this could have effect on the environment.
Effective inventory management in organizations is also affected by lack of inventory control system. Since stock is equivalent to cash, it follows that it should be carefully protected, counted and checked in similar way. There are many organizations where the inventory system displays looseness which would not be tolerated in a cash office in spite of the fact that the value of stock is usually greater than cash held.
Inventory planning must take note of the ease of accessibility of inputs. A crucial factor in this regard is the geographical location of the source of supply. In a country like Nigeria, where manufacturers are highly dependent on import as a source of their inventory needs, this has effect on the size and frequency of deliveries. Manufacturers like Nigerite Nigeria Limited can mitigate this problem by embarking on backward integration to provide substitute for imported raw materials. It can establish wheat farms in areas of the country where conditions are favourable.
2.5 INVENTORY ANALYSIS
Whatever system of operation that is established for inventory management, the procedures adopted in its implementation and the workers concerned matter a great deal on the expected result. The logical point therefore, before commencing any worthwhile inventory planning is to analyze the stock being held by an organization. By analyzing the stock held, management can best determine what amount of effort would be spent controlling the various ranges of stocks. The grouping of inventory into various categories for the purpose of effective planning and control is called Inventory Analysis. Banjoko, (2004) gave the following types of inventory analysis.
THE ABC ANALYSIS
The ABC method requires that an estimate be made of the total purchase cost for each item of stock for the period. Sales forecast is the basis used for estimating the quantities of each item of stock to be purchased during the period. Each item is then grouped in decreasing order of annual purchase cost. The top 10% of items is stock in terms of annual purchase cost are categorized as A items, the next 20% as B items, and the final 70% as C items. For example, if it is assumed that there are 10,000 stock items, then the top 1000 items in terms of annual purchase costs will be classified as "A" items and so on. In practice, it will be unnecessary to estimate the value of many of the 7000 C items, since their annual purchase cost will be so small it will be obvious that they will fall into the category.
V. E. D. ANALYSIS
V - Stands for Vital items. When these items are out of stock or when not readily available, production is completely brought to a halt.
E - Stands for Essential items when not available, there is temporary loss in the production process.
D - Stands for Desirable items. These are items which are necessary but their non-availability does not have any immediate disruptive effect on the production process.
2.5.3 F. S. N. ANALYSIS
Here the quantity and rate of consumption are analyzed and classified as:
F - Fast - moving items
S - Slow - moving items
N - Non - moving items
S. D. E. ANALYSIS
This analysis is useful where most inventory items are not only scarce but have to the imported.
S - Stands for Scarce items. These items are usually imported and also very short in supply.
D - Stands for Difficult items which are available in the market but are not easily accessible.
E - Stands for items which are Easily available. that is, mostly local items.
Each of the above analysis has its specific features, advantages and shortcomings. It is therefore left for management to choose any or a combination that would bring practical and optimum solution to control of inventory.
2.6 INVENTORY CONTROL SYSTEM
In an effort to provide an adequate, but not too much stock of materials at any particular point in time to allow for optimality in the use of organization's resources, firms normally resolve to order for appropriate quantity of materials and decide on when to place such order. Inventory control system is thus the method of managing inventory resources for optimum result. The forms of inventory control system include:
- Re-order level or two bin system
- Periodic review system
2.6.1 RE-ORDER LEVEL OR TWO BIN SYSTEM
This is an inventory system in which a fixed quantity is ordered at irregular intervals. When stock level has fallen to a certain level specified on the bin card, a fixed quantity usually the economic order quantity will be ordered. This system is called a two bin system because of the way it is sometimes operated.
For the stock items, two bins are assumed. Stock is taken from the first bin until it is empty; the first bin is then replenished with the economic order quantity. During the lead time stock is used from the second bin. The standard stock for the second bin is the expected demand during lead time plus safety stock when the order arrives the second bin is filled up to its stand stock and the rest placed in the first bin.
ADVANTAGES OF RE-ORDER LEVEL SYSTEM
According to Adeniji (2004), the following are the advantages of re-order level system.
Lower stock on average
More responsive to demand fluctuation
Appropriate for different types of inventory
Items are ordered in economic quantity since economic order quantity is calculated.
Automatic generation of replenishment order at the appropriate time by comparing stock level with the re-order level.
DISADVANTAGES OF RE-ORDER LEVEL SYSTEM
The re-order level may be reached by many items simultaneously thereby overloading the re-ordering system.
Items come up for re-ordering randomly so that there is no set sequence.
