INVENTORY CONTROL AND PROFIT MAXIMIZATION IN A MANUFACTURING COMPANY; A CASE STUDY OF NIGERIA DISTILLERIES LIMITED, SANGO OTTA OGUN STATE

ABSTRACT
It has been generally accepted that for any organization to produce and satisfy its stakeholders, such organization must have good management team that manages the resources of the organization using some laid down rules. In manufacturing concerns, inventories constitute a greater proportion of assets. The management of inventories usually involves a lot of problems which range from the right time to place order to maximization of profits for the stakeholders. The objective of the study was to determine whether profit is maximized and cost minimized due to the application of the efficient inventory management. To determine also whether manufacturing concerns in our country manage inventories effectively by using inventory management techniques e.g. Economic Lot Size, Just-in-Time etc. Data were collected using questionnaire method, and were analyzed using chi-square (X2) Pearson product moment, correlation co-efficient (r) and regression analysis. The result shows that orders were placed at the right time and right quantity overcoming the setbacks of lead time. The companies also minimize costs of holding inventories and maximize their profits. The findings also showed that manufacturing concerns in Nigeria meet the target requirement of their customers, stakeholders, and the society where they operate. The research recommends that all staff of the manufacturing concerns should be made to have thorough knowledge of inventory management as this will enable them to work towards their stock protection and cost minimization. The manufacturing concerns should also get the recent developed software on inventory management and use it to update their knowledge of inventory management on regular bases.
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TABLE OF CONTENTS
Page
Title Page………………………………………………………………………………………i
Declaration…………………………………………………………………………………….ii
Certification ……………………………………………………………………………………iii
Dedication………………………………………………………………………………………iv
Acknowledgements……………………………………………………………………………….v
Abstract ………………………………………………………………………………………..vi
Table of Contents………………………………………………………………………………vii
List of tables……………………………………………………………………………………x
CHAPTER ONE: INTRODUCTION
1.1 Introduction…………………………………………………………………………….1
1.2 Background to the study………………………………………………………………2
1.3 Statement of the problem………………………………………………………………4
1.4 Objectives of the study………………………………….………………………………..5
1.5 Research questions……………………………………………………………………..6
1.6 Statement of the hypotheses…………………………………………………………..6
1.7 Significance of the study……………………………………………………………….7
1.8 Justification of the study……………………………………………………………….8
1.9 Scope of the study………………………………………………………………………8
1.10 Definitions of terms ……………………………………………………………………9
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CHAPTER TWO: LITERATURE REVIEW
2.0 Introduction……………………………………………………………………………11
2.1 Conceptual frame work………………………………………………………………….11
2.2 Theoretical frame work…….…………………………………………………………….18
2.3 Literature on subject matter………………………………………………………………21
CHAPTER THREE: METHODOLOGY
3.0 Introduction………………………………………………………………………………32
3.1 Area of study……………………………………………………………………………32
3.2 Research design ………………………………………………………………………..32
3.3 Study population………………………………………………………………………..33
3.4 Sample size determination………………………………………………………………33
3.5 Instrument for data collection ………………..………………………………………..33
3.6 Procedure for data collection and data analysis………………………………………34
3.7 Limitations of the study………………………………………………………………..35
CHAPTER FOUR: DATA ANALYSIS, FINDINGS AND DISCUSSION
4.0 Introduction………………………….………………………………………………….36
4.1 Data presentation………………………………………………………………………36
4.2 Data Analysis…………………………………………………………………………….37
4.3 Findings of the study……………………………………………………………………45
4.4 Discussion of the findings………………………………………………………………48
CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.0 Summary of findings……………………………………………………………………49
5.1 Conclusion..…………………………………………………………………………….50
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5.2 Recommendations..…………………………………………………………………..50
5.3 Proposal for further studies…………………………………………………………….51
References…………………………………………………………………………….52
Appendix………………………………………………………………………………54
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LIST OF TABLES
4.2.1 Percentage analysis of sex of the respondents……………………………………………37
4.2.2 Percentage analysis of age of the respondents…………………………………………..37
4.2.3 Percentage analysis of marital status of the respondents………………………………..38
4.2.4 Percentage analysis of respondents by educational qualification……………………….38
4.2.5 Percentage analysis of respondents by self-cadre……………………………………….39
4.2.6 Percentage analysis of respondents by working experience…………………………….39
4.2.7 Question one…………………………………………………………………………….40
4.2.8 Question two……………………………………………………………………………40
4.2.9 Question three…………………………………………………………………………..41
4.2.10 Question four……………………………………………………………………………41
4.2.11 Question five……………………………………………………………………………42
4.2.12 Question six…………………………………………………………………………….42
4.2.13 Question seven………………………………………………………………………….43
4.2.14 Question eight………………………………………………………………………….43
4.2.15 Question nine…………………………………………………………………………..44
4.2.16 Question ten…………………………………………………………………………….44
4.2.17 Question eleven…………………………………………………………………………45
4.3.1 Testing of hypothesis one………………………………………………………………46
4.3.2 Testing of hypothesis two……………………………………………………………..47
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CHAPTER ONE
1.1 INTRODUCTION
