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IMPACT OF INVENTORY MANAGEMENT ON MANUFACTURING ORGANIZATION (A STUDY OF CADBURY NIGERIA PLC, LAGOS)

CHAPTER ONE

INTRODUCTION

1.01     Background to the Study

Inventory control was not seen to be necessary. In fact excess inventories were considered as indication of wealth. Management by then considered stocking beneficial. But, today firms have started to embrace effective inventory control due to its strategic role. Inventory constitutes the major part of a Nigeria manufacturing firm’s current assets due to the big size of inventories kept by firm’s most part of an organization’s fund is being invested into it. 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, 2016).

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 (Lwiki, 2013).

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. 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 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).

Thus, efficient inventory cost management is vital for the successful functioning of manufacturing and retailing organizations. Inventory consist of raw materials, work in progress, spare parts or consumables, goods in transit and finished goods. It is not necessary that an organization will have all these inventory classes, but whatever may be the inventory items, they need efficient management as, generally, substantial share of the company’s funds are invested in inventory(Lyndon & Paymaster, 2016). The inventory cost management of any organization represents an important decision making function at all stages of the product manufacturing, distribution and sales chain. Apartfrom being a major portion of total current assets of many organizations, inventory often represent as much as 40% of the capital of industrialorganizations. Sawaya and Giauque (2006) also stated that inventory represents 33% of acompany’s assets and as much as 90% of working capital. As inventory constitutes a majorsegment of a company’s assets, it is crucial that good inventory management practice is put inplace to ensure the organization’s growth and profitability to sustain the business as a goingconcern. This means that the right materials are in stock in the right quantity, and are available at the required time. Proper and regular checks on stores inventory are conducted to avoidpilferage, wastage and loss of customers due to stock-outs. Making the right order forinventories (buying of stocks that are needed by customers) at all times would promote highturnover thereby improving the profit level of the organization.

Good inventory management in any manufacturing organization saves the organization from poor quality production, the displeasure of customers, loss of profit and good social responsibility which in turns have a direct effect in the performance of the firm (TemengEshun&Essey, 2010). This is done by ensuring timely delivery of raw materials to the factory and distribution of finished goods, in order of production to the warehouse. If inventory management is not adequately maintained, production cannot meet the aspirations of customers which is loss of revenue to the organization and makes the organization performance very low. Right from procurement to the time of processing, quality of raw material is the chief determinant of the productive efficiency of any manufacturing concern

The word profitability is composed of two words, namely, profit and ability. The term profit has been explained above and the term ability indicates the power of a business entity to earn profits. The ability of a concern also denotes its earning power or operating performance. The profitability may be defined as the ability of a given investment to earn a return from its use. Profitability is a relative concept whereas profit is an absolute connotation (Dwan, 2014).

Profitability evaluates the effectiveness and efficiency with which equipment, plant, and current assets are transformed into profits. It reveals how working capital has been effectively managed. Profitability, which could be determined through Return on Assets (ROA), Return on Equity (ROE), Net Profit Margin (NMP) and Profit after Tax (PAT), means a firm’s ability to generate satisfactory return on invested capital (Peter, 2013)

Despite being closely related to and mutually interdependent, profit and profitability are two different concepts. In other words, in spite of their generic nature, each one of them has a distinct role in business. As an absolute term, profit has no relevance to compare the efficiency of a business organization. A very high profit does not always indicate sound organizational efficiency and low profitability is not always a sign of organizational sickness. Therefore, it can be said that profit is not the prime variable on the basis of which the operational efficiency and financial efficiency of an organization can be compared. To measure the productivity of capital employed and to measure operational efficiency, profitability analysis is considered as one of the best techniques (James, 2013).

Nevertheless, the primary focus in this research will be on manufacturing oriented firms. Inventory control is pivotal in effective and efficient performance of a firm. It is necessary in the control of goods to be used for production, stored or exchanged for money. It also aids the firm to avoid holding too much or too little stock or to tie up capital, which in return have an adverse effect on performance of manufacturing firms. This guides against the incurring of cost such as storage, spoilage, pilferage and obsolescence and the desire to make items or goods available when necessary for the manufacturing firms to perform properly.

1.02   Statement ofthe Problem

Inventory is the life blood of any organization. This is because inventory contributes directly to the profitability of an organization more so the growth of any organization depends largely on its ability to manage its inventory effectively and efficiently(James, 2014). The real problem therefore has been in the determination of the best inventory control method that fits into an organization very well and also to get the best inventory level at which money invested in inventory will produce a rate of return higher than it if invested in some other areas of the business (Amoako-Gyampah&Gargeya, 2011).