In certain circumstances the economic order quantity calculated may not be accurate.
2.6.2 PERIODIC REVIEW SYSTEM
This system which is sometimes called the constant cycle system is the system under which the stock level is reviewed at fixed intervals. Varying quantities are ordered at each interval depending on the current level of stock remaining after the review. The objective is to ensure that the stock is made up to a predetermined level which takes account of the likely demand before the next review and during lead time.
Advantages of Periodic Review System
Adeniji (2004) presents the following as the advantages of periodic review system.
All stock items are reviewed periodically such that obsolete items are quickly identified.
Larger quantity discount may be gained by ordering a range of stock items from a supplier.
Economics in placing orders may be gained by spreading the purchase office load more evenly.
Disadvantages of Periodic Review System
Larger quantities are required since order quantities must take account of the period between reviews as well as lead times.
Re-order quantities are not at the optimum level of a correctly calculated economic order quantity.
It is less responsive to changes in consumption if the rate may well occur before the next review.
It may be difficult to set appropriate periods for review unless demands are reasonably consistent.
2.6.3. JUST - IN - TIME SYSTEM (JIT)
Just - in - time (JIT) can be defined as a workflow organization technique to allow rapid high quality, flexible production whilst minimizing stock levels and manufacturing waste. It is a series of manufacturing and supply chain techniques that aim to slash inventory levels and improve customer service by manufacturing not only at the exact time customers require but also in the exact quantities they need and at competitive prices.
JIT is said to have originated from Toyota's 'kanbnu' system named after a card which is passed from workstation to workstation to control the production flow. The card ties production to actual orders effectively pulling orders through the factory.
JIT extends much further than a concentration of inventory levels and also centres on the elimination of waste. Waste had been defined as any activity performed within a manufacturing company which does not add value to the product. Examples of waste are:
raw materials inventories
Finished goods inventories
Queues and delays on the shop - floor.
Advantages of Just-In-Time (JIT)
Just-In-Time (JIT) attempts to eliminate waste at every state of the manufacturing process notable by the:
Elimination of work-in-progress by reducing batch size (often to one)
Elimination of raw materials inventories by the suppliers delivering direct to the shop floor just in time for use
Elimination of scrap and rework by an emphasis on total quality control of design of the process, and of the materials.
Elimination of material handling cost by re-design of the shop floor so that goods move directly between adjacent work centres.
Elimination of finished goods inventories by reducing lead times so that all products are made to order.
The combination of these concepts brings about JIT, which provides a smooth flow of work through the manufacturing plant, a flexible production process which is responsive to the customer's requirement and massive reductions in capital tied up in inventories. The end result of JIT is radical improvement in the productivities and more products of higher quality getting to the customers more quickly at a lower cost.
Obtaining the cooperation of suppliers is a vital first step when implementing a JIT System. A firm is a long way towards JIT if its supplies will give it shorter lead - times, deliver smaller quantities more often, guarantee a low reject rate and perform quality - assurance inspection at source. If a firm's suppliers make more frequent deliveries of small quantities of material, then it can ensure that each delivery is just enough to meet its immediate production schedule. This will keep its inventory as low as possible. If suppliers will guarantee quality of the materials they deliver and will inspect it at source, then a firm can make enormous savings on both time and labour. Materials handling time will be saved because as there is no need to move the stock into a store the goods can be delivered directly to a workstation on the shop floor. Inspection time and cost can be eliminated and then labour required for reworking defective material or returning goods to the supplier can be saved.
In return for this improved service from supplier, the firm can guarantee to give more business to fewer suppliers, place long-term purchase orders and give the suppliers a long-term purchase orders and a long-range forecast of its requirements.
The objectives of JIT philosophy include achieving the elimination of non-value added activities, zero inventory, zero defects, batch size of one, zero breakdowns and a 100% on-time delivery service. Firms that have implemented JIT techniques have substantially reduced their investment in raw material and work-in-progress stocks. Other advantages include a substantial saving in factory space, large quantity discounts and a reduction in paper work arising from issuing blanket long-term orders to fewer suppliers instead of purchase orders.
Disadvantages of Just-In-Time (JIT)
Any failure in the product design will result ultimately to waste of time
There is waste of time because the system is restricted to the use of standard parts. Time is wasted during the training of employees, purchasing, checking and handling also consumes time.
It considers a relatively small lot size. In the Just-In-Time philosophy, the ideal lot size is one unit, a quantity which may not be realistic owing to practical considerations requiring minimum lost sizes.
