Inventory Management Control System in Manufacturing Industry

INVENTORY MANAGEMENT CONTROL SYSTEM IN MANUFACTURING INDUSTRY

BY

OKORA, HAPPINESS DANIEL

H/2017/BAM/011

A SEMINAR PAPER

SUBMITTED TO

THE DEPARTMENT OF BUSINESS ADMINISTRATION

FOUNDATION POLYTECHNIC

IKOT IDEM, IKOT EKPENE AKWA IBOM STATE.

IN PARTIAL FULFILLMENT OF THE REQUIREMENT FOR THE AWARD OF HIGHER NATIONAL DIPLOMA (HND) IN BUSINESS ADMINISTRATION AND MANAGEMENT

NOVEMBER, 2018

APPROVAL PAGE

I hereby certify that this seminar paper titled “INVENTORY MANAGEMENT CONTROL SYSTEM IN MANUFACTURING INDUSTRY” written by Okora, Happiness Daniel with registration Number H/2017/BAM/017  has been examined and found acceptable in partial fulfilment for the award of Higher National Diploma (HND) in Business Administration & Management.

MR. EKPENE UBONG                                                ------------------------------

Supervisor’s Name                                                                  Signature/Date

MR. NICHOLAS UWANA                                                             ---------------------------

HOD’s Name                                                                                       Signature/Date

INVENTORY MANAGEMENT CONTROL SYSTEM IN MANUFACTURING INDUSTRY

TABLE OF CONTENT                                                                    

APPROVAL PAGE

CHAPTER ONE

1.0 Introduction

1.1 Objectives

1.2 Scope of study

1.3 Theoretical framework

1.4 Conceptual clarification

CHAPTER TWO – LITERATURE REVIEW

2.0     Review of related Literature

2.1     Nature of Inventory

2.2 Inventory Control and Management

2.2.1 Objectives of Inventory Management and Control

2.2.2 Importance of Inventory Management

2.3 Critical Evaluation of Inventory Problems

CHAPTER THREE

3.1     Summary

3.2     Conclusion

3.3     Recommendations

REFERENCES

CHAPTER ONE

INTRODUCTION

BACKGROUND OF STUDY

It is difficult to determine the contribution of production to the society welfare. Whoever has created something with his own hands knows that production is neither capitalist nor socialist but its only one thing, which is production, is what creates national wealth, the common material basis without which no country can exist. Production can be said to be the fabrication of physical objects, solid or liquid, through the use of labour, material and equipment.

Inventory is an accounting term that refers to goods that are in various stages of being made ready for sale, including:

·        Finished goods (that are available to be sold)

·        Work-in-progress (meaning in the process of being made)

·        Raw materials (to be used to produce more finished goods)

Inventories are a major component of virtually all sectors that makes up an economy system and as such its required to be planned, managed and controlled in order to achieve the basic aims of:-

·        Minimising costs at acceptable levels of investment.

·        Providing the desired levels of customer service.

Their purpose includes:-

·        The decoupling of supply and demand through the creation of buffer stocks.

·        Building-up anticipation stocks to meet planned or expected demand.

Inventory management and control also means keeping proper and accurate record or account of all available stock in a warehouse. The feasibility of an organization can be improved through effective and efficient management of material resources. Inventory management control system exists to ensure that proper and adequate utilization of materials are made and that the optimum levels of material investment are determined and maintained. This is a notable measure managing material resources. Management of resources covers action taken from the procurement of the resources to their disposal firms the certain measures towards preventing their stock from being in shortage. Pilferage and waste of some of the resources are very effective while others are not.

The main goal of every business entity is to maximize wealth and minimize loss. Maximization of wealth can only be achieved when stock holder interest is been met and this can only be when the business entity make profit. Profit on the other hand is said to be cost and expenses incurred. . Effective Inventory Controls are important factors in keeping the total cost of maintaining inventories at a minimum and help to increase returns on the investment.  Many organizations do not adequately control their inventory, making it possible for losses (through shortage of stock, pilferage, waste of materials, etc.) to pass unnoticed. The stores department is often neglected an equivalent amount of (liquid) cash.

Unplanned flow of materials is detrimental to efficient production. Production stoppages resulting from the stock out have innumerable negative effects (cost). They lead to loss of manpower, disappointment of customers and possible loss of goodwill. Few manufacturing firms use scientific approach of inventory control. Many full bank on the rule of thumb "this is reasonably inaccurate". It results into over-stocking or under-stocking. Over-stocking entails incurring high storage cost. Excessive capital being locked up, shortage of storage spaces and stock losses. On the other hand, under-stocking may result to panic buying production delay and loss of sales revenue which gives rise to loss of profit and goods will or even penalty payments where there is a contract to maintain regular supplies.

