CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
To
management, inventory is an aggregate or total number of goods; it serves the
function of making a company's internal operation relatively stable, while
providing service to customers. It is possible to reduce inventory by
purchasing more frequently, in smaller lots. However, the processing of many
small orders to the distributor's vendors and the increased receiving load
would be likely to result in serious disruption of operations.
The dictionary meaning of inventory is
a “detailed list of goods, furniture etc.” Many understand the word inventory,
as a stock of goods, but the generally accepted meaning of the word ‘goods’ in
the accounting language, is the stock of finished goods only. In a manufacturing
organization, however, in addition to the stock of finished goods, there will
be stock of partly finished goods, raw materials and stores. The collective
name of these entire items is ‘inventory’. Therefore, the term ‘inventory’
refers to the stockpile of production a firm is offering for sale and the
components that make up the production. Inventories occupy the most strategic
position in the structure of working capital of most business enterprises. It
constitutes the largest component of current asset in most business
enterprises. In the sphere of working capital, the efficient control of
inventory has passed the most serious problem to the flour mills because about
two-third of the current assets of mills are blocked in inventories. The
turnover of working capital is largely governed by the turnover of inventory.
It is therefore quite natural that inventory helps in maximize profit and
occupies the most significant place among current assets.
There
is need for installation of a proper inventory control technique in any
business organization in developing country like Nigeria. According to Kotler
(2000), inventory management refers to all the activities involved in
developing and managing the inventory levels of raw materials, semi-finished
materials (work-in- progress) and finished goods so that adequate supplies are
available and the costs of over or under stocks are low. Rosenblatt (1977)
says: “The cost of maintaining inventory is included in the final price paid by
the consumer. Good in inventory represents a cost to their owner. The
manufacturer has the expense of materials and labour. The wholesaler also has
funds tied up”. Therefore, the basic goal of the researchers is to maintain a
level of inventory that will provide optimum stock at lowest cost. Morris
(1995) stressed that inventory management in its broadest perspective is to
keep the most economical amount of one kind of asset in order to facilitate an
increase in the total value of all assets of the organization – human and
material resources. Keth et al. (1994) in their text also stated that the major
objective of inventory management and control is to inform managers how much of
a good to re-order, when to re-order the good, how frequently orders should be
placed and what the appropriate safety stock is, for minimizing stock out.
Thus,
the overall goal of inventory is to have what is needed, and to minimize the
number of times one is out of stock.
Drury (1996) defined inventory as a
stock of goods that is maintained by a business in anticipation of some future
demand. This definition was also supported by Schroeder (2000) who stressed
that inventory management has an impact on all business functions, particularly
operations, marketing, accounting, and finance. He established that there are
three motives for holding inventories, which are:
i. Transaction motive
ii.
Precautionary motive
iii.
Speculative motive
The
transaction motive occurs when there is a need to hold stock to meet production
and sales requirements.
A
firm might also decide to hold additional amounts of stock to cover the
possibility that it may have under estimated its future production and sales
requirements. This represents a precautionary motive, which applies only when
future demand is uncertain. The speculative motive for holding inventory might
entice a firm to purchase a larger quantity of materials than normal in
anticipation of making abnormal profits. Advance purchase of raw materials in
inflationary times is one form of speculative behaviour.
The British Institute of Stocks
Management (1988) defined the concept as the management process, which
integrates the flow of supplies into, through and out of an organization to
achieve a level of service which ensures that the right materials are available
at the right place, at the right time and at the right cost.
According
to Alasi (1993), inventory management is “the aspect of industrial management
which is concerned with all the activities involved in acquisition and use of
all materials employed in production of the finished product. It is clear that
planning without control is eventually hopeless and waste of time and
resources. Thus planning is not enough, it must be accompanied by control.
Control is the process of comparing predetermined performance with the actual
performance with the aim of taking corrective measures to achieve set
standards.
Considering the trend of economic in
Nigeria, where companies are being closed down as a result of high cost of
importation of raw materials, devaluation of the currency, high exchange rate,
inadequate stock control, etc. One is forced to ask “how do the manufacturing
companies that are presently in operation being able to keep floating and
maintain their stands despite the economic turbulence? The reasons are not
far-fetched. The management of some critical success factors in the company
operation. One of these critical success factors is the inventory
control/management as its importance to all sectors of the economy. It involves
the use and control of inventory. This is influenced by the ability of
management to carefully and efficiently decide on when to increase or maintain
stock level based on stock usage in order to achieve the targeted output.
However, considering manufacturing
companies, inventory is seen as raw material, work-in-progress and finished
goods. Decision in relation to management of inventory could be seen as one of
the many strategic decisions of a company because it affect the operational
efficiency and to a large extent determine the future prospects of the company.
Thus, a company must maintain a suitable level of inventory because its excess
or shortage could be detrimental to the company. Inventory management is an
important aspect of business especially in a manufacturing concern because it
provides the most general case embracing production, marketing, and general
administration function. Farmer (1977) defined inventory management as a
concept that concerned with the management of flow of material into an
organization to the point where these materials are converted or used up in the
production of the company’s end product. He added further that the management
aspect may require the collaborations of persons in charge of materials
components, designers and purchase specifications which include the search for
and location of supply logistics and transportation, goods receiving, inventory
control and in some cases the internal handling and utilization of materials.
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