CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
According to Wild (1998) “Inventory
management is concerned essentially with the use and control of Inventories
associated with operating system” He went further to explain, “the need of
Inventory management is influenced by capacity management decisions. Since the
existence of Inventories “will be defined by capacity
shortage which are to be employed” “if inventories exist he further explains”
“they should serve some useful purposes and therefore must be carefully
managed”.
Lyson (2000) “Inventory is an American
accounting term for the value of quality of materials, components, work in
progress and finished products that are kept or stored for uses as the need
arises.
Inventory in the form of raw
materials, work in progress and finished goods constitutes significant
proportion of assets of most firms. But why is it pertinent to keep an eye on
these items in other words, why do we engage in inventory management?
Inventory materials cost money to
acquire, they cost money to store and to look after these means storage
facilities has to be provided as to make
sure that the materials or items do not get spoiled until they are turned into
saleable goods, they do not produce money.
When stock are held, it means typing
down capital that would have been used in other aspects, so it all represents
cost and should be managed properly to acquire efficiency.
However, hold stock to meet
production needs and sales needs. This is because if we do not hold stocks in
sufficient qualities we stand the risk of running out of stocks.
Similarly if we are short of finished
goods, we may disappoint our customers and money, for the organizations to
avoid the above problems they should strike a balance between carrying too much
stock (overstocking) 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 method of analysis applied to cash and fixed assets as to
inventory themselves.
First of all, a basic stock must be
on hand to balance inflows and outflows of items, the size of the stock depends
on the pattern of flows whether fast moving or regular items or slow moving or
irregular items.
Secondly, because the unexpected may
occur, it is necessary to have safety stocks 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
relations to anticipation stocks is the recognition that there are optimum
purchase sizes defined as economic order quality (EOQ).
In borrowing money for buying raw
materials, for production or purchasing plants and equipments, it is cheaper or
more economical to buy more than just enough to meet immediate needs
manufacturing firm generally have three kinds of inventories.
(a)
Raw
materials
(b)
Work-in-progress
(c)
Finished
goods
(a)
The
level of Raw Materials: inventories is influenced by anticipated production,
seasonality of production, reliability of source of supply and efficiency of
scheduling purchases and production operation.
(b)
Work-in-progress
inventory: is greatly influenced by the length of the production period, which
is time in planning raw materials in production and completing the finished products.
Inventory turn over therefore can be increased by decreasing the production.
One means of
accomplishing this is perfect engineering techniques, thereby spreading up to
manufacturing process. Another means is to buy rather than make them.
The level of finished
goods is a matter of coordinating production and sales.
Holding stock whatever
form cost money the capital tries down by the stock it self has to be service
by the payment of interest and the land or warehouse needed for stock has to be
bough or rented. The handling and securing of the stocks and any quality
deterioration that occur also cost money.
The sample type of stock
control system used in most organization is two the bin system of stock control
and is of two quality. The first qualities, is the stock level below which an
order I to be placed, the other gives the quantity to be ordered. Under this
system, the unit of stock are held in two one and two stock is taken from bin
as required until this bin is empty. More are then ordered 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 and to
discover and maintain to optimum level of investment In the inventory.
Inventories may too high
or too low if too high there are unnecessary carrying cost and risk of
obsolesce. If too low production may
disrupted or sales permanently cost and loss of goodwill, reputation and
customers to other firms in the same industry.
The optimum inventory level is that which minimizes the total cost
associated with inventory.
1.2 STATEMENT OF 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 materials function policies involved and recognition
according to the function.
Up till now inventory management has
not been able to occupy its 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 functions in many organization has cause so many havoc for instance
where the function is forced to recognized and established because of the
demand to manage the affairs of various activities. To compound these problems
the function responsible for the manpower operation 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 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 low effective inventory management can enhance
profitability.
1.4 STATEMENT OF HYPOTHESIS
H0: Effective inventory management has no effect
on profitability.
Hi: Effective inventory management has effect
on profitability.
1.5 SIGNIFICANCE OF THE STUDY
The major significance of this study
is for the partial fulfillment of the requirement for the award of Higher
National Diploma (HND) in Production and Operations Management and to expand
the understanding of the writer’s knowledge regarding research study. Others
significance are:
i.
To serve as a reference for further
research by students and other academicians.
ii.
To serve as an assets to management of
bakery, particularly Kaduna
Polytechnic Bakery, Kaduna.
iii.
To be used by manufacturing
organizations in carrying out their inventory management.
1.6 SCOPE 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 cannot hold without a problems, which serves in most
cases as problem. As such its work is limited to these areas the researcher
feels and crucial or relevant to the problem under investigation that is
“inventory management as a tool for enhancing profitability in manufacturing
organization”.
1.7 LIMITATION OF THE STUDY
The
following are some of the problems that limited the extent of the study.
Time constraints: this is a very
important for one to get accurate and up to date data, it is important to have
enough time. But for a research to spent time as much as possible collecting
information (being a student) and at the same time battling with class room
work, coupled with assignment it is infact not easy without the available time.
Another problem is restrictions to
vital information and document by the organization understudy due to secrecy.
The organization is so strict with their documents added not allow vital
information to be revealed for fear of leaking managements secrets to
competitors, this generated a non challant attitude by some staff towards the
research.
Another constraints that of finance.
To conduct a research as this nature one needs money to enable one travel to
different organizations 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 environs of the organization
understudy.
1.8 HISTORICAL PERSPECTIVE OF
THE ORGANIZATION
Kaduna
polytechnic bakery was formerly introduced by Mrs. M. Ja’afar in the year 1983
as food production unit, until then the bakery was used for student practical
and certificate course.
The bakery
was not functioning for a long time before the idea of commercializing the
bakery came up the Head of Department (HOD) in person of Mr. P. T. Bolaji in
the year 2007 and he introduce a matter baker/manager from then, the bakery now
consolidate in the large growth in the Kaduna Metropolis.
1.9
DEFINITION
OF TERMS
Inventory: Items
usually held in stock by organizations. This can be inform of raw materials,
finished goods, work in progress furniture, capital, equipment etc.
Raw materials: Are item, which are to process
through production process to obtain the desire finished good.
Work in progress: They are partly finished goods,
which are to go for further production before they can be regarded as finished
goods.
Store House: Is a building where materials or
item held in stock are kept and protected against unauthorized removals is also
a place where materials are received, stored, accounted for recorded
replenished when due.
Lead Time: These are the new product of the
whole production process.
Stock control: Is
the means by which materials of the correct quantity and quality is made
available and when required with due regards, to economy in storage ordering
cost, purchasing prices and working capital.
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 materials.
Economic Under Quantity: This
is size of the order, which minimizes the total cost of acquiring and holding
stock. It is the quality that is most economical to order at a time, taking
into consideration the cost of ordering and carrying.
Maximum Stock Level:
Is that level above which stock should not normally be allowed to rise
except is special circumstances to avoid both storage problems and over
investment in stocks.
Minimum stock level: Is
that level below which stocks should not normally be allow to fall if it goes
below there is danger of shortage of supply which may result to stoppage 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 influence from the target