Effective Inventory Control as a Means of Improving An Organization is Performance

Effective Inventory Control as a Means of Improving An Organization is Performance

Following from the importance of this study in the manufacturing industries, many practicing managers management practitioners, students and experts in management have suggested ways and means of arriving at the optional stock level necessary for organizations,  performance, many have viewed inventory definitions, classifications, function, control and flow cycle differently from other depending on ones status, academic orientation environment etc.

It is on this ground that Love (1979) stated that “inventory is a quantity of goods or materials in the control of an enterprise and held for a time in a relatively idle or unproductive state, awaiting its intended use or sale”.

Richard (1982) in his own definition said “ that the term inventory can be used in to mean stock on hand at a given time that is to said (a tangible asset which can be seen weighed and counted)”.

It could therefore be concluded that inventory can be referred to as a whole stock of goods owned by an organization at a particular period. The nature of inventory to be carried by an organization, no doubt depends on the types of business being run by that organization, whether manufacturing or selling for instance. A manufacturing will need a good supply of raw materials on hand in order to keep a good flow of production and a sizeable stock of finished goods so that the demand of consumers or users can be constantly met.

Another definition put forward by Thorngren (1978) is that “ inventories consist of merchandise produces of manufactures, goods in the process of being manufactured, and raw materials”.

According to him, stock taking is the means of minimizing the effect of mistakes or investable in accuracies that might creep in when goods are continually being moved in and out of inventory” it also  means a complete process of verifying the balance of the entire range of items held in inventory.

 2.1     FUNCTIONS OF INVENTORIES

Through inventories might be though of requiring high cost and investment opportunities thereby constituting a necessary evil, it must not be forgotten entirely that there are benefit, which accrue to organizations are increasingly aware that the overall efficiency and effectiveness of their operations are directly related to inventory control. Because of this vital role inventory plays in survival of organization, it has become an everyday concern.

Tersine (1982) is saying that “inventor exists because organizations cannot function without it and also supply and demand differ in the rates at which they respectively provided and require stock”.

He also maintained that the existence of inventory can be explained using four functional factors such as: Time factors, economy factor, uncertainty factor and discontinuity factor. Using a time factor hre inventory enables an organization to reduce the lead time in meeting demand.

This includes the minimization of delays that might be encountered in production due to lack of parts and raw materials. This time factor is necessary because of long process of production and distribution that will be required before goods reach the final consumers, only few consumers would be willing to wait for such an extended time interval.

The economy factor helps the organization to take advantage of cost reducing alternatives in order to take advantage of quantity discount it may be advantageous to purchase more supplies than are immediately required per unit cost can be excessive  it items are order separately without regard to transportation and lot size economic also price holding against impending materials cost increases may also favour large quantity purchases.

Uncertainty factor have to do with unforeseen even that modify the original plane of the organization. It includes errors in demand estimates, variable production yields, equipment breakdown, strikes and unusually weather conditions. When inventory is available, the organization has some protection from unplanned occurrences.

The discontinuity factors permits from the treatment of various dependent operations (retailing, distributing, warehousing manufacturing and purchasing an  independent and economical manner. This factor is also referred to as the decoupling function of inventory lee plus Doubler (1977) maintain that “ inventories make possible smooth and efficient operation of an manufacturing organization by decoupling individual segments of the total operation, they allow flexibility for suppliers in planning, producing and delivering an order for a given part.

Raw material inventory solaces the department in process inventory isolates production department from each other and finished goods inventory isolates the customer from producer.

Love (1979) added that “ inventories are held for protection against stock out to the extent that supply for demand process fluctuates unpredictable. There is risk of running out of stock and suffering the associated customer strife. An often overlooked purpose  for carrying larger inventories is that less control effort is required, it may be chapter to carry large stocks and review stock level less frequently.

Inventories can also be held as a means to support a process that requires the presence of the inventory for example good in transit. Apart from the reasons enumerated above, for holding inventory, it is the view of star and miter that inventories as  well held for transaction, precautionary and speculative motives. Transaction motive ensures for the maintenance of inventory materials, precautionary motives takes cares of the uncertainty under which the degree of   demand and supply for forces are unpredictable and since there will always be fluctuation in the prices of inventory materials speculative motive ensures that safety stock are maintained.

