The Role of Inventory Management on the Nigeria Brewery Industry
DEFINITION OF INVENTORY MANAGEMENT: This has caused a lot of work to be done in inventory management practices in the form of actual researchers carried out and texts written on the topic. All these aim stressing on the thing, the importance and benefits of derived from the usage of varies methods of scientific inventory control system.
Weston and Brigham discussed extensively about deterministic model of inventory control system. They studied inventory problems where the actual demand on business is assumed to be known.
Hiller and Liaberman made an in depth study of the stochastic models. They studied inventory problems where the demand on a business for a period is a random variable having a known probability distribution.
Batters wrote on the two bin system which is quite simple for the uneducated but could prove very inconveniencing for certain types of materials.
The amount of work carried out on the topic not withstanding, one question still remain, which is inventory management? Several authors have preferred definitions.
Greene defined inventory management as the development and administration of inventory policies as well as procedures by which they are implemented. He also classified inventory into the following, raw material, work in process, finished products component parts and supplies.
Lewis defined it as the science based art of controlling the amount of stock held (in various forms) to meet economically the demands placed on a business enterprise. According to wild inventory management is the regulation of the flow of items, where output stocks exist to accommodate. Short – term differences between demand and system output rates. He also observed that the extent to which the level and composition of stock vary is a measure of their usefulness and that a lack of variation might suggest the lack of need for stock..
Magee looked at inventory management as the ability to determine the optimum size of sock to carry. He noted that the bit challenge facing every staff is the of determining what amount of stock should be adequate or optional for the business to carry.
Battersby on his own part viewed inventory management as a system employed by organizations to fight against industrial obesity (carrying of excess stock).
Morgan qualified inventory management as a systematic approach of maintaining inventory in line with the overall objectives of the firm by means of an inventory control system.
All in all, there seems to be a consensus on the definition of inventory management. It is thus a system which formulates policies pertaining to inventory level within brewery and produces for their implementation. It is a continuous process whereby inventory levels required for independent periods are deciphered by projections and forecasting, based on such data as present demand, sales volume, capacity utilization etc. and strictly maintained.
2.3 THE NEED FOR INVENTORY MANAGEMENT
In order to determine the purpose or objective of an inventory control policy, it is vital to find out the need for controlling inventory. According to Morgan, this could be due to any of the following reason:
- To minimize cost
- To maximize profits
- To avoid running out of stock
- To maximize return on investments
- To keep stock level from getting to high
- To keep inventory within available storage capacity
- To control capital investment
- To minimize human effort
- To maximize sales or share of market
More often than not, there will be two or more reasons why brewery needs to manage its inventory as above mentioned reasons are not mutually exclusive.
2.4 THE NEED TO HOLD INVENTORY
Inventories act as a buffer between the vagaries of demand and supply – each brewery has its own peculiar reason(s) for holding some amounts of inventory which could range from the desire to ensure steady supply of goods to taking advantages of large orders.
There are three general motives for holding inventories:
- The transactions motive which emphasizes the need to maintain inventories to facilitate smooth production and sales operations.
- The precautionary motive which necessitates holding of inventories to guard against the risk of unpredictable charges in demand and supply forces and other factors.
- The speculative motive which influences the decision to increase or reduce inventory levels to take advantage of price fluctuations. Again, Lewis gave five reasons for this need.
However, a more comprehensive set of reasons was given buy Morgan, and includes the following:
- To provide customer service in the face of sales fluctuations and other problems.
- To give customers assurance of availability.
- To hedge against expected surges in sale due to promotions or price reduction
- To permit flexibility in plant scheduling.
- To hold off capacity
- To permit more flexible raw materials scheduling
- To take advantage of distribution costs of factors
- To hold material that is a by product
- To keep storage equipment operational or form shutting down (as in the case of still bottoms and pipelines)
- To allow for errors in measuring and recording.
- To protect against hurricanes and other act of God
- To protect against strikes and work stoppages.
- To speculate against price and cost changes.
A Brewery should maintain adequate stock of materials for a continuous supply to industry for an uninterrupted production. It is not possible for a brewery to procure raw materials wheneve it is needed. A time exist between demand for materials and its supply. Also there exists in time may occasions the procurement of materials may be delayed because of such factors as strike, transport disruption or short supply. Therefore, the brewery should maintain sufficient stock of a raw materials inventories are quantity discounts and anticipated price increase.
This brewery may purchase large quantity discounts of bulk purchasing. At time, the brewery would like to accumulate raw materials in anticipation of price.
Work in progress inventory builds up because of the production cycle. Production cycle is the time between introduction of raw materials into production and emergency of finished product at completion of production cycle. Till production cycle completion, stock of work in process has to be maintained. Efficient brewery constantly try to make production cycle small by improving their production techniques.
Stock of finished goods has to be held because production and sales are not instantaneous. Therefore, to supply finished goods on a regulate basis, there stock has to be maintained stock of finished goods has also to be maintained for sudden demands from customers.
Finally, the need for every brewery to hold some form of inventory is therefore justified and cannot be over emphasize. This has led Paterson and Silver to state that the efficiency of the operations of any brewery is directly related to the inventory situations existing within such brewery industry.