Stock loss could accrue when inventories are not properly accounted for. This may be due to the type of inventory system used. The method of valuation of unsure or unsold inventories at the end of the accounting period and the managerial efficiency in adopting an acceptable inventory control when and most required. This gives rise to many organizations, individuals and the corporate firms to benefit inevitably to the adequate and proper management of inventories. Also product management of our financial, material and human resources are more important now than ever before, because of adequate management of inventories as the economy takes a downturn. No wonder Havngreu says that good inventory control helps maximize efficiency, minimize waste, unintentional error and fraud. Therefore, the reduction of wastage is one of the most important elements of inventory planning.

Hence, inventory management and control procedure are highly relevant function in all organizations, small or big, profit or no profit oriented, service or manufacturing alike.

1.1 OBJECTIVES OF INVENTORY MANAGEMENT

The main objectives of this seminar are:

1.     To identify issues of poor inventory management arising in the manufacturing industry

2.     To avoid both overstocking and under-stocking of inventory.

3.     To eliminate duplication in ordering or replenishing stocks.

1.2 SCOPE OF THE STUDY

          The scope of the study will be focused on inventory management issues that arise at the manufacturing industry in Nigeria. The researcher will focus on the inventory management especially in the area of overstocking and under-stocking.

1.3 THEORETICAL FRAMEWORK

          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 confirmed by Schroeder (2000) who stressed that inventory management has an impact on all business functions that is particularly in marketing, accounting operations and finance.

          According to Wild (2002:4), inventory control is the activity which organizes the availability of items to the customers is the activity of inventory control. It provides the manufacturing, purchasing and distribution functions to meet the marketing needs. The existence of too large inventory leads to increased costs and reduced cash flow and contributes to decreased sales. The mentioned aspects show the importance of accurate inventory management in enabling the company’s competiveness Felea (2008).

The aim of inventory management is to hold inventories at the lowest possible cost, given the objectives to ensure uninterrupted supplies for ongoing operations. When making decisions on inventory, management has to find a compromise between the different cost components, such as the costs of supplying inventory, inventory-holding costs and costs resulting from insufficient inventories (Hugo, Badenhorst-Weiss and Van Rooyen 2002:169).

Clodfelter (2003:279) adds that a good inventory control system offers the following benefits:

a.      The proper relationship between sales and inventory can better be well maintained. Without inventory control procedures in place, the store or department can become overstocked or under-stocked.

b.     Inventory control systems provide a business with information needed to take markdowns by identifying slow-selling merchandise. Discovering such items early in the season will allow a business to reduce prices or make a change in marketing strategy before consumer demand completely disappears.

c.      Merchandise control systems allow buyers to identify best-sellers early enough in the season so that re-orders can be placed to increase total sales for the store or department.

d.     Merchandise shortages and shrinkage, can be identified using inventory control systems. Excessive shrinkage will indicate that more effective merchandising controls need to be implemented to reduce employee theft or shoplifting.

Gourdin noted that ‘inventory is one area of logistics that has received a great deal of management attention over the past decade. Executives now realise that holding excessive stocks is simply too expensive. Therefore, a great deal of effort has been expended to eliminate unnecessary inventory without compromising customer service. However, there are numerous situations where inventory simply must be held, particularly when meeting the needs of global customers. Management’s goal should be to hold only what is necessary to satisfy customer requirements and manage it effectively’ (Gourdin 2001:82). Finally, Pycraft et al (2000:419) define inventory or stock as ‘the stored accumulation of material resources in a transformation system.

1.4 CONCEPTUAL CLARIFICATION

The following key concept will be defined in this work. They are Inventory, management and control system of manufacturing industry.

Inventory: the concept of inventory according to International Accounting Standard (IAS2) says inventories are defined as assets:

a.      Held for sale in the ordinary course of business;

b.     In the process of production for such sale;

c.      In the form of materials or supplies to be consumed in the production process or in the rendering of services

The valuation of inventory involves:

a.      The establishment of physical existence and ownership;

b.     The determination of unit costs;

c.      The calculation of provisions to reduce cost to net realizable value, if necessary.

The valuation of inventory has been a controversial issue in accounting for many years. The inventory value is a crucial element not only in the computation of profit, but also in the valuation of assets for statement of financial position purposes. As inventory is usually a multiple ratherthan a fraction of pofit, invenrtory errors may have a disproportionate effect on the accounts.