Any occurrence of quality detects during the process can disturb the orderly flow of work. This will also lead to additional cost for investigating the problem.
2.7. INVENTORY MODELS
Models can be defined as any representation (physical or abstract) of a real thing, event, or circumstance, Lucey (1996). With models the object of the study can be simulated through the introduction of manipulability input values and results obtained which can be used in real life situation. In inventory control, two types of models are generally used. They are deterministic and stochastic model. Before going into detailed examination of these models it is Pertinent to first consider the various costs that are associated with stockholding.
2.7.1 INVENTORY COSTS
The total inventory cost can be classified into four categories namely:
Carrying or Holding Cost
These are the costs incurred whenever a material is stored.
They are incurred because the firm has decided to maintain inventory. The cost may however be difficult to determine but may include the following:
Cost of capital tied down
Insurance and audit
Store, labour and administration costs
Damages and Pilferages
Deterioration and obsolescence
Storage cost which may include rent,
Interest on money borrowed to buy stock,
Documentation cost, e.g. stock taking.
The larger the size of stock held, the higher the carrying cost incurred.
Ordering or Acquisition Cost
These are costs incurred in placing the order up to the point of receiving the goods into the warehouse. Most of these costs are administrative in nature. These costs will include:
Costs issuing purchase order- remuneration of purchasing department staff.
Cost of loading and offloading
Cost of getting payments to the supplier
Cost of communication e.g. on delay, wrong quantity
Ordering costs per year increase as the number of orders increase.
Stock out Costs
These are costs involved when customers demand cannot be met because the stock is exhausted. They are the opportunity cost of not having a stock item when there is effective demand. The costs involved are mostly subjective in nature without involving movement of cash. This type of costs may include:
Loss of turnover
Loss of goodwill
Loss of qualified employees
Loss of trade secrets to competitors due to loss of staff.
Premium payment for rush delivery.
These are also referred to as outage costs which are always very difficult to quantify, usually arbitrary and approximate in nature.
Cost of Inventory or Purchasing Cost
This is the actual cost of the items placed in stock. The per unit cost of the items may vary with some quantity discount or it may be fixed if no quantity discount is allowed.
Deterministic Inventory/ Economic Order Quantity (EOQ) Model
Deterministic inventory model assumes that all relevant variables necessary in arriving at the optimal order level are known with certainty and there is no element of risk and uncertainty. It is also referred to as the economic order quantity (EOQ) model. Economic order quantity (EOQ) is the ordering quantity which minimizes the total cost or the quantity where the holding cost and ordering cost are equal. The basic EOQ model is predicated on certain assumptions. These include:
Demand rate is constant and can be ascertained
There is zero lead - time on orders. i.e. lead-time is certain.
Stock-outs are not allowed and safety stock can be ignored
Orders arrive instantaneously and not gradually
The ordering cost per order is known.
The annual holding cost per item can be determined
The purchase price per unit is constant.
With the above assumptions, the inventory graph is a follows
P Ordering Cost Qty
Source: Banjoko (2002)
From figure 2.1, the vertical axis represents the relevant annual costs for the investment in stocks and the horizontal axis can be used to represent either the various order quantities or the average stock levels. Note that the total cost line is at minimum at point (P) and it is the point where the ordering cost and holding cost curve intersect, that is, the economic order quantity is found at the point where the holding cost equals the ordering costs. It is also interesting to note from the graph that the total relevant costs are not particularly sensitive to changes in the order quantity. Mathematically, the economic order quantity formula can be derived using differential calculus.
Let TC = Total cost of inventory
Q = Re-order quantity
C = Ordering Cost per year
H = Holding cost per year
D = Annual Demand
D/Q = Number of orders per annum
D/Q x c= Total ordering cost per annum
Q/2 = Average Stock
Q/2 x h= Total holding cost
œ TC = dc + Qh
EOQ is where TC is minimized
MC = dTC i.e. differentiate with respect to Q
TC = dc + Qh
œ Tc = dcQ + ½ Qh
dTc = -dcQ-2 + ½ Q1-1h
= -dcQ-2 + ½ h
dTc = -dc + h
dQ Q2 2
Equate MC = 0
= -dc + h = 0
Make Q the subject of formula.
