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 eicient 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-os (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.