Bansal in his study on material management; has evaluated the existing systems of inventory management. He emphasizes: the need for automatic replenishment system in the undertaking offer studying the application of ABC analysis and EOQ technique of inventory control. He also points out the accumulation of surplus and absolute stores which are no longer required should be disposed off as early as possible at the best available price. He further, suggest the preparation of monthly class wise statements on inventories for effective control over them and the introduction of reconciliation system of stores ledgers with account ledgers to avoid misappropriation of stores, and spares for production and operation are above their actual consumption level.

Inventory management has often meant too much inventory and too little management or too little inventory and too much management. There can be severe penalties for excesses in either direction. Inventory problems have proliferated as technological progress has increased the organization’s ability to produce goods in greater quantities, faster and with multiple design variations. The public has compounded the problem by receptiveness to variations and frequent design changes (Tersine, 1982:5).

Silver, Pyke and Peterson (1998:10-11) continue arguing that in the United States of America and other Western Countries, productivity improvement was pursued through reducing the amount of direct manufacturing labour expended per unit of output. This was a valid strategy because of the high labour content in many manufactured products.

Inventory control systems: is the activity which organizes the availability of items to the customers. It co-ordinates the purchasing, manufacturing and distribution functions to meet the marketing needs. This role includes the supply of current sales items, new products, consumables, spare parts, obsolescent items and all other supplies (Wild 2002:1).

Wild (2002:7-8) adds that the purpose of the inventory control function in supporting the business activities is to optimize the following three targets:

• Customer service

• Inventory costs

• Operating costs.

The most profitable policy is not to optimize one of these at the expense of others. The inventory controller has to make value judgments. If profit is lacking, the company goes out of business in the short term.

CHAPTER TWO

2.0 REVIEW OF RELATED LITERATURES

2.1 NATURE OF INVENTORY

Inventory represents finished and unfinished goods which have not yet been sold by a company. Inventories are maintained because time lags in moving good to customer could put sales at risk, inventories are also maintained as buffers to meet uncertainties in demand, supply and movements of goods. When a merchant or buyer buys goods from inventory the value of the inventory account reduces due to cost of goods sold out.

2.1.1 Classification of Inventory

Raw material: these are materials and components schedule for use in making a product and are termed as unfinished goods or product. Example, A canned food manufacturer’s materials inventory includes the ingredients to form the foods to be canned, empty can and their lids (or coils of steel or aluminum for constructing those components), labels, and anything else (such as; solder, glue etc.) that will form part of a finished can.

Work-in-Progress: they are materials and components that have began their transformation to finished goods. Example, the firms work-in-process includes those materials from the time of release to the work floor until they become complete and ready for sale to wholesale or retail customers. This maybe VAT (Value Added Tax) of prepared food, filled cans not yet labeled or sub-assemblies of food components. It may also include finished cans that are not yet packaged into cartons or pallets.

Finished goods: these are goods ready for sale to customers which includes the wholesalers, retailers and final consumers. Example, finished goods inventory consists of all the filled and labeled cans of food in its warehouse that it has manufactured and wishes to sell to consumers.

          The management’s interest in inventory control is to determine the optimum level of inventory and appraise the decisions and rules for ordering inventory. Not having enough inventory, as pointed out, lead to profit losses. Unfortunately, the loss is a hidden cost because it is not reflected in the normal accounting report to management. The accountant therefore is interested in determining the inventory turnover, turnover period and minimum inventory.

2.1.2 Techniques of Evaluating Inventory

In inventory control commodity that cannot be tracked individually, accountants or finance managers must choose a method that fits the nature of sale which could include the following methods:

FIFO (First-in-first out):- IAS 2 also requires the use of the First-in, First-out (FIFO) principle whereby those items which have been in stock the longest are considered to be the items that are being used first, ensuring that those items which are held in inventory at the reporting date are valued at the most recent price. As an alternative, costs of inventories may be assigned by using the weighted average cost formula. This method treats first unit of stock that arrived in inventory as the first to be sold out.

LIFO (Last-in-first out):- it considers the last unit arriving in inventory as the first to be sold out. Using this method a company reports lower net income and book value, which always result into lower taxation.

2.2 INVENTORY MANAGEMENT CONTROL

According to International Accounting Standard (IAS 2) inventories are all type of the entity Assets that held for the purposed of its normal business activities. For example, Raw Material for Production or Finish Goods.

Net realizable value (NRV) - the estimated selling price less the estimated costs of completion and the estimated costs necessary to make the sale.  (IAS, 2013)

Inventory management is considered as major concerns of every organization. In inventory holding, many steps are taken by managers that result a cost involved in this row. This cost may not be constant in nature during time horizon in which perishable stock is held. To investigate on such a case, Taygi (2014) proposes an optimization of inventory model where items deteriorate in stock conditions.

