AN APPRAISAL OF INVENTORY MANAGEMENT AND CONTROL IN MANUFACTURING FIRMS ( A CASE STUDY OF UNILEVER PLC)
CHAPTER ONE
INTRODUCTION
1.1 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, 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-offs (Aminu, 2012). Specific performance indicators have been proved to depend on the level of inventory management practices (Lwiki et al., 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).
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.
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. Apart from being a major portion of total current assets of many organizations, inventory often represent as much as 40% of the capital of industrial organizations. Sawaya and Giauque (2006) also stated that inventory represents 33% of a company’s assets and as much as 90% of working capital. As inventory constitutes a major segment of a company’s assets, it is crucial that good inventory management practice is put in place to ensure the organization’s growth and profitability to sustain the business as a going concern. 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 avoid pilferage, wastage and loss of customers due to stock-outs. Making the right order for inventories (buying of stocks that are needed by customers) at all times would promote high turnover thereby improving the profit level of the organization.
AN APPRAISAL OF INVENTORY MANAGEMENT AND CONTROL IN MANUFACTURING FIRMS ( A CASE STUDY OF UNILEVER PLC)