ASSESSMENT OF EFFICIENT INVENTORY MANAGEMENT ON THE PERFORMANCE OF MANUFACTURING FIRMS IN NIGERIA

ASSESSMENT OF EFFICIENT INVENTORY MANAGEMENT ON THE PERFORMANCE OF MANUFACTURING FIRMS IN NIGERIA

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Background to the study

The material or inventory management function is one of the most relevant roles in most businesses in terms of its importance and integration into the broader organizational architecture. Despite growing recognition of the importance of material management in comparison to other business functions such as production, engineering, finance, marketing, personnel, and so on, it is in this context that some of the key concepts of materials or inventory management will be examined in order to determine its role in achieving overall corporate objectives (Ogbadu, 2009).

Notably, inventory management and materials management will be used interchangeably in this work for the sake of clarity and comprehension.

However, it is necessary to first address the question of why a company should care about materials management at all. The primary goal of most businesses is to make as much money as possible. Materials management is also vital in non-profit organizations such as government agencies, the military forces, and other such institutions (Ogbadu, 2009).

Inventory control was not seen to be required. Excess inventories were often thought to be a sign of affluence. By that time, management had decided that stocking was a good idea. However, because of its strategic importance, businesses have begun to embrace good inventory control. Due to the large number of inventories retained by firms, inventory makes up the majority of a Nigeria manufacturing firm's current assets. Most of an organization's funds are put into it (James, 2011). Inventory management is critical to an organization's growth and survival since poor and inefficient inventory management will result in the loss of customers and a decrease in revenue. Inventory management that is prudent avoids depreciation, pilferage, and wastages while guaranteeing that resources are available when needed (Ogbadu, 2009). Inventory management that is efficient and effective promotes business survival and profit maximization, which is the primary goal of every company. More importantly, effective working capital management establishes a balance between profitability and liquidity trade-offs through accurate and timely inventory management (Aminu, 2012). The amount of inventory management procedures has been shown to influence specific performance metrics (Lwiki et al., 2013).

Inventory makes up a large share of current assets, particularly in manufacturing and retail/trading businesses. Huge financial resources are required to maintaining inventory levels of this scale (Mittal, 2014). As a result, inventory is a significant part of working capital. The success or failure of a firm is largely determined by its inventory management capabilities. As a result, inventory management should find a balance between too much and too little inventory. Inventory management and control that is efficient and effective aids in obtaining better operational results and lowering working capital investment. Inventory management has a huge impact on a company's profitability, thus it should be a component of any company's overall strategic business strategy (Gupta & Gupta, 2012).

Inventory management is widely recognized as a critical tool for increasing asset productivity and inventory turns, identifying customers and positioning products in a variety of markets, enhancing intra and inter-organizational networks, and enhancing technological capabilities to produce high-quality products, all of which contribute to increased inter-firm effectiveness. Inventory management may even help tiny industrial units improve their competitiveness and market share (Chalotra, 2013). Companies with well-managed inventory can gain a competitive edge and achieve superior financial results (Isaksson & Seifert, 2013). Inventory management is also critical to an organization's performance and growth since an organization's whole profitability is related to the amount of items sold, which has a direct relationship with the product's quality (Anichebe & Agu, 2013).

Nonetheless, manufacturing-oriented businesses will be the major focus of this study. Inventory control is critical to a company's successful and efficient performance. It is required in the control of products that are to be produced, kept, or traded for money. It also helps the company avoid owning too much or too little shares or tying up money, all of which have a negative impact on manufacturing enterprises' performance. This protects against costs like as storage, spoiling, pilferage, and obsolescence, as well as the goal to make commodities or goods accessible when they are needed for manufacturing companies to function successfully (Ali, 2009).