2.5 APPROACHES TO INVENTORY MANAGEMENT
There are two basic approaches to the of inventory management and they are materials management requirement planning.
(1) Materials Management Approach
This approach looks at the materials manager as the regulator of the flow of material from suppliers through the various manufacturing departments of the customers. In brewery industry where this approach is adopted, the material manager is responsible not only for raw materials inventories but also for finished goods and even work in progress stock under this jurisdiction are the purchasing, production, inventory control and traffic departments, as well as such secondary activities as shipping, receiving, non-production stores and materials handling.
In this structure, the material manager not only is responsible for purchased materials but also is directly involved in manufacturing and marketing management.
According to Ammer, this approach attracts the following advantages.
- Forced cooperation between purchasing and production control.
- Tighter inventory control
- Efficiency in co-ordination
- Better communication.
(2) Requirements Planning Approaches
Thurston claims that specialists on inventory have succumbed to the pure of statistical tools in the management of parts inventories. He stressed that the statistically based approach has its short comings in a number of situations and that requirements planning or a combination of both could lead to substantial savings.
Basically, requirements planning sets aside the averaging process of statistics in managing inventories and substitutes it with a specific numeration of what parts to place in inventory and when.
The approach depends on a high order of accuracy in inventory records, in routing and lead time information, in records of sales and purchase commitments, and in the factory load schedule.
- INVENTORY FUNCTION
According to Magee, fundamentally inventories serve to uncouple successive operations in the process of making a product and getting it to customer. For example, inventories make it possible to process a product at a distance or to perform two operations at a distance from one another. Inventories make it unnecessary to gear production directly to consumption or alternatively to force consumption to adopt to the necessities fo production distribution process from the next, permitting each to operate more economically.
Having identified the basic inventory function the essential question is, at what point does the uncoupling function of inventory stop earning enough advantage to justify the investment required Magee also suggested that to arrive at a satisfactory answer, we must first distinguish between two types of inventories.
Inventories necessary because it takes time to complete an operation and to move the product from one stage to another.
Inventories employed for organizational reasons: – Inventories thus play an important role in the operations of industry as the bridge gap between production and distribution.
2.7 INVENTORY TYPE
There are basically two types of inventories namely movement and organization inventories.
(1) Movement Inventories
These are inventories balances needed because of the time required to move stocks from one place to another and according to Magee are often not recognized are confused with inventories resulting from other needs. The average amount of movement can be determined from the mathematical expression.
- = S x T
Where S represents the transit time from one stage to another and I represents the inventory movement needed in the nature and characteristic of the organization inventory they maintain, the following three functions are basic:
(1) Lot size inventories
These are probably the most common in business. They are maintained whenever the user makes or purchases materials in large quantities of lots them are need for his immediate purposes. For example, it is common practice to buy raw materials in relatively large quantities in order to obtained quantity price discounts, keep shipping costs in balance and hold down clerical costs connected with making out requisitions, checking, receipts and handling accounts payable
(2) Fluctuation Stocks:
These are also very common in business and are held in cushion the stocks arising basically from unpredictable fluctuations in consumer demand for example, warehouses and retail out lets maintain stocks to be able to supply consumers on demand, while factories maintain stocks to be in a position to replenish retail and field warehouses stocks in line with customer demands.
(3) Anticipation Stocks:
These are needed where goods and materials are consumed on a predictable but changing pattern through the years and where it is desirable to absorb some of these changes by building card depleting inventories rather than by changing production rates with attendant fluctuation in employment and additional capital capacity requirements. For example, inventories may be built up in anticipation of a special sale or to fill needs during plant shut down.
2.8 INVENTORY COST
Among the costs which directly influence inventory management are:
- Costs that depends on the amount ordered:
These include quantity discounts offered by vendors, set up costs in internal manufacturing operations, clerical costs of making out a purchase order, and when capacity is posed, the profit on production lost during down time for set up.
- Production costs:
Magee describes these as the abnormal or non-routine costs of production whose size may be affected by the inventory control method used. They include such costs overtime, shake down hiring and training express.
- Cost of handling and storing inventory:
These includes such expenses as those of handling products in and out of stock, storage costs such as heat and rent insurance and fares, obsolescence and spoilage and capital costs. Inventory obsolescence and spoilage costs may take several forms including:
- Out right spoilage after a fixed period of time
- Become technologically unstable, except perhaps at a discount or as spare parts
- Go out of style
2.9 DETERMINATION OF INVENTORY LEVELS
These are several factors that influence management towards the maintenance of inventory levels. These factors either tend to reduce (negative) or increase (positive) the levels of inventory field by industry. They include the following as put forward by Morgan.
FACTORS TENDING TO REDUCE INVENTORY LEVELS
- Possible product obsolescence
- Product spoilage and determination
- Storage and handling costs
- Space limitation
These factors tend to influence management towards reducing or limiting inventory levels.
FACTORS TENDING TO INCREASE INVENTORY LEVELS
This article was extracted from a Project Research Work Topic
“THE ROLE OF INVENTORY MANAGEMENT
ON THE NIGERIA BREWERY INDUSTRY
(A CASE STUDY OF NIGERIA BREWERY INDUSTRY 9TH MILE CORNER, ENUGU”