Every organization has its own purpose of operation and pre-determined goals and objectives to be accomplished in relation to the organization’s mission and vision statement. The level at which goals or objectives can be actualized depends on the efficiency and effectiveness of operation and internal control Mgbonyebi and Umead (2008). . But for the goals of any organization to be achieved, such entity must observe some stipulated or laid down principles for its performance. When these rules are followed simultaneously, then the usefulness of such principle or concept will be achieved. In general term, management has been recognized as the process of planning , organizing, direct and controlling business operation to ensure that states predetermined goals and objectives are accomplished Carter (2012). Agagu (2009) defines management as a process which enables organizations to set and achieve their objectives by planning, organizing, and control their resources including giving the commitment of their employees (motivation).
According to Ama (2001) inventory is described as stock of goods a firm is producing for sales and the components that make up the goods. Hilton (2004) defines inventory as an itemized list of goods (raw materials, finished goods and work in progress) which forms certain proportion of organizations’ investment. In recent years, Inventory Management has attracted a great deal of attention from people both in academia and industries. A lot of resources have been devoted into research in the inventory management practices of organizations. It represents one of the most important assets that most businesses possess, because the turnover of inventory represents one of the primary sources of revenue generation and subsequent earnings for the company. In the manufacturing companies, nearly 60% to 70% of the total funds employed are tied up in current
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assets, of which inventory is the most significant component Carter (2002). Thus, it should be managed in order to avail the inventories at right time in right quantity. Inventory can be also viewed as an idle resource which has an economic value. So, better management of the inventories would release capital productively. Therefore, from the above definitions inventory is the totality of all the stock, which includes raw materials work-in-progress and finished goods said to be the total amount of goods and materials contained in a store or factory at any given time.
Therefore the aim of this research work is to evaluate how beverage companies as part of manufacturing concerns have been avoiding wastages in inventory by using efficient Inventory managements and control techniques like Economics Order Quantity (EOQ), Just-in-Time (JIT), Quick Response Manufacture (QRM), among others to render efficient services to their customer, maximize profit, avoid production hold-ups in factories and eliminate risk of liquidity crunch, etc. to achieve the above objectives and to avoid complex result, Nigeria Distilleries limited, Sango Otta Ogun state is selected for this research work.
1.2 BACKGROUND TO THE STUDY
Profit is the entrepreneur’s reward and in fact, a major motive for doing business. Most often too, it is used as an index for measuring performance. This paper is undertaken to outline how profit can be maximized through effective management and control of inventory. It focuses on cost reductions, adequate supply of materials and proper storage. Inventory management is that aspect of business activity that deals with planning for purchasing, receiving, handling, storing, and releasing of materials for use in production with effective control measures. Inventories are industrial goods that are available for use or sale. Rumelt (2013) has classified materials for use in manufacture under three headings: (1) Raw materials primarily from agriculture and the
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various extractive industries (2) semi-finished goods that are yet to undergo all the production processes (3) finished goods that are ready for sale and (4) consumable goods which are used up during production process. Inventory control as it was pointed out by Koumanakos, (2008).implies the coordination of materials controlling, utilization and purchasing. It also involves 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. According to Pandey (2005) management through their policies, coordination, decision and control mechanisms must maximize the return on investment (ROI). The need for inventory control cannot be overemphasized because it serves as the potent management tool of verifying the arithmetical accuracy of stock records with physical stock (material in the store) through inventory control Lemu, (2015). Efficient inventory management is a delicate balance at all times between having too much and too little in order to maximize profits. The costs associated with holding stock, running out of stock, and placing orders must all be looked at, and compared in order to find the rigid formular for particular business Zanto, (2008). This is because it is impossible to have an unlimited supply on hand, for different reasons. Many businesses simply do not have enough money to keep excessively large inventories due to the costs associated with purchasing the items as well as storing them, and having too many products leads to further losses when they do not move off the shelves, damages and shortages become inevitable, Star (1962). At the same time, there are issues with inventory management when there is not enough stock in hand. One common problem is running out of inventory, which is caused by trying to reduce inventory costs too much. This is something that no business would like to experience, but it happens to virtually all of them at a given point in time. Even the largest stores run out of certain products
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from time to time when they sale or use more than they expected. There can be financial losses when inventory is not available for production and for customers to purchase which tends to result to the organization’s goodwill being negatively affected due to customers’ dissatisfaction Ayoade, (1986).