As a result, effective inventory cost management is critical to the profitability of manufacturing and retailing businesses. Raw materials, work in progress, replacement parts or consumables, products in transit, and finished goods are all included in inventory. It is not required for a firm to have all of these inventory classes, but whatever inventory items it does have, it requires effective administration because inventory accounts for a significant portion of the company's funds (Lyndon & Paymaster, 2016). At all phases of the product manufacturing, distribution, and sales chain, inventory cost management is a critical decision-making function for every firm. Inventory makes up a significant amount of many firms' total current assets, accounting for up to 40% of capital in industrial organizations, according to Sawaya and Giauque (2006), and accounting for up to 90% of working capital. Because inventory makes up such a large portion of a company's assets, it's critical that proper inventory management practices are used to assure the organization's development and profitability in order to keep the firm afloat. This implies the necessary materials are in stock, in the proper amount, and can be delivered on time. To reduce pilferage, waste, and client loss due to stock-outs, proper and frequent inventory inspections are performed. Making the correct inventory orders (purchasing the products that consumers require) at all times would promote high turnover and hence increase the organization's profit margin.

In every industrial company, proper inventory management prevents poor quality production, customer dissatisfaction, financial loss, and excellent social responsibility, all of which have a direct impact on the firm's performance (Temeng Eshun & Essey, 2010). This is accomplished by assuring the timely supply of raw materials to the plant and the distribution of completed items to the warehouse in the order of production. If inventory management is not properly managed, manufacturing will not be able to fulfill the needs of consumers, resulting in a loss of income for the company and a poor performance. The quality of raw materials is the most important indicator of a manufacturing company's productivity from purchase through processing. The research evaluates inventory management and control in industrial enterprises against this context. 

1.2    Statement of the problem

Any company's inventory is its lifeblood. This is because inventory has a direct impact on an organization's profitability, and an organization's ability to manage inventory effectively and efficiently is critical to its growth.

The main issue has been determining the optimal inventory control system that fits well within an organization, as well as determining the ideal inventory level at which money invested in inventory yields a greater rate of return than money invested in other aspects of the firm (Amoako-Gyampah & Gargeya, 2011). Manufacturing companies are having difficulty determining how much inventory is the appropriate stock to have on hand. When inventory levels are high, capital is being used inefficiently. Production will be hampered if inventory levels are low.

However, the purpose of this study is to investigate the link between effective inventory management and manufacturing company performance, as well as to determine the extent to which inventory control affects manufacturing firm performance (Amoako-Gyampah & Gargeya, 2011).

Poor inventory management refers to the failure to plan, execute, and regulate a supply and usage of chain network inventory that is crucial to the organization's performance. Inadequate inventory management, which is defined as a lack of managerial skills related to effective inventory management, exposes many businesses to issues such as overstocking, damage, and degradation, among others (Ali, 2009).

The demand for Economics Order Amount (EOQ) in an organization arises from the problem of selecting which inventory items should be held in stock and in what quantity. The problem of not implementing inventory management systems; many organizations do not keep up with inventory management systems due to poor or no knowledge of inventory management, and such organizations are bound to face several related problems, which this work highlights in order to reduce them (Jude, 2010).

In addition, some manufacturing organizations have difficulty determining how much inventory to purchase and when to order in order to fulfill customer demand and maintain a steady flow of production without excessive stoppages or idle time owing to inventory shortages.

1.3    Objectives of the study

The overall objective of this study is to appraise efficient inventory management on the performance of manufacturing firms using Anambra Motor Manufacturing Company – ANAMMCO. Other objectives includes:

1. Examine the efficiency of the various tools and techniques (Economic order quantity or Economic Batch Quantity) used by manufacturing firms in inventory management.
2. Ascertain the extents to which inventory management contribute to profitability and performance in manufacturing firms.

1.4    Research questions

The study will be guided by the following research questions:

1. How efficient are the various tools and techniques of inventory management in manufacturing firms?
2. To what extent has inventory management contributed to profitability and performance in manufacturing firms?

1.5 Research hypothesis

The under-stated hypotheses will be tested in the course of this study:

Ho1: Economic order quantity (EOQ) and Economic Batch Quantity (EBQ) techniques of inventory management adopted in manufacturing firms are not efficient.

HA:  Economic order quantity (EOQ) and Economic Batch Quantity (EBQ) techniques of inventory management adopted in manufacturing firms are efficient.

Ho2: Efficient inventory management has not contributed significantly to the net profit and performance of manufacturing organization.

HA: Efficient inventory management has contributed significantly to the net profit and performance of manufacturing organization.