Q = 2dc
i.e. the EOQ = 2dc
EOQ with Stockout
Where there are stock-outs i.e. stock-outs cost are known, the EOQ formula would be:
EOQ = 2DC x C x C2
Where: D = Annual demand
C = Ordering Cost per unit
h = holding cost per unit
C2 = Stock-out cost
EOQ model with stock out can be represented graphically as thus
Stock levelFigure 2.2
Source: Adeniyi, (2008)
EOQ with Discount
The classical EOQ model does not take account of purchase cost because it is constant. However, if quantity discounts are offered, then purchase cost becomes relevant since purchase cost now depend on the price quoted. According to Omolehinwa (1991), when quantity discount are offered, we have two savings in cost and one additional increase in cost. These savings arise from two sources. They are:
Saving due to the discount itself
Saving due to reduced ordering cost.
The extra cost incurred is due to keeping a greater level of stock and hence higher carrying cost.
To modify the EOQ model in order to accommodate discount, the approach to adopt according to Lucey (1996) is to consider the cost associated with the normal EOQ i.e. without discount and compare the cost with the cost at each succeeding discount point and so find the best quantity to order.
STOCHASTIC/PROBABILISTIC INVENTORY MODEL
A stochastic inventory model describes a condition where some of the factors that are responsible for optimizing inventory cost e.g. demand usage, lead time e.t.c. are not known with certainty and can only be expressed in probabilistic term. This situation is typical of daily business operation where decisions are taken under condition of uncertainty with varying degree of risk.
In the previous model it is assumed that demand and lead time are certain and constant and that the re-order level equals the demand during lead time. Lead time is the time that elapses between the time an order is placed and when the order is received. However, when the demand and or lead time vary, determining the re-order level becomes a problem.
The solution is to hold a buffer or safety stock. Buffer stock, according to Olowe (1997), is the level of stock to cover uncertainty in lead time. The size of the buffer stock will depend, among other things, on the nature of the business, the extent of variations in demand during lead time, the cost of stockout and the service level at which a company wishes to operate. A typical stochastic inventory situation can be depicted in the figure below.
LT1 LT2 LT3 Time
In the above diagram, note that,
Q1 ¹ Q2 ¹ Q3 and LT, ¹ LT2 ¹ LT3
Source: Banjoko (2000).
From the diagram above, it is observed that, the lead time varies from period to period. So will the lead time demand. Moreover, one can notice that Q1, ¹ Q2 ¹ Q3. Thus given this situation, a company may want to decide on the amount of the safety stock it wishes to maintain in order to operate on a particular service level.
Variation in demand and lead time leading to the creation of buffer stock and various re-order level, requires calculation of various degree of complexity. All these calculation are accomplished with the aid of statistical tools. When dealing with buffer stock with constant lead time, distribution such as poison distribution, exponential distribution, and normal distribution become handy tools. They consist of frequency distribution which uses standard deviation as a measure of the average value of the variability of a given distribution.
These distributions are useful approximation of the actual sales and average sales for many items. Where buffer stock with variable lead time has to be considered, the Monte Carlo simulation technique will be used. This is due to the complexity involved as a result of dial variation.
In this chapter, attempt has been made to look at literatures on the concept, management and motives for holding inventory. The various analytical methods available to inventory planners also came into focus; while the various inventory control methods were examined. Inventory models under different conditions, their behaviours, basic assumption, modification of these assumptions, and formulas for calculation formed part of this chapter.
This chapter covers the methods applied for data collection and techniques used in analyzing the data. The concise description of the method of enquiry employed for this study is also explained. It begins with the basic restatement of research questions which is sine qua non to the research. The description further entails the data analysis tools, target population and the research instrument employed.
3.1 HISTORIAL BACKGROUND OF NIGERITE LIMITED
Nigerite Limited, a member of Etex Group, is the largest company in Africa engaged in the manufacturing of NT fibre cement roofing and ceiling sheets, concrete roofing tiles and vinyl floor tiles. Nigerite Limited, incorporated in Nigeria in 1959 but began its commercial operations in early 1961, was awarded the NIS ISO 9002 (Certificate of the quality management system for the manufacture, sales and installation of fibre-reinforced building materials and PVC floor tiles), NIS ISO 14001 (Certificate of the Environmental Management Systems) and NIS ISO 9001:2000 Certificates in March 1998, September 2002 and December 2002 respectively.
The company is located on a fifty-acre site along Oba Akran Avenue, Ikeja, Lagos State. The company consists of three factories, workshops and stores as well as administrative offices, a health centre, a modern canteen and other services necessary for the efficient operation of a modern manufacturing company of our size.
