Inventory control

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Inventory control

  1. 1. inventory control80rate or flagBy jamylibraAds by GoogleInventory managementNextLevelPurchasing.com/inventoryLearn everything you need to know about inventory management.Study Marketing Masterswww.LSBF.org.uk/MarketingMultiple Campus Locations. Job Opportunities. Specialist Pathways!Inventory Control System www.unitechnik.comAutomated Material Handling Systems Consulting, Realization, Serviceinventory managementABSTRACTInventory control is essential not to manufacturing firms but also marketing and service firms. The firms apply different forms of inventory control techniques toensure that the required materials are available in the firm to forestall production or sales stoppages. Despite this immeasurable role of inventory control in theperformance and survival of firms. Inventory control has been associated with certain costs which if not controlled increases the losses of the firm. There is theneed to ensure that firms understand the importance of effective inventory management and implications of inappropriate inventory control techniques in oilproducing firms. Using the NAOC as a case study.The main purpose of this study is to appraise the inventory control technique in oil producing firms in this study data were obtained from both primary andsecondary sources. The primary data were collected through the questionnaires and personal interviews administered on the respondents who are basically thestaff of purchasing warehousing and production departments.The primary data were subjected to analysis with use of percentage frequency distribution and chi-square test.The major findings revealed were.1. There is a significant relationship between inventory control and profitably of the firm.2. The inventory control techniques of a firm are effective total inventory reduction3. There is effective inventory control system in oil producing firms4. The oil producing firms undertake frequent in stock taking.5. The main inventory control problem facing oil producing firm foreign vendors.6. Oil producing firm operate both centralized store system as well as sub-store system attached to each department.ivIn view of the above finding the following recommendations were made:1. Firms should employ the most recent, up data and scientific approach in their inventory control practices.2. Firms should understand regular and comprehensive stock taking for early detection of frauds or spoilage.3. Firms should constantly undertake the review inventory policies so as to adjust to changes in the business cycle.4. Attention should be extended to unforeseen circumstances which may affect the accuracy of the inventory control techniques.TABLE OF CONTENTSAbstract CHAPTER ONEIntroduction1.1 Background of the Study 11.2 Statement of Problem 31.3 The objective of the study 41.6 Research questions/Hypothesis 51.4 Significance of the study 61.5 Scope and limitations of the study 71.7 Definition of Terms 8
  2. 2. CHAPTER TWOLiterature Review2.1 The concept of inventory Management 102.2 Types of Inventories 112.3 The need for effective inventory control system 132.4 Inventory control costs 142.5 Inventory control Levels 162.6 Inventory control Techniques 182.7 Inventory control System 232.8 Stock taking 26CHAPTER THREEResearch Methodology3.1 Population 283.2 Sample/sampling Technique 283.3 Sources of data Collection 283.4 Nature and administration of research instruments 293.5 Method of data Analysis 30CHAPTER FOURData Presentation and Analysis4.1 Data Presentation 334.2 Analysis of Data 334.3 Testing of Hypothesis 41CHAPTER FIVESummary conclusion and Recommendations5.1 Summary 445.1 Conclusion 455.3 Recommendations 46References 48Questionnaire 50BACKGROUND OF THE STUDYCHAPTER ONEINTRODUCTION1.1 BACKGROUND OF THE STUDYInventory is a term that has been explained in various ways by various scholars, Inventories are stocks of the product a company is manufacturing for sale andcomponents that make up the product. They are raw materials, work-in progress and finished goods and they constitute various forms of inventory in amanufacturing firm.Inventories are the stocks of materials or finished goods which a company keeps in anticipation of demand or consumption.In the past, inventory management was not seen to be necessary. In fact excess inventories were considered as indication of wealth. Management by thenconsidered over stocking beneficial. But today firms have started to embrace effective inventory control.Consequently, there is the need for the firms to undertake effective inventory control with the aims of:a. Ensuring a continuous supply of materials to facilitateb. Maintaining sufficient stocks of raw materials in periods of short supply and anticipate price changes.