1.6    Significance of the study

Future investors: This research work can be of great help to those who have a little or no knowledge in manufacturing business. It will be valuable to people who are interested in the manufacturing business and wish to make it their career.

Manufacturing firms: The research work can help the Manufacturing Company to improve in areas where it is needed in their inventory operations so as to boost their profitability and consequently increase their shareholders’ wealth, and to assist the organizations to maximize their profits and reduce their risk of liquidity.

General public:  Indeed, this will in no little way have effects on the national growth and development of Nigeria manufacturing sector and economy at large. Customers’ goodwill towards the organization will be maintained as it enables delivery committed to be met all the time.

Future researches/ Academia: This work will be of immense benefit and use to the future researches as reference document and will provide a base for other research works that might be carried out on stock management in any other sector.

1.7    Scope of the study

The scope of this study considers appraisal of efficient inventory management on the performance of manufacturing firms. Also, this study will consider inventory management systems, contributions of efficient inventory management towards profitability, material usage, cost minimization and economy of operation; and the effect of efficient inventory management for organizational growth and performance.

1.8   Limitations of the study

In conducting this research work, the researcher encountered some difficulties such as the following:

1. Hoarding of data: Manufacturing firms held tightly their methods and data generated from their operations because they argued that they operate in a competitive industry and would not want to release their secret to their competitors.
2. Paucity of Relevant Literatures: The researcher found it hard in obtaining relevant literatures while conducting this research. Nevertheless, the researcher was able to surmount the above hurdles and at the end put up a research work whose output is reliable, testable and verifiable at any standard.

 

1.9 Operational Definition of Terms

Management:  Management consists of the interlocking functions of creating corporate policy and organizing, planning, controlling, and directing an organization's resources in order to achieve the objectives of that policy.

Inventory: Inventory is the raw materials, work-in-process products and finished goods that are considered to be the portion of a business's assets that are ready or will be ready for sale. Inventory represents one of the most important assets of a business because the turnover of inventory represents one of the primary sources of revenue generation and subsequent earnings for the company's shareholders.

Inventory Management: Inventory management is the management of inventory and stock. As an element of supply chain management, inventory management includes aspects such as controlling and overseeing ordering inventory, storage of inventory, and controlling the amount of product for sale.

Inventory control:  Inventory control, also known as stock control, involves regulating and maximizing your company’s inventory. The goal of inventory control is to maximize profits with minimum inventory investment, without impacting customer satisfaction levels. Inventory control is also about knowing where all your stock is and ensuring everything is accounted for at any given time.

Manufacturing Organization:  This is organizations that primarily produce a tangible product and typically have low customer contact. They produce physical, tangible goods that can be stored in inventory before they are needed. 

Costing Techniques (Methods): Costing techniques are methods for ascertaining cost-for-cost control and decision-making purposes. They can be applied to make-or-buy decisions, negotiation, price appraisal and assessing purchasing performance.

 

Cost Centre:  A cost center is a department within an organization that does not directly add to profit but still costs the organization money to operate. Cost centers only contribute to a company's profitability indirectly, unlike a profit center, which contributes to profitability directly through its actions.

Economics Order Quantity (EOQ): The Economic Order Quantity (EOQ) is the number of units that a company should add to inventory with each order to minimize the total costs of inventory—such as holding costs, order costs, and shortage costs.

Just-in-Time (JIT): Just-in-time (JIT) is an inventory strategy companies employ to increase efficiency and decrease waste by receiving goods only as they are needed in the production process, thereby reducing inventory costs.

Ordering Cost: Ordering costs are the expenses incurred to create and process an order to a supplier. These costs are included in the determination of the economic order quantity for an inventory item.

Stock-out Cost: Stock-out Costs is the cost associated with the lost opportunity caused by the exhaustion of the inventory. The exhaustion of inventory could be a result of various factors. The most notable amongst them is defective shelf replenishment practices.

Performance: the act of carrying out or accomplishing something such as a task or action.

Firm: a group of people who form a commercial organization selling goods or services.

Manufacturing: the production of finished goods from raw materials, especially on a large industrial scale.

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