INVENTORY MANAGEMENT IN A MANUFACTURE FIRM
(CASE STUDY OF SEVEN - UP BOTTLING COMPANY PLC ABA )
This project is a case study of inventory management functions as it practiced in seven – up Bottling Company PLC Aba.
The research is an in – depth study of the situation at the company, in face of the prevailing conditions of non – availability of raw materials, scarcity of funds and general economic uncertainties in the nation.
Chapter one gives the background information and operational definition of terms used in the study. And also, the research hypothesis, which was later tested in chapter four, was disclosed in this chapter. Chapter two is a review of the basic concepts, theories and practices in the management of inventory. Chapter two also contained the definition of inventory management of and the existing benefits to inventory management.
In chapter three, there was a discussion on the method used in collecting and analyzing data collected, which is actually presented and analyzed in chapter four. In chapter five, the concluding chapter, the findings were evaluated in the course of the project and made due recommendation such as the maintenance of optimum stock level in the company.
1.2 Purpose of the study
1.3 Statement of problem
1.4 Research Hypothesis
1.5 Significance of the study
1.6 Scope and Limitations of the study
1.7 Definitions of terms
REVIIEW OF RELATED LITERATURE
RESEARCH DESIGN AND METHODOLOGY
3.1 Study Area
3.2 Sources of Data
3.3 Methods of Investigation
PRESENTATION OF ANALYSIS OF DATA
4.1 Presentation and analysis data
4.2 Test of Hypothesis
SUMMARY OF FINDINGS, CONCLUSION AND RECOMMNDATION
Inventory in some big organization constitute the largest item of working capital and it’s control is very essential. The management’s of inventory have always been essential function of financial managers and are increasingly becoming a specialist function.
It is important to recognize that a company’s inventory holding are essentially viewed as necessary evil. They are costly to maintain both the up working capital and also incurring what may be substantial expenses for the company in respect of storage e.g (Ware house, rent, security etc ) .
Items that can be grouped under inventory include raw materials, work in progress and finished goods. Raw material inventory constitute the item necessary for manufacturing companies product. These items of raw material as to the company dealing with are concentrates, sugar c02 and piet.
Inventory work in progress constitutes the items of raw material inventory undergoing some process of production, which have not yet been completed. Inventory of finished goods are actual product, which the company manufactures for sale. These are seven –up pepsi – Cola and Savanna. It is apparent that the effective management of inventory is maintained to maximize cost of production. While the company will certainly have An objective of minimizing cost of production it will equally have other conflicting inventory objectives. These other objectives includes:
1. Avoidance of stock – out of raw materials through avoiding disruption of production of finished goods.
2. Avoidance of stock of finished goods thereby avoiding amongst other things;
- Loss of contribution of customer sales
- Need to buy emergency stocks when required at higher costs.
- Customer dissatisfaction
3. Taking advantage as far as possible of bulk quantity discount
4. Not placing too many separate orders with supplies since order cost will because correspondingly advantage of possible price advantage in the market.
The fundamental questions to which answer are required are therefore
1. How many should the company order ?
2. When should the company order ?
3. How many should the company produce ?
Included in this chapter is the defiled discussion of the background information of the plant also an overview of the inventory management process in the company (seven – up Bottling Company Aba )
A. ORGANIZATIONAL STRUCTURE
There is a formal structure with the plant manager as the head of the plant. He has the responsibility of implementing corporate policies formulated at the top management level. He does this with the assistance of his supervisors and officer clerks.
B. THE ACCOUNTS DEPARTMENT
This section is headed by accountant who reports administratively to the managing director. He has under him the account supervisor who works in this section. The accountant interact with other departmental heads and he is a cosignatory to the final accounts. He helps the plant manager to monitor the actual level of inventory, sales and production through data made available to him by the sores, production and sales department as well as computation from within his own department. Such information help the managing director to evaluate his performance against the manual budget.
C. SALES DEPARTMENT
This is headed by the sales manager who monitors market trends. He is able to determine the level of where demand is outstripping production or where is a stock analysis made by reference to the different brands.
His information is communicated to the production department through the managing director. The sales manager has as his subordinates the route supervisors, salesmen and helpers.
D. PRODUCTION DEPARTMNET
The production department is headed by a production manager. He reports to the managing director and ensures that production is carried on smoothly and according to plan. As the major users department, he has to rare properly with the raw material store. There is quality control unit to ensure that the product meets the set standard.
E. MATERIALS MANAGEMENT FUNCTION INVENTORY POLICY
The management of inventory could only be achieved when accurate plans and schedules are implement. In all cases of planning adequate information are needed.