  3. 3. c. Minimizing the carrying cost and time. Virtually every company has one form of inventory or the other. The levels of these forms of inventories of a firm dependson the nature of its business- manufacturing,1merchandizing or servicing. There are major reasons or motives for holding inventories by firms.They include:I. Transactions Motive: To maintain inventories to facilitate smooth production and sale operations.II. Precautionary motive: To guard against the risk of unpredictable changes in demand and supply forces.III. Speculative motive: To take advantage of price fluctuations.Inventory control is the means by which the correct quantity is made available as and required. It is true that inventory control is greatly practiced by manufacturingfirms than in the services firms. Hence, the focus of this study is on the appraisal of inventory control techniques on oil producing firms.1.1.1 PROFILE OF NAOCNAOC was incorporated in 1962 following an agreement reached between the federal Government of Nigerian and AGIP, one of the companies owned by ENIGroup. ENI group is a complex organization which operates in the oil nuclear and clerical field. The agreement provides for participation of the federal Governmentof 33 1/3% in case of oil discovery Agip specializes in the oil and nuclear exploration and production. Other members of the ENI group include SWAN, specializingin oil and gas, transportation, NIC specializing on Engineering SAIPEM specializing on oil facilities construction and drilling. LAXEROSS specializing.2on textile. SOFID specializes on financial services in 1965, Agip went into joint venture with Philips Petroleum Company Recently the joint venture partners includeNNPC with 55% , Philips Petroleum Company with 22.5% and NAOC with 22.5%. NAOC had its first oil well in Ebocha in march 1, 1965 but today it was over 208oil wells in areas such as Ebosha, Mbede, Akiri,Idu, Oshi, Obiafu, Obrikom, Obama, Omoku, Somabiri, Kwale, Tuonwu, Ebegoro, Okel etc, it has an oil terminal atBrass while its exploits of oil started in April 1973.NAOC Ltd has total staff strength of 2,200 permanent staff and 3 major offices, head office in Lagos, District office in Port Harcourt and area office in Warri. Thedistrict office is composed of 3 divisions, each headed by a divisional manager. Under the district office are departments. Such as District admin, safety, accounts,geology, transports, operations, production, contracts/purchasing, medical lands warehouse, drilling, each of these departments is headed by a manger as a headof department.STATEMENT OF PROBLEMSTATEMENT OF PROBLEMIt is important that a company maintains adequate stock of materials for a continuous supply to the factory for an uninterrupted production in doing so such acompany is exposed to two undesirable points‟ namely excessive and inadequate inventories. Each of them has dangers. For instance, inventories can lead tounnecessary tying-up of the firm‟s funds and loss of profit, excessive carry costs and3The risk liquidity. While inadequate inventories can lead to production hold-ups and failure to meet delivery commitments. The study is concerned with the problemof how to determine and maintain optimum level of inventory investment.It is also obvious that conflicting inventory objectives exist within the firm. The financial manager prefers to keep materials. This situation indeed makes itnecessary to examine the inventory controls practices and techniques of oil producing firms as this can have very sever impact on the organization‟s performancewith associated consequences on the survival of the firm.1.3 THE OBJECTIVE OF THE STUDYThe management of business firms must control the procedure for purchasing and controlling inventory to obtain an optimum balance between efficient control andeconomy. The success of this control system requires certain information to be made available. The study is aimed at providing this information and suggestingways to help management meet the required efficient inventory control.Other objectives of this study include.i. To find out whether the inventory control technique adopted by firms has helped to deal with inventory problems.ii. To find out whether the inventory controls system of oil producing firms affects their performance in terms of profit.RESEARCH QUESTIONS/HYPOTESISAs we commence our study on the subject of inventory system of oil producing company, we are faced with the following research questions:- what is inventory control system all about?- To what extent does inventory control determined oil producing company?- Does inventory control have further control outside oil producing firms?- Is there any way that inventory could be misused or abused within an oil producing firms?- When is inventory control system referred to as effective and efficient?H1: There is significant relationship between a firm‟s profitability and its inventory control Level.H0:There is no effective inventory control system in oil producing firms.H1:There is effective inventory control system in oil producing firms.5
  4. 4. 1.4 SIGNIFICANCE OF THE STUDYVarious scholars have written on management in general and inventory management in particular. They have at different times pointed out the centrality of efficientinventory management to the success of an organization. Although many studies have been done on material management, yet the issues of inventory controltechniques and performance evolution in oil producing firms appear to be quite limited.1.Consequently this study derives its significance from the attempt top add to existing literature on the subject.2. This study will assist the management of oil producing firms in adopting ways of efficient inventory control.3. The study is significantly a basis to unearth certain problems relating to material management and inventory control, and go a long way to enhance interest innew concepts, approaches and philosophies aimed at better cost control over inventories.4. Furthermore, it makes suggestions on the improvement of inventory control techniques in oil producing firms. This will in no doubt enhance performance amongthese firms. In addition, the Nigerian economy in6general is expected to benefit if the measure recommended are adopted.5. This study will also be of immense benefit to students who are carrying out