It is need to be emphasized conclusively that in as much as organization stand to reap some benefits from having inventory materials readily available, it will also be stressed that an organization must be careful not to stock inventories that ties up capital or one’s that may become obsolete.

2.2     INVENTORY COST AND VALUATION

Horngren (1978) said that “ inventory control aims at discovering and maintaining optimum level of investment in the inventory. He also said that inventories are controlled to avoid the cost associated with not keeping it, the objective of inventory control is to have the appropriate amount of raw materials supplies and finished goods in the right place, at the right time and at low cost. Inventory control itself a very costly activity.

Nigel Slaek etal (1995) identified four type of inventory

• Buffer Inventory is also called safety inventory or safety stock. Its purpose is to compensate for the uncertainties inherent in supply and demand for example, a retail business can never forecast demand perfectly, even when it has a good idea of the most likely demand level it will certain amount of most items in stock. The minimum level of inventory is there to cover against the possibility that demand will be greater than expected during the time taken to deliver the goods.

• Cycle Inventory : Occur because one or more stages in the operation can not supply all the items it produces simultaneously.

• Anticipation inventory: In many organization inventory planning and control is concerned largely with coping with seasoned demand fluctuations. Almost all products and services have some seasonality of demand and some also have seasonality of supply. Anticipatory inventory is used to compensate for differences in timing of supply and demand. For example rather than produce a product only when it is neede, it will be produced throughout the year ahead of demand and put into inventory until it is needed. An organization may take the opportunity to buy in inventories on an opportunities or speculative basis if they are only available spasmodically, or it they believe there might be disruptions to supply.

• Pipeline inventory: exists because materials cannot be transported instantaneously between the point of supply and the point of demand, because of lead time. If an organization orders a consignment of items from one of its suppliers, organization in its own warehouse, pack it, load it on to its truck, transport it to its destination.

Richard (1983) also identified four types of inventory cost

• Purchase cost: This is the unit purchase price, if the material is obtained from an external source or the unit production cost, it is produced internally. The unit cost is always the cost of the item as it is placed in inventories. For purchased items, the cost is the purchase price plus the cost of the frequent, but for manufactured items, the unit cost is the sum of direct labour, direct material and factory overhead.
• Order / set up cost: According to Stephen (1979) ordering cost are those costs that increases when a given total amount desired over a given total amount desired over a period of time is procured with many small orders rather than fewer /large ones. They vary with the number of orders placed within a given time period and not at all with the of the order. It originates from the expense of issuing order to an outside.

Vendor or from the internal set up costs. Order cost will include such costs as making requisitions, analysis suppliers, writing purchase  ordes, receiving materials and doing the paper work necessarily to complete the transaction.

Set up costs comprises of the costs of changing order, the production process to produce the ordered item is preparing the production set up.

• Holding cost: The cost of carrying inventory begin with investment. Money tied up in the acquisition of stock is prevented from earning a return else where holding cost is therefore  the cost of carrying inventory it includes such cost as:
  1. Capital cost which reflect on the loss earning power or opportunity cost of an un-received return in another investment.
  2. Insurance cost: amount being paid as premium for the insurance of the inventory materials.
  3. Property tax, tax being levied on the inventory carried.
  4. Shrinkage: Decrease in inventory quantities over time from loss or theft other cost associated with holding inventories include handing and storage costs, obsolescence, deterioration, salaries and ways of store keepers.

• Stock out cost: This result from both the external and internal shortages,  it is also referred to as shortage cost an external shortage occurs when a customer of the organization does not have his order met while an internal shortage result when a group or  department with the organization does not have its order filled.

External shortages can give rise to the followings:

• Back ordering cost
• Loss of present profit (potential sale)
• Loss of future profit

Internal shortage result in:

• Lost production (idle men and machines)
• Delay in completion date
• Cost of over time and extra shifts

It can then be seen that stock out cost are incurred because of the failure of the organizations inventory to meet the demands being placed on it. This cost can be extremely high it the missing item forces a production time to shut down.

