CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
In today's challenging business environment, where companies aim to achieve more with fewer resources and enhance quality, effective inventory management plays a vital role. Inventory management encompasses overseeing and controlling the ordering, storage, and usage of components used in the production of items a company sells. It also involves managing quantities of finished products available for sale. A business's inventory is a significant asset that represents an investment tied up until items are sold or used in production. Furthermore, it incurs expenses related to storage, tracking, and insurance. Mismanagement of inventories can lead to substantial financial issues, whether it results in an excess of inventory or a shortage. Successful inventory management requires a well-thought-out purchasing plan to ensure items are available when needed, without overstocking or understocking, while also monitoring existing inventory and its utilization.
Inventory should not be seen as idle assets; rather, they are an integral part of a company's operations. When inventory levels are too high, they can strain resources, while excessively low inventory levels can result in lost sales. Therefore, maintaining an optimal level of inventory is crucial. There are several opportunities to reduce a company's inventory costs while improving customer service. This can lead to more efficient and cost-effective manufacturing, merchandising, and maintenance operations. Estimated inventory cost savings have the potential to reduce expenditures by up to 25%. Implementing a coordinated inventory reduction program is essential for realizing these cost savings. Many companies have embraced these initiatives and achieved significant inventory cost savings.
The term "inventory" encompasses the goods and services that businesses keep in stock. These inventories are typically categorized into various types. The first category is "materials and components," which includes essential items required to create finished products, such as gears for bicycles, microchips for computers, or screens and tubes for televisions. The second type is "work in progress inventory" (WIP), referring to items that are partially completed but not yet the finished product; they are in the process of becoming whole items. The third and most common form of inventory is "finished goods," which are the final products ready for purchase by customers and consumers, spanning from cakes and furniture to vehicles. Finished goods may be the end products found in stores, but the components that make them are also tracked in inventory. The term "inventory" can refer to both the total quantity of goods and the process of counting them. Many companies conduct regular inventory checks to prevent running out of popular items and to ensure that the number of items ordered matches the actual count. Discrepancies in inventory levels can indicate issues like theft (commonly referred to as 'shrinkage' in the retail industry) or inaccuracies in accounting practices.
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1.2 Statement of the Problem
Manufacturing companies operating in Nigeria have the potential to significantly contribute to the country's economic growth, despite the challenges they face in inventory management. One of these challenges is determining the appropriate inventory levels to ensure customer needs are met and production processes remain uninterrupted. Striking a balance between overstocking and running out of stock has been a persistent issue for many manufacturing organizations. Inventory management directly impacts working capital management, and both overstocking and stockouts have their disadvantages.
Organizations that leverage inventory and procurement functions to gain a competitive edge can enhance their competitiveness, resulting in increased profitability and greater market responsiveness. Improper inventory control, coupled with Nigeria's geographical challenges, leads to increased commodity prices in Akwa Ibom State compared to other regions. This situation is exacerbated by the large inventories held by companies, which tie up significant funds. Therefore, effective and efficient inventory management is imperative to avoid unnecessary investments.
In the context of inventory management, many organizations in Rwanda have yet to realize the benefits of professional inventory management and its contribution to the performance of manufacturing companies and other organizations. Numerous Nigerian companies are grappling with the dilemma of maintaining large inventories to support efficient production and sales operations while seeking to minimize inventory investments and maximize profitability. It is worth noting that the mismanagement of inventories has led to the failure of many manufacturing companies in Rwanda. This research aims to investigate inventory management techniques to enhance the performance of manufacturing companies in this context.
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1.3 Objectives of the Study
The main objective of this study is to examine the best method of inventory management in a manufacturing company for better results. Other specific objectives include:
(a) To identify the best methods among all methods of inventory management and control procedures.
(b) To analysis various systems of inventory control methods as applied in other manufacturing companies.
(c) To evaluate each of the inventory management and control systems
1.4 Research Questions
The following research question will make for explicit answers:
(a) What are the best methods among the inventory management and control techniques to be applied in a manufacturing firm?
(b) What measures could be adopted in order to give a good analysis of inventory management and control techniques in a manufacturing company?
(c) To what extend can any of the inventory management and control methods can be evaluated?
1.5 Significance of the Study
This study will be of significant endeavour in planning for inventory control in manufacturing companies in Nigeria. Both small and large manufacturing companies would benefit from this study. It would also be of benefit to other researchers in Management, Accounting and Finance.
1.6 Scope and Limitation of the Study
This study is limited in scope to the Champion Breweries Plc Uyo as it is one of the longest established firm that manufacture beer and other beverages consumed in and outside Nigeria. Because of the growing competition going on in the country by other companies in the industry, some confidential strategies could not be exposed. The study was limited to inventory used in manufacture and not sources of other items for sale.
1.7 Definition of Terms Used
(a) Inventory: This is a stock of items in various forms such as raw materials, work-in-process and finished goods used by a manufacturing of merchandising firms in production and sales.
(b) Inventory Control: This is defined as the system used in a firm to control the firm’s investment in stock.
(c) FIFO: This is a method of valuing the stock based on First-In-First-Out and has a different effect on the profit from other valuation methods.
(d) LIFO: Defined as Last-In-First-Out. By this method the last item of stock that was purchase will be the first item to be used for manufacture of sales.
(e) AVCO: Defined as average cost method. By this method the balance in stock at the end will be added to the new purchase and the total quantity will be divided by the total money value given as Quantity/Price.
1.8 Organization of the Study
This study is organized into five chapters. Chapter one is the introduction which deals with the background to the study. Chapter two deals with the review of related literature while chapter three is the research methodology. In chapter four the data collected were presented, analyzed and interpreted. In chapter five the summary of findings were given, conclusion drawn and recommendations made.