1.3 STATEMENT OF THE PROBLEM
Effective inventory management in supply chain is one of the key factors for success. The challenge in managing inventory is to balance the supply of inventory with demand. A firm would ideally want to have enough to satisfy the demands of its customers and avoid lost of sales due to inventory stock-outs. On the other hand, the firm does not want to have too much inventory staying on hand because of the cost of carrying inventory Anichebe and Agu, (2013). According to Dimitrios, (2012) inventory management practices have come to be recognized as a vital problem area needing top priority. Inventory management practices thus deserve utmost attention. The reason of carrying inventory management practices is to ensure regular supply of materials as and when required. Insufficient inventories hamper production process and mitigate sales volume.
On the other hand, Rajeev (2012) denotes that excessive inventories tie up working capital and boost up carrying costs. In most organizations, direct materials represent up to 50% of the total product cost, as a result of the money entrusted on inventory, thereby affecting the profitability of the organization. The fundamental problem of inventory is overstocking and under stocking of stocks due to the absence of an effective inventory control system. Overstocking locks up the capital of the organization and also increase the cost of storage and the risk of stock becoming obsolete and redundant. Under stocking leads to stock out or nil stock leading to production bottleneck and for that matter halting organizational operations. The effects of stock out are
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production inefficiency, loss of sales, loss of profit, the cost of employing labor who cannot produce and the reputational damage that the company will face as a result of the failure to meet customer needs and requirements. The researchers have therefore found the need to study into this area and bring to bear how inventory management can affect the productivity and profitability of an organization
However, this shows that there exists a research gap which still needs to be addressed. The essence of this research work is to carry out further examination on the effect of efficient and effective inventory control on the profitability of manufacturing companies in Nigeria. This study was aimed at contributing to resolving the contending level of inadequacies associated with the inventory control and profitability in manufacturing companies.
1.4 OBJECTIVES OF THE STUDY
The main objective of this research work is to evaluate the effect of inventory control on profit maximization of in manufacturing companies in Nigeria using the Nigeria Distilleries limited, Sango Otta, Ogun State, as a case study.
Other specific objectives of the study
The specific objectives of this research work includes
i. To assess if the company order at the right time and obtain quantities of inventories that are economical through the use of inventory management.
ii. To ascertain whether the company maximizes their profit for the full benefits of their stakeholders.
iii. To assess if the organization renders efficient services to their customers through prompt delivery of their orders at attractive prices.
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1.5 RESEARCH QUESTIONS
For a meaningful research work to be carried out on the useful of inventory management in manufacturing concerns a number of questions must be answered. The following are therefore, some of the research questions:
i. Do manufacturing concerns use efficient inventory management techniques such as economic order quantity (economic lot seize) and just-in-time, among others?
ii. Does economic lot size technique in particular assist manufacturing concerns to hold sustainable size of inventory, for (efficient and smooth production?
iii. Does efficient inventory management help the manufacturing companies, Nigeria at large?
These questions will be structured in such a way that the responses will state whether they strongly agree, agree, or are neutral or disagree in their responses. The answer from these questions will form the basis of the analysis.
1.6 STATEMENT OF HYPOTHESIS
According to Onu (2006) the validity of a hypothetical statement is subject to verification which must be based on adequate information on which decisions could be objectively based for either to accept or reject such hypothesis.
Therefore the following hypothesis will be tested in this research work.