researches on inventory control techniques in corporate organizations especially inoil industry.1.5 SCOPE AND LIMITATIONS OF THE STUDYInventory control varies from organization to organization and from firm to firm. This implies that nature of the firm and the nature of the business determine thesize and types of inventory control system/techniques to adopt. Therefore it is practically impossible for the study to discuss inventory control techniques of allfirms.Consequently, this study is limited to the appraisal of inventory control techniques in oil producing firms in Port Harcourt. The population of this study is all oilproducing times in Port Harcourt; however, due to time and financial constraints experienced by the researcher, Nigerian Agip Oil Company Limited was selectedas the case study. The constraints are explained below.Time Constraints: The time allotted to this project was inadequate in view pf the fact that there are other academic work such as term papers and finalexaminations which the researcher combines with the study.Finance: The general economic of the country and the low state of the economic status of the research at the time of the research.7Attitude of Respondents: The respondents interviewed especially those of management cadre were unwilling reveal certain vital information about the operationsof their company on the ground of confidentiality.DEFINITION OF TERMSInventories: Are the stock of materials or finished goods which a company keeps in anticipation of demand or consumption. They constitute a sizeable portion ofthe total assets of many firms.Inventory management: Is the process which integrates the flow of supplies into, through, and out of an organization to achieve a level of service.Work in progress: Semi finished products found at various stages in the production operation.Re-order Point: The inventory level at which an order should be placed to replenish the inventory.Lead Time: The time normally taken in replenishing inventory after the order has been placed. It is the time interval between the ordering of inventory and time ofits receipt.Safety Stock: minimum or buffer inventory as cushion against expected increased usage and /or delay in delivery time.Material Handling: The process of preparing placing and positioning materials (including finished goods) in order to facilitate their storage or movement fromsupplier to buyers.Inventory Control: The accounting and keeping of records required to inform management and the purchasing8department of current stocks at hand, the maximum parts at which additional stocks should be purchased.Maximum inventory Level: The level above which stock should be allowed to rise.Stock out Cost: Costs associated with running out of stock due to under investment in inventories.THE NEED FOR EFFECTIVE INVENTORY CONTROL SYSTEMAs state above, inventory control is the means by which materials of the correct quantity is made available as and when required, in conjunction with economy instorage and ordering cost, purchase prices and working capital. Inventory control involves the following processes:i. Assessing the items to be held in stockii. Deciding the extent of stock holding of items individually and collectively.iii. Regulating the input of stock into store housesiv. Regulating the issue of stock from the store houses to the users departments13The need for effective inventory control system may be summarized as follows;
  5. 5. i. It ensures that production is not constructed due to the unavailability of recurring items. To achieve that involves determining correct minimum and maximumstock levels, timely recoupment and submission of shortage reports to purchasing unit.ii. It leads to effective control over investment on inventories. This is achieved by keeping stocks within pro-determined levels.iii. It tends to provide a smooth flow of production and these facilitate production scheduling.iv. Effective inventory control system helps to provide accurate information for financial control in the way of budgeting.v. It discloses cases of unused items purchased against special purchase requisitions received from various departments as well as the lists of obsolete andsurplus materials.2.4 INVENTORY CONTROL AND COSTSEffective inventory control requires a careful planning that will end up striking a balance between over investment and under investment in inventories. Inventorycontrol is associated with different types of costs. Hence the needs for effective inventory control mechanism to minimize the costs. These costs can be classifiedinto carrying costs, and ordering costs, stock out cost and excessive inventory cost.14i. Loss of profitii. The risk of liquidityiii. Excessive carrying costs.2.5 INVENTORY CONTROL LEVELSEffective and efficient inventory management calls for decision on how much should be ordered and when should it be ordered. The first question should be left fornow. Lee a Double (1997) described recorder level as the point at which an order should be placed to replenish the inventory.In determining actual timing of purchase or re-order point certain factor are considered. Certainty, the lead time, the average usage and EOP are considered.Ezirim (2002) described lead time as “The time interval between the ordering (or reordering) of fresh inventory and the time on its receipt. By certainty, we meanthat usage and lead-time do not fluctuate. Hence render point is calculated by multiplying lead-time by average usage. However under uncertainty, i.e. when theusage fluctuates or actual delivery time may be different from the normal lead time, the firm is expected to maintain safety stock in other to guard against the stockout.Safety stock is the minimum or buffer inventory as cushion against expected increased usage and / or delay in delivery time. According to Ezirim (2002) it isnecessary that a firm calculates its reorder levels to ensure that the stock does not deplete completely before the receipt of fresh stock.16Majority of the firms attempted to achieve effective inventory control through the use scientific approach than depending on guesswork. Thus simple mathematicsformulas of varying degree have been developed to calculate the various stock levels so as to cover such emergencies as abnormal usage of materials orunexpected delays in delivery of fresh supplies.The