Poor inventory management involves poor planning, executing and controlling a supply and utilization of chain network inventory that is critical to the success of the organization.  Inadequate control of inventoryconsist of lack of managerial skills relevant to proper inventory management exposes many organizations to many problems like overstocking, damage, deterioration and others. Problem of deciding which item of inventory should be kept in stock and at what quantity lead to need for Economics Order Quantity (EOQ) in an organization(Aktar, Sachu& Ali, 2012). Some organization looses much due to their failure to keep with EOQ desirable for them, and this work throws more light to forestall this.

The problem of not implementing the inventorymanagement systems;  Many organizations do not keep abreast with inventory management systems due to poor or no knowledge about the inventory management and such organizations are bound to face several related problems that this work highlights on towards reducing them.

 Also, in some manufacturing firms, they find it difficult to determine how much of the inventory to order and when to order; in order to meet customers demand and smooth flow of production process without unnecessary stoppage, idle time due to unavailability of inventory.

1.03    Objective of the Study

The main purpose of the study is to examine impact of inventory management on manufacturing organization (A study of Cadbury Nigeria plc, Lagos). Other specifics objectives of the study are:

1.     To examine the relationship between economic order quantity and organizational sale performance

2.     To assess the impact of inventory turnover on sales volume

3.     To ascertain if inventory control have significant impact on higher market share

1.04    Research Questions

This project intends to answer to the following questions:

1.     Is there any relationship between economic order quantity and organizational sale performance

2.     To what extent do inventory turnover influence organizational sales volume?

3.     Does inventory control have significant impact on higher market share?

1.05  Research Hypotheses

For the purpose of this study the following hypotheses are designed to be tested:

H1: There is no significant relationship between economic order quantity and organizational sale performance

H2: Inventory turnover does not significantly influence organizational sales volume

H3: Inventory control does not have significant impacton higher market share

1.06          Significance of the Study

The study is hoped to be of benefits not only to students, entrepreneurs, employees, and management of various organization. The study also hopes to highlight the problem associated with employee productive and to make use of the analysis to improve the working situation thereby minimizing the problems of inventory management in organization and its environment.

The findings in this study will have both theoretical and practical contributions by adding to the existing knowledge on research that has already been done in relation toinventory management and profitability of manufacturing organization.

1.07          Scope and Limitation of the Study

This research work focuses on manufacturing industry in Nigeria, but with particular reference to Cadbury Nigeria Plc, Lagos. The scope of inventory management and profitability of manufacturing organizationwill be discussed.The descriptive research survey method will be used in which a structured questionnaire will be administered to employees ofCadbury Nigeria Plc. Cadbury Nigeria Plchas a total number of 400 employees which consists of the production department, sales department and the marketing department. The sampling technique of this research work will be systematic random sampling and sample size will be determined by Taro Yamenformular.

The limitation of this study is the time factor. Since the researcher carried out the research of the same time with his studies, there was limited time for to cover all the necessary areas of the research study. And also lack of audience from the respondent.

1.08     Operational Definition of Term

Inventory management: refers to keeping or maintaining the firm’s stocks at a level that a firm will only incur the least cost consistent with other management’s set objectives or targets (Kwadwo, 2016). Inventory management is about ensuring that all input materials of production available to the firm are maintained at a level where production is not interrupted as well as ensuring that operational cost is kept at a minimal level without affecting operation efficiency (Eneje, Nweze, &Udeh, 2012)

Economic order quantity is a technique used in inventory management. It refers to the optimal amount of inventory a company should purchase in order to meet its demand while minimizing its holding and storage costs (Farah & Nina, 2016).

Inventory turnover is a financial ratio showing how many times a company has sold and replaced inventory during a given period. A company can then divide the days in the period by the inventory turnover formula to calculate the days it takes to sell the inventory on hand(Gundlach, 2015).

Profitability: refers to money that a firm can produce with the resources it has. The goal of most organization is profit maximization (Niresh&Velnampy, 2014). The profitability shows the ability of a firm to generate earnings from the use of its assets for a certain period of time.

Sale performance refers to the act of performing sales activity. In broader sense, sales performance refers to the degree to which sales objectives being or has been accomplished. It is the process of measuring the results of a firm's policies and operations in monetary terms (Zeithanl&Bitner 2014)

Market share: represents the percentage of an industry, or a market's total sales, that is earned by a particular company over a specified time period. Market share is calculated by taking the company's sales over the period and dividing it by the total sales of the industry over the same period (Porter, 2011).

Sales volume is the number of units sold within a reporting period. This figure is monitored by investors to see if a business is expanding or contracting. Within a business, sales volume may be monitored at the level of the product, product line, customer, subsidiary, or sales region (Weinstein, 2015)

Market Growth: This denotes an increase in sales or size observed within a particular consumer group over a given time frame (Slater &Narver, 2015).

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