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INVENTORY
MANAGEMENT AS A TOOL FOR ENHANCING PROFITABILITY IN MANUFACTURING ORGANIZATION
ABSTRACT
This
research is on impact of inventory management on productivity in an
organization with zarewa aluminum and plastic limited as a case study. Its
primary aims is to determine the level of inventory of goods and documented
with the organization. It also the aim of the research is to find out the
methods of control of goods with a view to eliminate the element of waste and
thereby minimize the amount of material purchased from tying down capital stock
out. The researcher divided the protect into five chapters. Chapter one forms
the general introduction, brief history of zarewa aluminum and plastic limited,
statement of general problems, hypothesis, limitations and significance of the
study. Chapter two deals with review of related literature. While chapter three
deals with the research methodology. Chapter four was used to analyzed and
present the data collected in a tabular form. While chapter five deals with the
summary, conclusion and recommendations.
CHAPTER ONE
INTRODUCTION
1.1BACKGROUND
OF THE STUDY
Inventory in
the form of raw materials, work in progress and finished goods constitute
significant proportion of assets of most organization. But why is it pertinent
to keep any eye on these items in other words, why do we engage in inventory
management?
Inventory
items cost money to acquire, they cost money to store and to look after, which
means storage facilities has to be provided so as to make sure that these
materials or items do not get spoilt until they are turned into sellable goods,
they do not produce money. When stock are held, it means tying down capital
that would have been used in other areas, so it all represent cost and should
be managed properly to acquire efficiency.
We must
however, hold stock to meet production needs and sales needs. This is because
if we do not hold stocks in sufficient quantities, we stand the risk of running
out of stock.
Similarly,
if we are short of finished goods, we may disappoint our customers. Inventory
shortages in both of these forms will likely lead to loss of customers and
money. For the organization not have the above problems, they should strike a
balance between carrying too much stock (over stocking) 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 methods of analysis applies
to cash and fixed assets as to inventory themselves.
First of
all, a basic stock must be on hand to balance in flows and outflows of items.
The size of the stocks depends on the pattern of flows whether fast moving or
regular items, slow moving or irregular items.
Secondly,
because the unexpected may occur, it is necessary to have safety stock 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, related to anticipation stocks, is the recognition that,
these are optimum purchases sizes defined as economic order quantity (EOQ).
In borrowing
money, for buying raw material for production or purchasing plants and
equipment, it is cheaper or more economical to buy more than just enough to
meet immediate needs.
Manufacturing
firms generally have three kinds of inventories:
a) Raw material
b) Work in-progress
c) Finished goods
(a) The
level of raw materials; inventory is influenced by anticipated production,
seasonality of production, reliability of sources of supply and efficiency of
scheduling purchases as well as production operations.
(b) Work
in-progress inventory is greatly influenced by the length of the production
period, which is the time between planning raw material in production and
completing the finished products. Inventory turn over can be increased by
increasing the production. One means of accomplishing this is to perfect
engineering techniques there by spreading up to manufacturing process. Another
means is to buy rather than make them. The level of finished goods inventory is
a matter of coordinating production and sales.
Holding
stock in whatever form cost money. The capital tied down by the stock itself
has to be serviced by the payment of interest and the land or warehouse needed
for the stock has to be bought or rented. The handling of the securing of the
stock and any quality deterioration that occurs also cost money. The sample
type of stock control system used in most organizations is two, the bin system
of stock control and is of two quantities.
The first
quantity is the stock level below which is new order is to be placed. Under
this system, the units of stock are held in two: one and two stock is taken
from bin as required until this bin is empty.
More are
then order 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 is to discover and to optimum level of
investment in the inventory. Inventories may be too high or too low, if too
high there are unnecessary carrying cost and risk of obsolescence. If too low,
production may be disrupted or sales permanently lost and loss of good will,
reputation, and customers to other firms in the same industry.
The optimum
inventory level is that which minimize the total cost associated with
inventory.
1.2STATEMENT
OF GENERAL 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 material functions,
policies involved and recognition according to the function.
Up till now
inventory management has not been able to occupy it 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 function in many organizations has caused
so many havoc.
For instance
where the function is forced to be recognized and established because of the
demand to manage the affairs of various activities. To compound these problems,
the functions responsible for the manpower operations 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.
1.3AIMS AND
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 how effective inventory management
can enhance profitability.
Furthermore,
the project is geared towards analyzing how issues of inventory is done as well
as its inspection and stock taking in the organization and how it affects
inventory management. The project also tends to reveal to the management of the
organization their proper implementation of inventory can reduce wastage cost
and filferages will be minimized. Therefore, this research work seeks to focus
on the following questions:
1. Where is good delivered to in the
organization?
2. Does the organization always keep store
records for accountability?
3. Where does purchase requisition originated?
4. How are goods located in the warehouse?
1.4
STATEMENT OF HYPOTHESIS
He following
are the hypothesis developed to guide this research work
Ho:
Effective inventory management will not reduce material wastage/cost and hence
cannot improve profitability.