reorder point can also be known as the minimum stock level since it is the level which stocks should not be normally allowed to fall. If stocks go below thislevel, there is the danger of stock out which can result to production stoppage.The next stock level that is necessary to be computed by a firm is the maximum stock level maximum stock level is the level above which stock should notnormally be allowed to rise. It is desirable that the level should be as low as possible, but it must allow fairest usage of materials and time delays in delivery. Thefollowing factors are considered while determining the maximum stock levels.i. The availability of storage spaceii. The rate of materials consumption / usageiii. The lead timeiv. The recorder quantity for the materials (EO4)v. The amount of capital necessary and availablevi. The cost of storagevii. The existence of price fluctuationviii. The incidence of insurance costsix. Seasonal consideration17X. Restrictions imposed by local state or national authority6 in regard to materials in which there are inherent risks.2.6 INVENTORY CONTROL TECHNIQUES
  6. 6. To achieve the objectives of inventory management, firms should Endeavour to determine the optimum level of inventory. This cannot be possible without theapplication of sound techniques. Some of the techniques are discussed below.2.6.1 ECONOMIC ORDER QUANTITYAccording to ihunda (2001) the optimal quality or economic lot size for a particular item of inventory is to be determined in consideration of the forecasted usage,ordering cost and carrying cost.At minimum cost inventory –carrying cost equals ordering cost. Certain assumptions made in deriving the EOQ.18i. Demand for the item is assumed to be uniform through out the year.ii. The entire order quality is received in a single lo: (at the same item)iii.CHBulk quality discounts are not availableThe model to drive Eop is Q= 2AC 2CODWhere:A =Annual consumption / requirement of inventory in NairaO =Ordering cost per order in NairaC =Inventory carrying costQ = quantity per order in NairaMATERIAL REQUIREMENT PLANNNING (MRP SYSTEM)This is computer based production and inventory planning system primarily employed for products in which the final product is an assembly of component parts theconcept provides a basic and different way of looking at the management of production inventories in an intermittent manufacturing operation.The objectives of MRP system are:i. To ensure the availability of materials and components foe assembly of the end item.ii. To minimize level of inventory.iii. To plan manufacturing activities, delivery schedules and purchasing activities.According to Ezirim (2002:327), „MRP challenges the traditional concept that any significant level of production19inventory need be carried prior to the time materials are actually required by production‟ the basic of MRP system is first to analyses and an end item (finishedproducts) and break it down into various component party i.e explosion.A schedule is then determined so that the demand and lead-time at a particular component level is determined. That means it is possible to calculate precisely theproduction material need for a given period of operation. The bill of material for a given finished product can be exploded for the number of units to be obtain theproducts exact requirements for each component material or part with this approach, a firm can calculate production material requirement in advance of the actualneed, And then generates requisitions for each material to be delivered in the required quantity prior to the beginning of the manufacturing operation.2.6.3 ABC ANALYSIS TECHNIQUEFor a firm that deals with thousand of inventory items, it is obviously difficult to devote equal attention in terms of personnel and financial resources to each of theinventory items, hence, the need for selective control. The common technique to be used in measure the significance each item of inventories in items of itsvalues.ABC analysis demands knowledge of each of items of its value, price, usage and lead-time, as well as problems which can be encountered during procurement.20Under ABC analytical technique the inventories are classified into “A” items and “C” items the high value items are classified as “A” item and would be under thehighest control and attract maximum attention “C” items represent relatively least value and would be under simple control, as it would attract the least attention “B”items fall in between these two categories and require reasonable attention management. Since ABC analysis concentrates on important items, Richmod (196974-78) branded it control by importance and exception.According to Pandey (1979), the following steps are involved in implementing the ABC analysis.
  7. 7. i. Classify the item of inventories determining the expected use in units and the price per unit for each item.ii. Determining the total value of each item by multiplying the expected units by its unit price,iii. Rank the items in accordance with the total value giving first rank to the item with highest total value and so on.iv. Compute the ratios (percentage) of number of units of each item to total units of all items and the ratio of total units of all items and the ratio of total value ofeach item to total value of all items.v. Combines items on eh basis of their relative value to form three categories – A,B and C,212.6.4 JUST IN THE TECHNIQUESJIT is the Japanese system of inventory control which is based on the premise that inventory is the most of all evil and should be kept at an absolute minimumlevel.The goal of JIT techniques is zero inventories with 100 percent quality. It does not mean that the firm shifts inventory tasks to the supplier, rather is calls forsynchronization between supplier and customer production schedules so that it becomes unnecessary to keep buffer stock. According to lotter ( ) effectiveimplementation or JIT should result in reduced inventory and lead-time and increase quality productivity and adaptability to changes.One of the importances of JIT is that it helps to ensure strict quality control, frequent and reliable delivery. It also encourage easily supplies involvement in theproduction process of the buying organization should maintains table production schedule.

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