Nigerite Limited is a venture between Odua Investment Corporation Limited and Etex Group of Belgium. Nigerite is a socially responsible company and as such, keeps a close watch on the environment in line with its motto: Towards Environmental Excellence through responsible care. This is contributing immensely to the successes recorded by the company for many years in the Manufactures Association of Nigeria's (MAN) best kept industrial premises competition. Nigerite has been allowed to retain the original trophy after winning the competition for three consecutive years 1993 - 1995. It is important to note that the company still maintained its first position in the 1996, 1997, 1998 and 1999 competitions.
3.2 RESTATEMENT OF RESEARCH QUESTIONS
The following are the basic and fundamental aspects of the research questions addressed by this study:
What types of inventory are kept in Nigerite Nigeria Limited?
Why is inventory kept in Nigerite Nigeria Limited?
How has inventory management affected profitability of the company?
What costs are associated with keeping inventory and their effect on profitability in the company?
What problems are associated with keeping inventory in the company?
How are inventory categorized in Nigerite Nigeria Limited?
What forms of inventory control system are used in the company?
H0: There is no significant relationship between the inventory management system and the prices of Nigerite Nigeria product.
H1: There is significant relationship between the inventory management system and the price of Nigerite Nigeria product.
H0: There is no significant relationship between proper inventory control and the productivity of Nigerite Nigeria Limited.
H1: There is significant relationship between proper inventory control and the productivity of Nigerite Nigeria Limited.
H0: There is no significant relationship between inventory control and regular flow of materials within the company.
H1: There is significant relationship between inventory control and regular flow of materials within the company.
3.3 RESEARCH DESIGN
Being an academic study, relying on opinion collection from target respondents, survey research design was used in this study. All data collected through primary sources would be analyzed by SPSS.
The target populations for this research consist of staff of Nigerite Limited; the largest company in the manufacturing of NT fibre cements roofing and ceiling sheets, concrete roofing tiles and Vinyle floor tiles, in Africa. The investigation was conducted in the Head Office at, Oba-Akran Avenue, Ikeja, and Lagos. This company was chosen based on its volume of operations. It keeps vast quantity of inventory and applies relevant control tools to minimize cost of production. The staff strength of this company as at present stands at 750 including permanent employees at management and non-management cadres.
3.4 SAMPLE SIZE AND SELECTION
The sample size used consists of one hundred and fifty (90) employees of Nigerite Nigeria Limited. Members were drawn from the following departments / section.
Procurement/Purchasing Department (20 employees)
Production (25 employees)
Sales Department (15 employees)
Stores and Quality control department (30 employees)
Selection is based on random sample; where by copies of the questionnaires were distributed to the respondents according to first come first serve basis.
3.5 RESEARCH INSTRUMENT
The questionnaire was the major instrument used for gathering the requisite data needed for analysis. Copies of the questionnaire were distributed to staffs in the various departments according to their relevance to the research study.
4.1 DATA ANALYSIS AND PRESENTATION OF RESULT
This segment outline the analysis of data collected from the respondents through questionnaires. Data from the respondents were quantified and converted in simple percentages. The Pearson's Product Moment Correlation Coefficient (PMCC) as statistical technique was also employed to test the relatedness to the hypothesis and the research findings were discussed.
A total of ninety (90) copies of questionnaires were administered out of which seventy two (72) copies were properly filled and returned. The breakdown is tabulated below:
Table 4.1.1: Distribution of returned/non-returned questionnaire
Return of outcome
(Source: field survey 2011).
Table 4.1.1 revealed that 91% of the sample returned their questionnaire and 9% did not. From the returned copies 11% were bad and dropped from analysis. Therefore, the analysis used 80% duly completed returned questionnaire.
Table 4.1.2 Demographic data of the respondent
Variables Frequency Percentage
Male 55 76%
Female 17 24%
Single 51 71%
Married 13 18%
Divorced 6 8%
Widow 2 3%
Secondary School 16 22%
ND/NCE 32 45%
HND/BSc 24 33%
18-25yrs 20 28%
26-30yrs 23 32%
30-40yrs 16 22%
Above 40yrs 13 18%
Source: Field Survey, 2011.
Table 4.1.2 above shows the demographic characteristics of the respondents. This aspect covers variables such as sex, martial status, academic qualifications and age of respondents.
Sex distribution of Respondents
Out of 72 respondents 55 were males which represented 76% of the total number; and 17 were females, representing 24%.
Marital status distributions of respondents
Of the 72 respondents, 51 were single, or 71% of the sample, 13 were married representing 18%; 6 were divorced which is 8% and 2 were widow(er) thus accounting for 3%.