          Inventories are materials and supplies in stock for either sale or for the productions process. They act as a buffer against differences in demand and supply and are a part of the planning process (Arnold, 1991).

Inventories can be seen as a tool dealing with uncertainties to achieve high customer service. Customer refers to both internal and external customers, such as that next production operation, or purchaser and distributor (Arnold, 1991). The performance measure describes the availability of an item when a customer needs it (Axsater, 1991).

A problem faced by decision makers in an organization often comes from management problem. Every organization has to take initiative because decision is an essential task. Because of the issue of allocating resources is common to all organizations, organizations should acquire, control and allocate the factors of production which are essential for the achievement of the business’s goals. In addition, inventory management should be adopted as a key activity of business logistics that contribute more to the company’s survival and growth.

Inventory management or control is a form of administrative control that is particularly essential in all manufacturing, wholesale and retail establishments. The essence of all inventory control is to have the right goods in the right quantity at the right time and place. Failure to have the right quantity of inventory could cause the loss of valued customers because it results in the failure of the organization to deliver on time. The maintenance of optimum inventory levels for the operation of the business reduces the amount of money that would be tied-up in inventory and makes for the advantages that could accrue from large quantity purchases.

2.2.1 OBJECTIVES OF INVENTORY MANAGEMENT

The main objectives of inventory management are operational and financial. The operational objectives mean that the materials and spares should be available in sufficient quantity so that work is not disrupted for want of inventory. The financial objective mean that investments in inventories should not remain idle and minimum working capital should be locked in it. The followings are the objectives of inventory management.

1.     To ensure continuous supply of materials spares and finished goods so that production should not suffer at any time and the customer’s demand should also be met.

2.     To avoid both overstocking and under-stocking of inventory.

3.     To maintain investment in inventories at the optimum level as required by the operational and sales activities.

4.     To eliminate duplication in ordering or replenishing stocks. This is possible with the help of centralizing purchases.

2.2.2 IMPORTANCE OF INVENTORY MANAGEMENT AND CONTROL

Coyle, Bardi and Langley (2003:188) state that “inventory as an asset on the balance sheet of companies has taken an increased significance because of the strategy of many firms to reduce their investment in fixed assets, that is, plants, warehouses, office buildings, equipment and machinery, and so on.

1.     It helps the firm to attain its viability, that is, profit maximization and growth through adequate planning and management of the inventories, because profit is necessary for new plans, equipment, and working capital and so on.

2.     Also, the willingness of individuals to invest in a business is governed largely by the firm’s profit history and profit potentials. In many respects, the welfare of all employees of business vest on the profitability of the company.

2.3 CRITICAL EVALUATION OF INVENTORY PROBLEMS AND WAYS TO SOLVE THESE PROBLEMS

PROBLEMS

There is absolutely nothing good with advantages that does not have disadvantages or problems that such thing can encounter at the course of making use of it therefore, inventory is not exempted from such problems. An effective inventory management system starts with analysis and design. The more thorough the analysis and the more care you take in developing the design, the fewer problems you’ll have running and managing a new inventory system (Jackie, 2009).

1.     To maintain a large size inventories: most times inventories are hard to manage in large size for efficient and smooth production and sales operation most especially for organizations that are still making use of books to keep track of available stock which we all know that using books for keeping records or account in our present business world is often risky which could be lost as a result of fire out break and also as a result of too many recording ledgers.

2.     Misplaced Inventory Items: A common problem with an inventory system design is a failure to include methods for cross-referencing the locations of inventory items. Just as it’s vital for a system to show what’s in stock, it’s also vital for a system to identify locations. Misplaced, lost or stolen inventory items can lead to increased labor and inventory costs and reduced profitability. A design solution can be to incorporate clearly written standard operating procedures for checking in and storing inventory items, bar coding technology that identifies an item’s location and instituting periodic physical inventory counts.

3.     To maintain only a minimum possible inventory: inventory holding cost and opportunity cost of funds invested in inventory. Holding cost of inventory is often too costly because it ties the capital of most organization down in available stock.

4.     Control investment in inventories and keep it at the optimum level: this is because controlling the total money to invest on inventory of an organization is usually not at a minimal level or amount due to the fact that most times need stock are often too numerous to be limited and an organization will fill they can exhaust every item in the warehouse before the next purchasing period. Therefore, inventory managers should strike a balance between too much inventory and too little inventory.

