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Effect Of Inventory Control Management On Performance Of Manufacturing Company. A Case Study Of Dangote Plc.

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study 

Stock or Inventory constitutes a substantial proportion of the current asset group. It represents investments made for obtaining a return (Duru, Oleka & Okpe, 2014). Inadequate inventory has an adverse potential effect on the smooth running of the business, while excess inventory involve extra cost, which can reduce the firm’s profits (Panigrahi, 2013). Excessive stock is not desirable for longer periods because high inventory levels increase carrying cost and as inventory is increases; the profitability decreases (Priyank & Hemant, 2015). Hence, a suitable inventory control strategy will help in ensuring that the companies always keep an optimal amount of assets. Freeing frozen amounts in the form of stocks or inventories increases the firm’s efficiency in the use of its resource (Ziukov, 2015). As such, a well-functioning inventory system has a great effect on total firm’s performance as well as that of the firm’s managers (Akindipe, 2014).

Inventories are part of current assets, which are convertible to other forms of working capital (cash and other receivables) in less than one year (Milicevic, Davidovic & Stefanovic, 2010). The theory of inventory management involves making decisions that are in line with basic trade off among firm’s objectives, costs and other constraint (Mathuva, 2013). The economic order quantity theory, suggests that companies should maintain the quantity of inventory which provides the lowest total holding cost and acquiring cost (Milicevic, Davidovic & Stefanovic, 2010). Thus, inventory management is vital to for an effective and efficient firm. It is also important since it helps the firm in determination of the optimal amount of materials and goods a firm can hold at any given time (Kumar & Bahl, 2014).

Profit of an organization can easily be maximized with the help of an effective inventory management system in places. Profit maximization is all about cost minimization and revenue maximization. An effective inventory management improves the firm’s total performance through matching inventory management practices and a competitive advantages especially now that most organizations operates in a more competitive industries or sectors all over the world (Mahidin et al., 2015). The main goal and objective of inventory management system is to keep at the necessary required inventory at any time so that production runs smoothly without interruption whatsoever (Panigrahi, 2013). Inventory is the second largest assets as shown in the statement of financial position in brewery industry. It’s only exceeded by equipment and the physical facilities (Eneje, Nweze, & Udeh, 2012)

 1.1.1 Inventory Management 

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). Inventory management entails planning, organizing, controlling and directing. All these coordinated efforts are meant to ensure achievement of efficiency in all operations of the firm. Such operations may include procurement, stocking and transportation (Akindipe, 2014). Mismanagement of Inventories may lead to significant financial problems for a firm (Muhayimana, 2015).  Inventory management is of high importance in financial management decision. This is because excess or shortage of this may bring danger to the company (Duru, Oleka & Okpe, 2014). The objective of inventory management is to maintain a system that minimizes total cost, while specifically, it establishes that the amount of stock to be ordered is optimal as well as the period between orders (Anene, 2014). Excess inventory consumes a lot of space, can increase possibility of spoilage, leads to a financial burden and loss while insufficient inventory has the potential of interruping business operations

(Swaleh & Were, 2014).

Inventory management is vital and needed in various areas within the firm especially in a supply network so as to protect production against any disturbance of running out of production inputs or materials and goods (Ogbo, Onekanma & Ukpere, 2014). Management of Inventory is crucial to a firm since it plays a decisive role to enhance efficiency and improve the firm’s competitiveness ability against the firm’s competitors. Effective inventory management ia all about holding the right amount of inventory required by the business at any point in time (Swaleh & Were, 2014). Inventory management involve creation of a purchasing plan which will help to ensure that all items or materials are available when needed as well as and tracking the existing inventories and its use (Muhayimana, 2015).

1.1.2 Effect of Inventory Management on Firm Profitability and

Operating Cash Flows

Inventory management policies and procedures are normally designed to ensure that a firm or an organization uses its inventory in a way that it is able to maximize its profit from the least inventory investment amount without encroaching or affecting customer’s levels of satisfaction (Anene, 2014). Inventory constitutes a large portion of total investment, it is vital that a firm adapts a good inventory management system to enable firm’s growth and enhancement of firm’s profitability (Anichebe & Agu, 2013). As such, the Economic Order Quantity (EOQ) theory states for a firm to maximize benefits from inventory management it should hold an optimal inventory, which minimizes both ordering cost and holding cost of inventories. The Just in Time (JIT) model proposes that companies should produce or to purchase products or components as they are required by customers or for use rather than holding stock (Sitienei & Memba, 2015).

A study by Koumanakos (2008) on effect of inventory management on performance of some companies established that a rate of returns is significantly affected by the level of inventory held. That is, high inventory level lowers the rate of returns. Khaled & Hayam (2016) studied the relationship that exists between management of inventory and the general firm’s performance. The study established that inventory to sales ratio affects organization performance negatively in the initial growth stage and the maturity stage; it exerts a positive and significant coefficient on performance in either the rapid growth stage or the revival stage. Further, Kwadwo (2016) investigated effect of efficient management of inventory on profitability of manufacturing companies. The study revealed that a significantly and positive correlation between raw materials inventory management and profitability of manufacturing companies in Ghana.

In their study, Duru, Oleka and Okpe (2014) analyzed effect of inventory management on profitability and revealed that inventory turnover had significant and negative effect on the profitability. Additionally, Siyanbola (2012) also studied effect of stock valuation on profitability of manufacturing industries. The study established that high stock cost affects profit negatively and stock also affects the company’s profitability. Lwiki et al. (2013) also studied effect of inventory management practices on financial performance. The study established a positive and statistically significant correlation between management of inventory and return on sales.

1.2 Research Problem 

The main goal of management of inventory management is all about balancing the conflicting economics of not wanting to hold less stock or too much stock at any point in time (Kumar & Bahl, 2014). Return maximization on investment of inventories present a considerable proportion of firm’s working capital which is a key function of the firm’s financial manager (Mathuva, 2013). However, most managers ignore the saving potential that arise from proper management of inventories, trying to treat inventories as a necessary evil and not as an asset that require to be managed. As such, some companies do not or ignore to control their inventory holding, this usually leads to under stocking and causing the firm to stop or slow its production. This finally results to firm’s ineffectiveness (Anichebe & Agu, 2013). According to Schreibfeder (2006) many organizations usually fail to examine its investment in inventory. They most focus on maximization of returns.

 

In Nigeria, more and more institutions including small and medium companies are increasingly adopting inventory management systems with the aim of achieving competitive advantage and enhancing their performance (Swaleh & Were, 2014). However, the main challenge today among companies in Nigeria is about the need to enhance of efficiency and improving on effectiveness at the same time. Nigerian companies are known to have a poor inventory management techniques which has negatively affected the firm’s ability to service and satisfy their customers (Thogori & Gathenya, 2014). Thus, the need to study effect of inventory management on profitability of manufacturing company.

1.3 Research Objective

To examine effects of inventory management on the performance of manufacturing company using Dangote Plc as a case study.

 

1.4 Significance of the Study 

This study is of great significance to management of manufacturing companies as it will help them to establish whether inventory management affects their companies’ profitability and operating cash flows. The study will also be of significance to various policy-making organizations, which can use the findings to come up with policies on inventory management. Finally, the study will be of significance to researchers, as it will add on to the available empirical evidence on inventory management, firm profitability and operating cash flows.

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