Academic qualification distribution of respondents
Out of 72 respondents, 16 were secondary school certificate holders which is 22%, 32 were ND/NCE holders and represents 45% and 24 were HND/BSc holders accounting for 33%.
Age distribution of respondents:
The table revealed that 20 were between the ages of 18-25 years which is 28%, 23 were between the age of 26-30 years which represents 32%, 16 were between the age of 30-40 years which and accounts for 22% and 13 were older than 40 years, with 18% representation.
Table4.1.3 RETURNED QUESTIONNAIRES ACCORDING TO DEPARTMENTS IN NIGERITE NIGERIA LIMITED
Source: Field Survey, 2011.
Table 4.2 shows the pattern of returned questionnaires from departments in simply percentage. Out of 72 respondent, 20 were from purchasing department (the whole questionnaires distributed were received properly filled), which is 27%, 18 from production department which is 25%, 9 were from sales department which translates to 13%, 25 came from stores department which accounts for 35% .
Table 4.1.4 INVENTORY MANAGEMENT AND PROFITABILITY IN NIGERITE NIGERIA LIMITEDj
Nigerite Nigeria Limited keeps inventory of raw materials, component parts, semi-finished & finished goods.
Inventory is kept for the purpose of production and supply of finished goods to customers.
Inventory is categorized into fast moving items and special items.
Nigerite Nigeria Limited applies continuous inventory counting and spot check by auditors as inventory control system.
Ordering cost, carrying cost and purchasing cost are incurred on inventory management.
Inventory management system has helped to reduced cost of production.
Inventory management helps to make prices of Nigerite products competitive.
Sales revenue increases as a result of proper inventory control.
Inventory control boosts productivity of Nigerite Nigeria Limited.
Inventory control provides regular flow of materials within the company.
Inventory control prevents material shortage and stock-out costs.
Inventory control promotes uninterrupted production activities in the company.
Source: Field Survey, 2011.
Table 4.3. Shows the extent to which respondents agree or disagree to the research questions. The interpretations are given in simple percentages below:
Research question 1:
Nigerite Nigeria Limited keeps inventory of raw materials, components parts, semi finished and finished goods:
From 72 respondents, 84.1% workers strongly agree, 2.5% were undecided, 9.2% disagreed, and 4.2% strongly disagreed.
Research question 2;
Inventory is kept for the purpose of production and supply of finished goods to supplier:
The table shows that out of 72 respondents, 75.8% strongly agreed, 16.7% Agreed, 4.2% disagreed, 3.3% strongly disagreed.
Research question 3;
Inventory is categorized into fast moving items and special items:
The table shows that 67.6% strongly agreed, 15.8% agreed, 7.5% undecided, 5.8% disagreed, 3.3% strongly disagreed.
Research question 4;
Nigerite Nigeria Limited applies continuous inventory counting and spot check by auditors as inventory control system:
76.7% strongly agreed, 5.8% agreed, 4.2% undecided, 5.0% disagreed, 8.3% strongly disagreed.
Research question 5:
Ordering costs, carrying costs and purchasing costs are incurred on inventory management:
71.7% strongly agreed, 15.8% agreed, 3.3% undecided, 4.2%disagreed, 5.0% strongly disagreed.
Research question 6:
Inventory management system has helped to reduce cost of production:
57.4% strongly agreed, 14.2% agreed, 4.2% were undecided, 11.7% disagreed, 12.5% strongly disagreed.
Inventory management helps to makes prices of Nigerite Products Competitive:
71.7% strongly agreed, 10.0% agreed, 7.5% disagreed, and 10.8% strongly disagreed.
Research question 8:
Sales revenue increases as a result of proper inventory control:
75% strongly agreed, 12.5% agreed, 1.7% undecided, 5.0% disagreed, and 5.8% strongly disagreed.
Research question 9:
Inventory control boosts productivity of Nigerite Nigeria Limited:
68.4% strongly agreed, 10% agreed, 5.8% undecided, 7.5% disagreed, and 8.3% strongly disagreed.
Research question 10
Inventory control provides regular flow of materials within the company:
59.4% strongly agreed, 14.2% agreed, 4.2% undecided, 19.2% disagreed, and 5.0% strongly disagreed.
Research question 11:
Inventory control prevents material shortage and stock-out costs:
75.0% strongly agreed, 4.2% agreed, 4.2% were undecided, 13.3% disagreed, and 3.3% strongly disagreed.
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