Four  methods are adopted in the process of valuing the stock files of an organization viz.

• FIFO (First-in first-out) With its use, materials are issued from the oldest supply in stock and units issued are costed at the oldest cost listed on the stock ledger sheets with materials on hand being the most recent purchases. It is mainly used for goods that are subject to deterioration or obsolescence. Fifo method yields the greatest amount of profit during inflationary period because the costs of units sold is assumed to be in the order in which they were incurred.

• LIFO (Last-in Fist-out): This assumes that the most current cost of goods are to be charged to the cost of goods sold. The cost of unit remaining in inventory represents the oldest costs available. The inventory sold or consumed in a period are those most recently acquired or produced and the remaining ones are those earliest acquired or produced.

• AVERAGE COST: This method attempts to determine the average cost of each item during a time period. It consists of

• Simple average
• Weighted average
• Moving average

The simple average regardless of the variations in the number of units, reflects the lot size and gives the unit production or purchase unit cost by the number production runs or orders.

The weighted average considers quantity as well as unit costs. It is determined by dividing the cost of goods available for sale or use by the total number of units available during the period.

The moving average on its own computes an average unit cost after reach purchase or additional stock it is however well suited for computerized inventory operation in this method, the units cost does not reveal price changes as clearing as may be desired.

• SPECIFIC COST: This method is best suited for goods of significant vale which are few in number, its application is usually limited to large, expensive item handled in small quantities. The procedure consist of tagging or numbering each item as its placed into inventory and so its cost is dissemble.

2.3     INVENTORY CONTROL MECHANISM

According to Tersine (1982) “The development and implementation of an inventory control system to meet the needs of a specific organization is a customizing operation. Since inventory management is not an island unto itself, the system must serve the goals of the organization and service objectives of other department.” He is of the opinion that a necessary precondition for the development of an inventory system is forecast of all the items produced or used by the organization. He stressed further that though the decision to implement or subsequently redesign an inventory vest with the top management the department affected should be a party to the design s that as to party to the design so that as to avoid resistance to change and implementation difficulties. He argued that “without employee support, any inventory system is subject to demised or at least a turbulent future”.

An inventory control system was defined by madder (1966) as a system in which only the three underlisted cost are significant, and in which any two or all of the three costs subjects to control, they are as follows:

• The cost of carrying inventories
• The cost of carrying shortage
• The cost of replenishing inventories

The cost of carrying inventories madder explained is the cost of investment in inventories of shortage, handling and obsolescence, which the cost of incurring shortages refer to the cost of cost sales, lost of goodwill of overtime payments and of special administrative efforts telephone calls, memos, letters)

The cost of replenishing inventories is the cost of machine setup for production of preparing orders. These costs which can be aggregately called total costs are closely related in that when one cost is decreased, one of the other two costs and sometimes even both man increase.

Lamar lee and Dobler (1977) stated three basic types f inventory control system as follows:

• THE CYCLICAL ORDERING SYSTEM:

This system can simply be referred to as a periodic inventory control system. This is because it orders inventory materials on a time cycle basis which involving scheduled periodic reviews of the inventory levels of all inventory items. The intervals may be one month, three months or one year.

Review frequency varies from firm to firm and among materials within the same firm depending upon the importance of the material specific production schedules and market conditions. This system is well suited for materials whose purchases must be planned months in advance because of established and infrequent production schedules maintained by the suppliers.

• THE MATERIAL REQUIREMENT PLANNING SYSTEM (MRP):

This system orders stock only to meet preplanned production requirements. It challenges the traditional concept of carrying any production inventory prior to the time materials are actually required by the production operations. This system maintains no satting stock this kind of system is most suited to a large manufacturing organization that produces come components in its own workshops un-rich buys some components from suppliers and ultimately assembles into a fairly complicated finish product.

The MRP system can best be used under the underlisted conditions:

• It is demand for the materials directly dependent on the production of other specific inventory items.
• When there is a highly unstable materials usage or it is discontinues during a firms normal operating cycle.

It this system is well applied, the amount of capital required to finance inventory of materials and work-in-progress will be reduced to the bearest minimum.