5.     Inaccurate Needs Analysis: Identifying and evaluating what your business needs from an inventory system is a vital step in the process. If an inventory system is already in place, a needs analysis should focus on identifying gaps between what the system currently is and what the system should be. In a new inventory system, a needs analysis should identify, fully evaluate and prioritize system needs. Common problems in this area involve conducting an analysis that is too narrow in its scope or basing a needs analysis on a flawed or unrealistic business plan.

WAYS TO SOLVE THE PROBLEMS

Every problem in life has a solution to it, which inventory has ways of solving it problems. The following are ways of solving inventory problems: (Way, 2007)

1.     Accounting Records: Maintaining up-to-date accounting records of the inventory account helps improve inventory management control. Accurate inventory records of the amount of inventory on hand at any given time are essential in managing and controlling inventory. Businesses may use either the perpetual inventory system or the periodic inventory system to keep their inventory records.

2.     Physical Count: Physical count of inventory is an important measure for improving inventory management control. No matter what inventory system a business uses and how well it keeps the inventory records, losses of actual inventory because of theft, breakage or waste are always a possibility and may not be reported and recorded in the inventory account in a timely fashion.

3.     Inventory Level: The primary objective of inventory management control is to determine and maintain an optimal level of inventory, which helps free some investment capital and reduce inventory holding and handling costs. A small business should avoid either overstocking inventory or running the risk of inventory stock-outs. Keeping too much inventory on hand not only increases costs, but it also subjects inventory to potential deterioration and obsolescence. On the other hand, keeping the inventory level too low may disrupt normal business operations. By implementing a just-in-time inventory order system through better supplier relationships, a business can improve its inventory management control, and thus, keep the inventory level leaner.

4.     Inventory Quality: Effective inventory management control also helps ensure the quality of newly purchased inventory and those in stock. Businesses may hold wrong lines of inventories due to inadequate inventory quality control. Both the accumulation of unsalable inventory and the lack of inventory that customers’ desire may point to potential losses in sales. A proper inventory quality evaluation and assurance system helps improve inventory management control to allow the stocking of balanced lines of different inventories, increasing customer appeal for a business's total operations.

5.     Maintain sufficient stock of raw material in the period of short supply and anticipate price changes. Organizations have to ensure their stock are not overstocking and not under-stocking so that they can sell as at when due and at an affordable price so as to avoid depreciation of stock value and also not to run out of stock before anticipated time due for such stock to depreciate.

6.     Ensure a continuous supply of material to production department facilitating uninterrupted production. Production units do not need to run out off stock for any reason because if they do their customers will be force to change to a different seller, likewise their suppliers they should always make sure organizations don’t lack

CHAPTER THREE

CONCLUSION, SUMMARY AND RECOMMENDATION

3.1 CONCLUSION

A company that does not have well structured inventory management system will get into problems when checking whether the products known from the brand are available in stock or not. Study has reveals that the inventory of selected public enterprises has accumulated due to faulty purchases, heavy rejections, long lead time, in-cohesive organization. Beside that, in theday to day activity, without inventory management system, sometimes employee needs to check to warehouse especially if the products are out of stock in all the shops and remember; checking to the warehouse will take longer time so it wouldn’t be efficient at all.

Benefit of inventory management system for shop day to day activity are list the product that still available in database, update the inventory database whether by reducing the number of stock available in database if the product has been sold or adding the number of stock if there were products coming from the distributor or producer, and also keep the transaction history in database about what happened in retail. Besides that, inventory management system will help employee in warehouse to know whether the product in store are available or not, so can help to prevent stock minus of product in warehouse.

By using inventory management system, an employee will find it easier to check required product based on quantity, quality, price etc. so as to ensure that the activity of the employee is more effective and more efficient.

3.2 SUMMARY

Inventory management is one of the important key activities of business logistics. Because of its role in business organizations, Schonleben (2000:395) adds that inventory is one of the most important instruments of logistics planning and control. While inventory on work in process is linked to the production process, physical inventory on stock or in buffer storage is unnecessary from the standpoint of added value and is considered as waste of time and money (tied-up capital).

3.3 RECOMMENDATION

1.     Manufacturing firms should reduce administrative lead time by expediting purchase matters to the appropriate functional area.

2.     Manufacturing firms should purchase an inventory system software to avoid much paper work which will most times get missing when required by management to know the stock level of available stock in store.

3.     Manufacturing industries most especially in Nigeria should endeavor to carry out serious and regular inspection on their stock available in the store, so as to ensure they don’t loss their customers due to under-stocking where it will limited them to producing less product as at when required of them. They should also ensure there have adequate amount of inventory needed in their store and not overstocking so as to eliminate wastage of available resources.

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