THE IMPORTANCE OF INVENTORY MANAGEMENT AS A TOOL FOR COST REDUCTION IN MANUFACTURING COMPANIES

CHAPTER ONE

 INTRODUCTION

BACKGROUND OF THE STUDY

“Inventories” and “stock” are used interchangeable in this study.

The most significant component of current asset of majority of predominately large manufacturing companies is constituted by inventories or stock. It has been stated that.

“On an average, inventories are approximately 55% of current assets in public limited companies.

Evidently therefore, the above statements is an affirmation that the greater proportion of the valid, both quantitatively and qualitatively, of what a manufacturing company produces is ascribable to or a factor of the material cost. This element of cost, in other words, represents a large percentage of production cost and as such, special  and careful consideration must be given to materials acquisition, storage and usage. Ben. O. Nweke (Collins) (2000) affirmed this much when he asserted that.

“The holding of these ingredients in the from of stock at a reduced cost serves an important management function. Permits continuous production to meet the need of the consumer at a reasonably cost and time”. Different components of stock are raw materials, work-in-progress and finished goods. Raw materials are those basis input materials that are converted into finished goods through the manufacturing process and they include the units of input, which have been purchase and store for future production.

Work-in-progress inventories are semi-manufacturing products. They represent product that need more work before they become finished goods for sale or consumption.

Finished goods inventories are those completely and fully manufactured products which are ready for sale or consumption. The stock of raw materials and work-in-progress facilities production, while stock of finished goods is required for smooth and effective marketing operations. Inventories therefore serve as a link between the production and the consumption of goods.

The motivating factors for holding inventories are generally three and they include the following:

THE TRANSACTIONS MOTIVES:

This emphasis the need to maintain inventories to facilitate growth, production and sales operations.

2.  THE PRECUATIONARY MOTIVE:

This necessitates holding of inventories to guard against the risk of unpredictably changes associated with demand and supply force and other factors.

3.         THE SPECULATIVE MOTIVE:

This influences the decision to increase or reduce inventory or stock level to take advantage of price fluctuations.

For these various reasons and more such as cost and profit maximization reduction elimination of waste for holding stock or inventories, viable firms always recognize the need to hold inventories.

Nevertheless, this should not be at the detriment of wealth maximization which is the bedrock and main purpose of every profit oriented organization or firm. Consequently, firms are faced with the problems of meeting two conflicting needs namely.

a.         Maintaining a large size of inventory for efficient, effective and smooth production and sales operation.

b.         Maintaining a minimum investment in inventories to  maximize profitability.

Neither excessive investment of inventories nor inadequate investment in inventories are desirable. The former will cause unnecessary tie-up of the firm” funds and loss of profit while the lather will have the consequences of production hold-up and failure to meet delivery commitments or targets.

Thus, inventory management should aim at avoiding excessive and inadequate levels of inventories and so to maintain sufficient inventory for the smooth production and sales operations. Ineffective, maintaining an optimum level of inventory should be the good and is most desirable. Accordingly clarles T Hongren (1990 states that:

“The optimum inventory level is some where between the two danger points.”

Also, Ben. O. Nweke (Collins) (2002) asserts that “ The efficiency of any activity for production of goods and services depend on the supply of materials, equipment, and manpower made available in their right proportions”

STATEMENT OF THE PROBLEM

Inventories management in manufacturing companies is a function of the observation of product inventory accounting techniques. Which aim at not only helping the sustenance of manufacturing industries or setting it on the parth of growth back also bolster and improves the industry as a going concern and thereby fostering long term profitability through and by cost reduction. One of the problems that indeed usually confronts manufacturing companies is how to maintain and value their inventories and by so doing achieve optimum inventory. Often these companies lack the requisite expertise or manpower hence the knowledge of the right valuation method and the optimum level to maintain their stock.

The problem  associated with inventory management is the maintenance of an optimum level of inventory so as to among others, reduce cost. To elliviate this, efforts should be made by management to eliminate pride distortion and high expenditure on the frequent re-order levels, find the true value of the order quantity over labour sector inefficiency. Production stop pages should be avoided, if not eliminated, as they constitute some of the major problems arising from under stocking.

Various methods of stock valuation impact  differently on the financial statement. As such there is need to verify reliability effort of each specified and accepted method on the financial statement.

Finally the problem of desperately has always lingered. Authors are however not agreed as to whether this difference exists as far as inventory management and valuation are  concerned.

OBJECTIVE OF THE STUDY

Precisely, the aims and objectives of the study are:

1.         To evaluate the management of inventories in Nigeria breweries plc.

2.         To ascertain the importance of inventory management as a tool for cost reduction.

3.         To ascertain the effort of various valuation methods on the reliability of financial statement.

4.         To ascertain the extent of application of inventory management valuation methods in Nigeria breweries plc.

5.         To determine the effort of poor storage spaces, under or over stocking of materials.

SIGNIFICANCE OF THE STUDY

Since it means a lot to its users, especially the users of financial statements, manufacturing companies, researchers and readers, the significance of the study cannot be over-emphasized.

To the user of financial students, this study will give an in-dept knowledge of the proper composition and valuation inventories as a significant and essential part of current assets.

It could, to the manufacturing companies, mean the break of a new down since they could borrow a loaf on how the tackle their age-long seemingly intractable inventory management problems will a view to among others, reducing cost.

 DEFINITION OF TERMS

For purposes of this study and clarify, the following terms are defined:

i.          Lead time:       This is the time below even when an order is placed and the time order is received.

ii.         Safety stock or Buffer stock:  This is the extra stock that should be kept to allow for the possibility that demands may increase or that supply may be delayed. It is kept to minimize stock out.

iii.        Stock out:        This is a failure to meet customer’s order or material requisition on desired data simply because the materials ordered are not available.

iv.        Economic order quantity (EOQ):       This is other wise know as re-order quantity. It is the quantity which is most economical to order. In other worlds, it is a calculated ordering quantity which minimizes the balance of cost between inventory holding costs and re-order cost.

v.         Ordering cost: Ordering cost consist of all the costs inlured though writing purchase orders, sending inquires, receiving and inspection of goods.

vi.        Carrying stock:            This is a made up of all stock associated with keeping stock.

vii.       Maximum stock:         This is a stock level selected as the maximum desirable which is used as an indicator to slow when stocks have arisen.

viii.      Re-order level:            This is the level of stock at which a further replenishment order should be placed.