• FIXED ORDER QUANTITY SYSTEM:

This is a perpetual inventory control system that orders inventory at anytime the inventory position reaches a re-order point. The system requires for each inventory items, the predetermination of a fixed quantity to be ordered each time the supply of the item is replenished which is based on price consideration and usage rate and the predetermination of an order point so that when the stock level on hand drops to the order point the item is authomatically “flagged” for re-order purpose. This system allows for variable review period it will be more desirable if:

1. The number of transactions is compared to annual demand
2. The unit cost of the item is high

• Demand fluctuation are great and difficult to predict

2.4     STRATEGIES OF INVENTORY CONTROL

It has earlier been established that of controlling the amount of inventory held in various forms within a business to meet economically the demands placed upon that business.

Organizationally, the inventory control function is usually assigned to the purchase or the production control department. The number of item demand for greater variety by customers and requirements for better services. This increasing growth in the number of inventory items therefore demands an adoption of a particular control measure at any point in time. This control can be achieved using the following strategy approaches.

1)      THE USE OF INVENTORY POLICIES

A company’s inventory holding policy is usually implemented by a series of rules that determine how and when certain decisions concerning the holding of inventory should be made. These series of rules are known as inventory policy.  Inventory policies defined actions to be taken under three different situations which are:

1. i) When and how replenishment orders are placed usually made in form of time basis or on inventory level.

(ii)     What size of the replenishment order is placed either fixed or variable.

(iii)    What action is taken when a stock out occurs.

The policies are sub-divided into three namely:

• The re-order level policy
• The re-order level policy with periodic review
• The re-order cycle policy

• ECONOMIC ORDER QUANTITY (EOQ)

This is the size of an order that minimize the total inventory cost, it is the quantity that will be ordered which will not be too much to tie the capital down in excessive materials and will also not be too low in such a way that one will be buying frequently.

Ordering less than EOQ will result to frequent. Also ordering that will definitely in crease cost while ordering above EOQ will result to capital being tied down it therefore becomes necessary for each company to determine the EOQ for most or its most important costly inventory items once this is determined, it becomes the quantity to be ordered each time the policy allows the company to order.

• ABC ANALYSIS (PARATO CURVE)

This provides a sound basis on which to allocate funds and personnel time with respect to refinement of control over the individual inventory items. Each inventory item is being stocked in terms of its price usage (demand) and lead time as well as its attendant specific procurement or technical problems the inventories are classified into A, B and C with the A class getting the greatest attention. This is because the A class is high value items with the greatest percentage of naira value that is spent inventory items this is followed by B class and the C class recording the least percentage of naira valve that is spent on inventory items. The inventory value is got by multiplying the annual demand by the units cost. It inventory levels can be reduced for class A items there will be a significant reduction in inventory investment.

• SPECIFICATION AND STANDARDIZATION

Specification are detailed description of the materials. Part and components that are use in making a product. It ensures that less costly type of materials that can serve the purpose for which it is needed effectively are used.

Standardization is the process of establishing agreement upon uniform identification for various characteristics of quality, design, performance quantity and service. The use of standards permits firms to purchase fewer items in large quantities and at lower prices.

The therefore means that purchase of standardized materials saves money via low prices, lower processing cost and lower inventory cost.

• RATIONALIZATION AND VARIETY REDUCTION

The part of an inventory material can be rationalized or reduced. For example, the length of a ceiling fan rod can be reduced and yet it performs the same function as when it is not reduced.

In the same vein, a variety of materials serving a common purpose can be reduced in number to save cost. In this way the number of inventory items to be controlled are reduced as well as saving in personnel time and also making more space available for more important items.

 2.5     INVENTORY FLOW CYCLE

Inventory control involves the controlling of this rate of materials flow into and out of a system.

According to Richard Tersine (1982) “inventory flow cycle is a vital part of the operational processes that satisfy. Customer demand. The driving force behind the inventory flow cycle is the demand” to finished goods when then flow is regulated an organization can then function effectively  in the initial state, materials and supplies are procured from vendors.

This forms the first poor of inventory investment that must be managed and controlled. This variety and quantity of items purchase are timed so that they can meet the demand for their utilization by the organization as these materials are released to manufacturing, they join the in – process goods inventory that must be managed in relation to the capacity of the facility. These items on leaving the in – process goods category, enter the finished goods that must be also regulated with relation to external demand.