Hi:
Effective inventory management will reduce material wastage/cost and will
improve profitability.
1.5Rationale
of the study
The study is
aimed at having a look at inventory management as a tool for enhancing profitability
and come out with some problems associated with the function and necessary ways
of solving such problems. The researcher choose zarewa aluminum and plastic
limited as its case study.
It is
equally an attempt to disabuse the impression of manufacturing organization
that inventory is not a profit generating center but to see inventory
management as a managerial function which need to be accorded a proper
attention than merely treating it as a dumping ground.
The work can
be very useful and helpful to those engaged in inventory management function in
organization and to students studying production operation management in
various institutions of higher learning. The study is also a partial
fulfillment for the award of higher national diploma in all colleges of
technology and polytechnic. The study is also to improve the function of
inventory management in the organization under study and the entire
manufacturing industry at large.
1.6SCOPE AND
LIMITATION 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 can not hold without a problem,
which serves in most cases as problems. As such the work is limited to these
areas, the researcher feels are crucial or relevant to the problem under
investigation that “inventory management as a tool for enhancing profitability
in manufacturing organizations”.
The
following are some of the problems that limited the extent of the study:
Time
constraint: This is very important for one to get accurate and up to date data,
it is important to have enough time. But for a researcher to spend as much time
as possible collecting information (being a student) and at the same time
battling class room work, coupled with assignment it is infact not easy within
available time.
Another
problem is restriction to vital
information and documents by the organization under study due to secrecy. The
organization is so strict with their documents and did not allow vital
information to be revealed for fear of leaking management secrets to
competitors, this operated a non chalant attitudes by some staff towards the
research.
Another
constraints is that of finance. To conduct a research of this nature, one needs
money to enable one to travel to different organization 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 branch of the
organization under study.
1.7HISTORICAL
BACKGROUND OF ZAREWA ALUMINUM AND PLASTIC
Zarewa
aluminum and plastic limited was established on 25th of May 2007. It was also
commenced its commercial activities in June, 2007 since then PVC ceiling
production has been growing within Kaduna and other part of the country.
Through hard work and determination, the company has been able to expand its
plants and distribution network to some parts of the country. Its greatest
period of growth actually started in July, 2007 with the opening of the branch,
solely for corrugation of long span roofing sheets, the third branch which is
in Jalingo, Traba state was opened in October, 2009 for corrugation of long
span roofing sheets also.
The
company’s vision statement is “to be the most admired and innovative company in
Nigeria by the year 2020”. The Kaduna branch engaged in production of PVC
ceiling, cornice which include angle, seven and join cornice, rubber pipes both
small and big ones. The Kaduna branch has a thirty (60) number of employees and
it was headed by the general manager.
The
activities of the Kaduna plant is headed by the general manager and coordinated
under four major section namely:
1. OPERATIONS DEPARTMENT: This can be seen as
the largest department or unit in the organization headed by the factory
manager. It comprises three departments, quality control, production and
engineering.
2. ADMINISTRATIVE DEPARTMENT: This handles all
administrative matters. It encompasses the following department, accountants,
human resources and computer (management information system or MIS).
3. MARKETING DEPARTMENT: This is charged with
the responsibilities of managing sales distribution, merchandising and product
warehousing. It also handles marketing issues of the following department,
marketing and sales.
4. INVENTORY DEPARTMENT: This handles the
aspects of plant material inventory. It encompasses the stores and warehouse
departments and is headed by the inventory manager.
DEFINITION
OF TERMS
INVENTORY:
Items usually held in stock by organization. This can be in form of raw
material, finished goods, work-in-progress, furniture, capital, equipment etc.
RAW
MATERIALS: Are items which are to be processed through production process to
obtain the defined finished goods.
STORE HOUSE:
This is a building where materials or items held in stock are kept and
protected against unauthorized removal. It is also a place where materials are
received. Stored, accounted for, recorded, replenished when due.
FINISHED
GOODS: These are the new products of the whole production process.
LEAD TIME:
This connotes the number of days, weeks, months, which lapses from point of
placing an order to the time the goods ordered for are received.
INVENTORY
MANAGEMENT: This is a system used in the firms to control the firms investment
in stock.
STOCK
CONTROL: Is the means by which materials of the correct quality and quantity is
made available as and when required with due regards to economy in storage,
ordering cost, purchasing prices and working capital.
STORE: Items
to be held in stock.
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 of materials.
ECONOMIC
ORDER QUANTITY: This is the size of the order, which minimizes the total cost
of acquiring and holding stock. It is the quantity that is most economical to
order at a time, taking into consideration the cost of ordering and carrying.
SAFETY
STOCK: This is the quantity of items which provides a buffer against variation
in lead time.
MAXIMUM
STOCK LEVEL: Is that level above which stock should not normally be allowed to
rise except in special circumstances to avoid both storage problems and over
investment in stocks.
MINIMUM
STOCK LEVEL: Is that level below which stock should normally be allowed to
fall. If it goes below there is danger of shortage of supply which may result
to stoppages 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
influenced from the target.
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