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EFFECT OF AN EFFICIENT INVENTORY MANAGEMENT ON THE PROFITABILITY OF A FIRM

CHAPTER ONE

INTRODUCTION

1.1   Background of the study

Inventory constitutes a major portion of current assets especially in manufacturing companies and retail/trading firms. In order to maintain inventory levels of such magnitude, huge financial resources are committed to them (Mittal, 2014). As such, inventory also constitutes a major component of working capital. To a large extent, the success or failure of a business depends upon its inventory management performances. Inventory management, therefore, should strike a balance between too much inventory and too little inventory (Gupta & Gupta, 2012). The efficient management and effective control of inventories help in achieving better operational results and reducing investment in working capital. It has a significant influence on the profitability of a concern thus inventory management should be a part of the overall strategic business plan in every organization (Gupta & Gupta, 2012).

Inventory plays a significant role in the growth and survival of an organization in the sense that ineffective and inefficient management of inventory will mean that the organization loses customers and sales will decline. Prudent management of inventory reduces depreciation, pilferage and wastages while ensuring availability of the materials as at when required (Ogbadu, 2009). Efficient and effective management of inventories also ensures business survival and maximization of profit which is the cardinal aim of every firm. More so, an efficient management of working capital through proper and timely inventory management ensures a balance between profitability and liquidity trade-offs (Aminu, 2012). Specific performance indicators have been proved to depend on the level of inventory management practices.

Inventory management is recognized as a vital tool in improving asset productivity and inventory turns, targeting customers and positioning products in diverse markets, enhancing intra and inter-organizational networks, enriching technological capabilities to produce quality products thereby imparting effectiveness in inter-firm relationships. Proper inventory management even results in enhancing competitive ability and market share of small manufacturing units (Chalotra, 2013). Well managed inventories can give companies a competitive advantage and result in superior financial performance (Isaksson & Seifert, 2013). Management of inventory is also fundamental to the success and growth of organization as the entire profitability of an organization is tied to the volume of products sold which has a direct relationship with the quality of the product (Anichebe & Agu, 2013).

Inventories are the current assets which are expected to be converted within a year in the form of cash or accounts receivables. Thus, it is a significant part of the assets for the business firms. Actually, inventories are the goods that are stocked and have a resale value in order to gain some profit. It shows the largest costs for the trading firms, wholesalers and retailers. Normally, it consists of 20-30% of the investment of the total investment of the firm. Thus, it should be managed in order to avail the inventories at right time in right quantity. Inventory refers to the stock of the resources which are held to sales and/or future production. It can be also viewed as an idle resource which has an economic value. So, better management of the inventories would release capital productively. Inventory control implies the coordination of materials controlling, utilization and purchasing. It has also the purpose of getting the right inventory at the right place in the right time with right quantity because it is directly connected with the production.

1.2Statement of the problem

Previous studies have shown that organizations have continuously ignored the potential savings from proper inventory management, treating inventory as a necessary evil and not as an asset requiring management. Some of the problems of inventory management in an organization standardizing data: Some companies have been tripped up by having too many definitions for the same data, such as purchase orders and product categories. Standardizing data definitions is a necessary step in building an architecture that works across departments and locations.

Choosing just the demand planning and inventory management modules that suit your business: The unique nature of your demand will determine which components you need. Goods can be expensive to ship overseas and delays can squash revenue gains, so a well-honed demand planning tool updated with real-time sales numbers is essential. But if your sales typically come from large deals, inventory management software merits more attention.

Integrating specialized demand and inventory planning software together, and to related systems such as ERP, is both an opportunity and a need not adequately addressed by the industry. Vendors admit they spend significant time integrating their software into existing supply chain management (SCM) systems.

Training users of demand planning: For some people, forecasting will be an entirely new discipline. Companies that have successfully implemented inventory management software stress the importance of teaching the underlying methodologies before handing out the software.

Webinars, slide shows, and classroom instruction can spread the gospel about your company's new planning processes. A train-the-trainer approach is one of the quickest, least-expensive ways to make people comfortable with inventory management software.

Ease of use should be high on your list of criteria when deciding among vendors, but don't ask people to take on too much at once. Let them start with basic functions and build from there.

Dumping those old spreadsheets and paper: Inventory managers can be reluctant to give up their familiar ways. You might have to forbid the use of spreadsheets, for example, to get people to switch to new inventory management software. To ease the transition and build trust, sit down with users and demonstrate the benefits. Ironically, it might help to simulate the software in Microsoft Excel for those who have never made the transition from paper. Executive champions in the IT and business sides and easy-to-use software can also further buy-in that enables cultural change.

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