Proper monitoring and evaluation of the inventory flow cycle demands that all the inventory categories must be synchronized as per the rate of flow of material into and out f it, no particular category can be controlled without respect to the others.

It should equally be noted that although different organizations may have fewer or more categories to control, the flow cycle is still remarkable similar.

D

Diag

Like we have previously said, inventory control does not concern only raw materials but also applies to in process goods and finished goods. The flow shows how various departments takes charge of inventories at their various stages. The effective and full control of the above cycle also requires the recognition of the four common components properties that are attached to inventory. These includes demand, replenishment, constraints and cost properties. Demands are units that has been taken from the inventory replenishment  are units put into inventory while cost are what has been scarified by keeping or not keeping inventory and constraints are limitations imposed on demand, replenishment and costs by management or physical environmental conditions.

• WHAT IS INVENTORY CONTROL

It has been widely acclaimed that materials constitutes the life blood of any business enterprise and so its efficient and proper control must be an indispensable element in all management activities. It is on this premise that David and Alex (1986) defined inventory control as “the activity of determining the range and quantities of materials which should be stocked, and the regulation of receipts and issues of this materials”.

Love (1979) However approached the definition from a different dimension. He related inventory control to the maintenance of balance between cost incurred and saved in holding materials. According to him, “ inventory control is the effort to achieve and maintain an economic balance between the cost incurred and the cost saved by holding material in stock”. The establishment of the fact that inventory control is an invaluable subject that requires very great attention led lee and Dobler (1977) into describing inventory control as “a vital element in the management of material”

Inventory control has also been defined in relation to meeting demands being placed upon business organizations, thus, as Lewis (1970) rightly put it “ inventory control is the science base art of controlling the amount of stock held, in economically the demands placed upon that business” following on that John Warman (1979) described it as “being an unwanted child of industry and commerce for two long” the reasons for this undertaking are:

• To verity the accuracy of inventory record
• To support the valued inventory shown in the balance sheet by physical verification
• To disclose the possibility of fraud theft and loss
• To reveal any weakness in the inventory control system for the custody and control of inventory

2.7     HISTORY OF NIGERIAN BOTTLING PLC

The year 1953 saw the emergence of coca –cola in the Nigerian market. This was the year when the company set up its first plant in Lagos. This however was to be the beginning or an exiting story of growth and development particularly during last fifteen years.

The company is today Nigeria’s number one bottler of soft drinks selling more than six million bottles per day, a figure which is still growing with the continuing expansion of the existing sixteen plants and with the opening of brand new plants in various parts of the federation other  products bottled by Nigerian bottling company Plc include Fanta Orange, Fanda lemon, krest bitter lemon, diet coke soda water, spirte, krest tonic water and krest club soda.

The success of coca-cola, since its year of inception has brought with it the development of a number of sister companies which includes Delta glass company in Ugbelli which suppliers bottles, crown products factories in Ijebu-ode and Kano which manufactures the mental crowns to sear the bottles and also the Benin plastics company which makes the plastic crates for carrying the bottles.

Nigeria bottling company Plc employs over 8,000 Nigerians in all fields of operation. In 1988 the company introduced the “Big coke” into the Nigeria market. The sale of this new product is currently encouraging. The company had also acquired Schweppes which is a company engaged in the same line of product.

In 1994 the company started the manufacture of Eva spring water in commercial quantity.

In 2004 the company acquired formerly known as Nigeria mineral bottling company (Limca). The company’s major raw material that concentrates are not sourced locally. The manufacturing process is based on a carefully measured combination of sugar, water and concentrate. The company which belongs to Leventis group of companies is having it headquarters at leventis building Iddo House Lagos.

—-This article is not complete———–This article is not complete————

This article was extracted from a Project Research Work Topic:

“EFFECTIVE INVENTORY CONTROL AS A MEANS OF IMPROVING AN ORGANIZATION IS PERFORMANCE. (A CASE STUDY OF NBC PLC)  NINTH MILE CORNER, ENUGU .”

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