HO1: Inventory control and profit maximization does not help maintain effective use of the organization resources
H11: Inventory control and profit maximization help to maintain effective use of the organization resources
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HO2: manufacturing company does not minimize cost of inventories through the use of economic cost size (EOQ).
H12: manufacturing company minimize cost of inventories through the use of economic cost size (EOQ).
1.7 SIGNIFICANCE OF THE STUDY The research work was taken up to show the significance of materials management to aggregate performances of the organization. Apparently, all organizations, whether service oriented or good oriented need to pay attention to the essence inventory and inventory management in their organizations. Consequently, it is clear that the contribution and importance of this study cannot be over emphasized.
The research work will help the management of the Nigeria Distilleries limited, Sango Otta, Ogun State.to appreciate areas where improvement is needed in her inventory operations so as to boost her profitability and consequently increase her shareholders wealth. Indeed, this will in no little way have favorable effects on the national growth and development of Nigeria manufacturing sector in particular and economy at large. The results of this study will also assist in defining new methods/ strategies of materials management for manufacturing sector in particular so as to avoid the incident of over-stocking and under-stocking which tends to have adverse effect on their profit maximization.
The results of this study should help scholars, students and upcoming researchers in the conduct of future research and add more to their review of literature.
Finally he study when conducted would be of immense benefits to the public in general i.e. those who are able are to come across this research work and also writing to know much about inventory control and profit maximization in a manufacturing company. It is going to serve as a
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reference or record purpose and as well as increasing the number of publication in this concentration.
1.8 JUSTIFICATION OF THE STUDY
The study of this research work is justified based on the need for the effective control and management of inventory by all levels of organization which will ensure smooth operation and maximization of profit. The need for this research work can be explained through the unresolved inherent problems associated with the ordering, holding and control of inventories by organizations, especially manufacturing companies in Nigeria. This research work will go a long way providing an insight to the techniques available to manufacturing organizations in the area of inventory control and management so as to ensure profit maximization.
1.9 SCOPE OF THE STUDY
The scope of this study revolves around the effect of inventory control and management on profit maximization in manufacturing companies in Nigeria. Many areas such as inventory management systems, contributions of efficient inventory management towards profitability, material usage, cost minimization and economy of operation; and the impacts of efficient inventory management especially as it concerns the area of study etc; are given precise explanations as time and scope constraints permit the researcher. The Nigeria Distilleries limited, Sango Otta, Ogun State was used as a case study therefore references relating to the Nigeria Distilleries limited, Sango Otta, Ogun State was used for discussion and analysis.
1.10 DEFINITION OF TERMS
The following terms or concept, which has been used in this research, would be operationally defined as follows.
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i. Inventory: is the raw materials, work-in-process products and finished goods that are considered to be the portion of a business assets that are ready or will be ready for sales Investopedia (2016)
ii. Management: Minizber (2010) define management as a social process where in the process consists of planning, control, coordination and motivation.
iii. Inventory control: this is the managerial activity performing to ensure that materials are sufficient for uninterrupted organizational operational are available both in quality and quantity-Joseph Adewale Oke (2006).
iv. Economic Order Quantity: (EOQ) A standard formula used to arrive at a balance between holding too much so little stock.
v. Just-in-time (JIT): This aims to reduce costs by cutting stock to a minimum level.
vi. Quick Response Manufacturing: (QRM) is a companywide strategy to cut lead times in all phases of manufacturing and office operations university of Wisconsin (2015)
vii. Stock Review: This is a regular review of stock. At every review you place an order to return stock to a predetermined level.
viii. Inventory Turnover: This simply shows how quickly inventory is being
ix. Obsolete stock: A stock no longer in use i.e outdated
x. Ordering cost: The cost incurred in placing the order up to the point of receiving the goods into the warehouse.
xi. Overtrading: This is a situation whereby a company performs excessive business operations than its capital can cope with.
xii. Profitability: This is the ability to sell goods and services above cost and earn reasonable returns on capital employed.
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xiii. Raw material: These are those inputs that are converted into finished goods through the manufacturing process.
xiv. Re-order Level: It is a fixed point between minimum and maximum stock levels where requisitions are raised for new purchases.
xv. Shortage cost: These are costs incurred when customers demand cannot be met because the stock is exhausted.
xvi. Under trading: This is a situation whereby a company has much fund than necessary.