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INVENTORY CONTROL AS AN EFFECTIVE TOOL FOR COST CONTROL IN AN ORGANISATION

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ABSTRACT

This research work is on inventory control as an effective tool for cost control in an organization using Cadbury Nigeria plc as a case study. The management of various companies is faced with the problem of at what level inventory should be held in order to have a healthy operation that is optimal stock level that will minimize the cost of stocks the (ordering and holding costs). The researcher objective is to know the effectiveness of inventory control on cost control. In this course of carrying this research work various techniques or methods of data collection were used. They include questionnaires, interviews and observations. The researcher makes use of three hypotheses in this study to analyze the research project. The researcher used the descriptive statistical tools (tables, figures and percentages) in the presenting and analyzing the data generated from this study. From the analysis, the researcher finds out that effective management of inventory will help a firm to control its cost and contribute to the actualization of a firm organizational goal. The researcher therefore recommends that organization should apply the technique of inventory control with the objective of cost control so as to enable the goal of profit maximization to be attained.

                                        CHAPTER ONE

                                        INTRODUCTION
1.1 BACKGROUND OF THE STUDY

In general, inventory control and cost control techniques have become a household name in the business of manufacturing firms, that boast of the possession of goods or stocks, Every organization invests a considerable amount of capital on materials. In many cases, the cost of materials exceeds fifty percent of the total cost of goods produced. Such a large investment requires considerable planning and control so as to minimize wastage which invariably affects the performance and profitability of organizations. Materials are the lifeblood and heart of any manufacturing system. No industry can operate without them. They must be made available at the right price, at the right quantity, in the right quality, in the right place and at the right time in order to co-ordinate and schedule the production activity in an integrative way for an industrial undertaking. A manufacturing firm will remain shaky if materials are under stocked, overstocked or in any way poorly managed (Lee et al., 1977 and Banjoko, 2000). Materials Management encompasses all operations management functions from purchasing of raw materials through the production processes to the final delivery of the end products. It brings together under one management responsibility for determining the manufacturing requirement, scheduling the manufacturing processes and procuring, storing and dispensing materials (Wild, 1995, Ondiek, 2009). Thus, Materials Requirements Planning (MRP), purchasing, procurement of materials, inventory management, storage, materials supply, transportation and materials handling are the activities of Materials Management (Monday, 2008). Materials Management came to limelight at the advent of liberalization and globalization which posed intense competition on the business environment. Before that time, the concept was treated as a Cost Centre since Purchasing Department was spending money on materials while Store was holding huge inventory of materials, blocking money and space (Ramakrishna, 2005). With the process of liberalization, there has been a drastic change in the market which has forced manufacturing companies to devise strategies to minimize production costs in order to remain competitive. Since then, Materials Management has been recognized as a source of opportunities to reduce production costs and can be treated as a Profit Centre.  Today, there are dramatic evolutions in the market environment and every organization must strive to keep itself in business. Major competition has shifted from the market to the production floor where manufacturing costs can be reduced and profitability boosted for firms to compete favourably. Backed by advanced technology, firms are closely monitoring their manufacturing costs and embarking on efficient management of materials (Ondiek, 2009). Fearon et al. (1988) see the introduction of computers as a great boost to the adoption of Materials Management, as materials functions have many common databases. Therefore, efficient Materials Management is fundamental to the survival of business, industry and economy. Previous Researches (Evan et al., 1987; Ramakrishna, 2005; Ogbadu, 2009; Ondiek, 2009) have shown that materials account for more than fifty percent of the annual turnover in the manufacturing firms. This shows clearly that priority should be given to Materials Management in manufacturing firms in order to achieve significant cost saving, improvement in production efficiency, and increase in profitability and competitiveness.. The level of the forms of inventories of a firm depends on the nature of its business manufacturing.
The scope of inventory management concerns the fine lines between the replenishment lead time, carrying cost of inventory asset management, inventory forecasting, inventory valuation, inventory visibility, future inventory price forecasting, physical inventory, available physical space for inventory, quality management replenishment, returns and defective goods and demand forecasting. Balancing these competing requirements leads to optimal inventory levels, which is an on-going process as the business need shift and react to the wider environment.
Inventory management involves the monitoring of material moved into and out of stock room locations and the reconciling of inventory balance. Management
of inventories with the primary objective of determining/controlling stock levels within the physical distribution function to balance the need for product availability against the need for minimizing stock holding and handling cost. Policies relate to what levels of inventories are to be maintained and which vendors will be supplying the inventory. How and when inventories will be replenished, how inventory records are create, managed and analyzed and what aspect of inventory management will be out sourced are also importance component of proper inventory management.
On the other hand, cost control refers to steps taken by management to assure that all segments of the organization function in a manner consistent with its policies. For effective cost control, most organization use standard cost system, in which the actual cost are compared against standard cost for performance evaluation and deviations are investigated from remedial actions. Cost control is also concerned with feedback that might change any of all the future plans, the production method, or both. From the foregoing, it can be categorically asserted that how strategic a firm manages its stocks or inventories will defines its cost control techniques and budgets. It is therefore, the focus of this research study to carry out and assessment of inventory control as an effective tool for cost control in an organization, using the inventory and cost control techniques of Cadbury Nigeria plc as our case study.

1.2 STATEMENT OF THE PROBLEMS

In the last couple of decades, the numbers of products offered to the market have generally exploded. . Today, there are dramatic evolutions in the market environment and every organization must strive to keep itself in business. Major competition has shifted from the market to the production floor where manufacturing costs can be reduced and profitability boosted for firms to compete favorably. Backed by advanced technology, firms are closely monitoring their manufacturing costs and embarking on efficient management of materials. In general terms, inventory management policies should be aimed at lowering the holding costs through higher inventory rotation, but without triggering substantial stock outs and backorders, caused by demand peaks and or lead time delays. How then can the firms maintain adequate or proper inventory
control alongside with cost control? The answer to this question and many issues from the basis for the appraisal is this research study.

1.3 OBJECTIVES OF THE STUDY

  1. To ascertain the impact of inventory control management in the profitability of the firm.
  2. To investigate the effect of stock management in the manufacturing process.
  3. To ascertain the relationship between inventory management and organizational profitability.
  4. To ascertain the role of management in maintaining optimum level of stock

 

 

1.4 HYPOTHESES OF THE STUDY

H0: Inventory control management is not an effective tool for cost control in an organization.

H1: inventory control management is an effective tool for cost control in an organization.
H0: There is no relationship existing between cost control and inventory control.
H2: There is relationship existing between cost control and inventory control.
H0: A well-planned and effective inventory control technique does not contribute to the profitability in an organization.
H3: A well-planned and effective inventory control technique contributes to the profitability in an organization.

1.5 SIGNIFICANCE OF THE STUDY

Prior to the eighteenth century, possessing inventory was considered a sign of wealth. Generally, the more inventories you had, the more prosperous you were. As at then, inventory existed in stores of wheat, herd of cattle and rooms full of pottery and other manufactured goods. While these inventories were been kept, their effective cost objective were also being defined at the same time, in order to allow the firm achieve its objectives.
Based on this, when this research study is completed, it will be beneficial to: The management of Cadbury Nigeria plc and other manufacturing firms in the country. It will essentially help to bring out how relevant inventory control and effective cost control are to their organizations if well manipulated. It also let them see how important it is to take stock and evaluate it correctly. Academic student: it will allow the student to have an insight of what the practice of inventory control is outside school environment. It will also provide them with information for their further study.

1.6 SCOPE AND LIMITATION OF THE STUDY

The research study will basically focus on Cadbury Nigeria plc, taking into cognizance its inventory control practices and technique or steps and try to bring out how relevant it can be to the organization’s activities. An attempt will also be made to assess the cost control technique of the company in order to see how they synergize with their inventory control practices.
The limitation that will likely be faced in the course of this project shall include; limited timing for the completion of the project, shortage of required finances for the work, non-cooperation on the part of some of the respondent will be given the questionnaire.

1.7 DEFINITION OF TERMS

INVENTORIES: These are stock of materials or finished goods which a company keeps in anticipation of demand or consumption. They constitute a sizeable portion of the total assets of many firms.
INVENTORY MANAGEMENT: Is the process which integrates the flow of supplies into, through and out of an organization to achieve a level of service.
RAW MATERIAL: Inputs into the production process that will modify or transform into finished goods.

WORK IN PROGRESS: Semi finished products found at various stages in the production operation.

STOCK LEVEL: One of the most objective of a stock control system is to ensure that “stock-out” do not carry occur and that surplus stock are not carried.
STOCK OUTS: Occurs when there is insufficient stock to meet production demands and this can lead to loss of customer goodwill, reduced profit etc
MINIMUN STOCK LEVEL: The minimum stock level is below which stock should not be allowed to fall. If stock so below this level there is a danger of the stock out resulting in production stoppage.
MAXIMUM STOCK LEVEL: The maximum stock level above which stock should not be allowed to rise. It is desirable that the level should be as low as possible but of course it must all forecast usage of materials and time type in delivering.

CONTROLS: The activity of determining the range and quantity of material which should be stocked and regulation of receipts and issues of the materials.

LEAD TIME: The time normally taken in replenishing inventory after the order has been placed. It is the time interval between the ordering of inventory and time of its receipts.

CARRYING COST: Expenses incurred from storing raw materials
ORDER COST: The variable cost of placing an order for raw materials.
RE-ORDER LEVEL: This is also known as economic ordering quantity (E.O.Q). It is the most economic quantity to order; in order words, it is the ordering quantity at which the controllable cost of ordering is minimized.
RE-ORDER LEVEL: This is the point at which is essential to initiate purchase requisition for fresh supplies of the materials. This point will be higher than the minimum stock level, so as to cover such emergencies as abnormal usage of material.

1.8 ORGANIZATION OF THE STUDY

This research work is organized in five chapters, for easy understanding, as follows Chapter one is concern with the introduction, which consist of the (overview, of the study), statement of problem, objectives of the study, research question, significance or the study, research methodology, definition of terms and historical background of the study. Chapter two highlight the theoretical framework on which the study is based, thus the review of related literature. Chapter three deals on the research design and methodology adopted in the study. Chapter four concentrate on the data collection and analysis and presentation of finding.  Chapter five gives summary, conclusion, and recommendations made of the study.

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