The inventory policy of the SEVEN – UP BOTTLING COMPANYT PLC, ABA can only be appreciated in the context of its maintain quality market share and profit. This implies that enough inventories should be available for continuous production. This fact also determines the level of inventory the company maintains. The major problem of the inventory policy of the company is in the national economy it self. What happens in the pollicies and strategies of the company as a whole.
F. STORES FUNCTION
The co0mpany has two sets of stores. The are the raw materials store and finished goods store the raw material store is headed by a store – keeper who is operationally under the officer of the production manager since most of his products are used by his department. However the store keeper is responsible directly to the managing director.
The finished goods store id headed by a manager who takes responsibility of the goods as soon as production is completed. The major raw materials that are stored includes the following concentrates C02 and sugar.
G. MATWRIAL RECEIPT ISSUE
The purchasing department is responsible for the purchase of its raw materials locally. Since, stock levels are always being monitored, the store – keeper knows when certain items of stock are deficient. This is made known to ma managing director who authorizes the placement of orders. When the materials ordered arrive, they are cleared at the gate by the security personnel. This involves examining accompanying documents, recording arrival time, vehicle number and driver’s name. This inspection is carried out by the store – keeper with the assistance of the store clerks. They check for the correctives of the qualities which the recorded on the delivery notes show before recording them in the store receipt note acknowledgement of the receipt of the materials. Similarly, entries are also made in the cards. The store receipts roles and other relevant document are then forward to the accounts department and final recording in the store ledger. There is no elaborate inspection of the quality of materials at the store because those sent to stores conforms to standards.
Issues from stores are made on request by the production manager who has to authorize the requisition. The quality of each materials needed by each department for the daily production are communicated to the managing director who has to approve the requisitions before stores can issue the materials. The materials so issued are transported by the use of Fork – Lifts to the raw materials store where they await production. Below are details of movement of materials in seven – up Bottling company PLC Aba.
MOVEMENT OF MATERIALS
In order access the effectiveness and efficiency of the management of inventory performance must be measured against plan.
A minimum balance must be attained of the cost of carrying and the cost of ordering inventory such that the quantity on land is just sufficient or optimal for the operation of the company.
The production manager plays an important role as the head of the user department in the control of the inventory. He determines the quality of concentrates, C02 and sugar to be mixed with the additive such as be sodium Benzoate and Technical parts that are required for the production of planned output per day. He has to ensure that the required mix of products flavours are produced. However, the overall responsibility for control of inventory rests on the managing director who do not only analyze situation received from the production manager but also supervise the duties of the store – keeper.
It is the managing director as the head of activities of various departments and the requirements of able to determine what amount will be needed and how well accordingly, to plan the plant – production. He inspects the facilities twice a day, the last inspection being just before the close of operation for the day. He also visits the store checking the stock level and occasionally interview the staff in production. In this way he is able to exert immediate control. As a means of control store department issues every month, accumulated figure, of all materials issued to production department. This serves as a means of reconciling records at the store with those of production.
Control is able enhanced by posting of security staff to the gate of the plants with raw materials. The raw materials are counted before taken into store by the storekeeper. Any discrepancy is noted and reported to the managing director. The finished goods are also counted before distribution.
1. THE PRODUCTION PROCESS
The production is carried on the three line with a combined capacity of 333,3.33 bottles per day. The line operates twenty – four hours on three shifts with each production line running shift of eight hours production process involves the use of the following materials.
iii. Sodium Benzoate
v. Technical puts
Production starts with the weighting of the major raw materials and the additives at the batch control room.
In pursuance of the purpose of this research works the researcher with:
(a) Find solution to the problem o managing inventory or stocks.
(b) Determine the effects of inefficient inventory management.
(c) See whether there is divergence between policy and practice of inventory management at seven - up bottling company.
(d) Find how best optimal stock level could be determined in Seven – Up Bottling production .
(e) Determine the impact of stock valuation and control producers.
(f) Make recommendations in the light of the findings from the above objectives.
1.3 STATEMENT OF PROBLEM
The major inventory control problem is to maximize profitability by balancing inventory investment cost against what is required sustain smooth operations.
The essential raw materials of Seven – Up bottling company PLC are concentrates C02 and sugar, which normally are locally purchased. With inf;ation in our country, the unit cost of these raw material has increased as a result of the fall in the value of Naira. As a result of this, the company is now faced with the situations either to increase it’s allocations of funds to inventory in budget so as to be able to maintain its market share or to continue to use the same amount.
As a result of this, important management decision have to be taken in order not to loose contributions of customer sales and need to buy emergency stocks when required at higher cost. Such decisions are also necessary to avoid interruption in the production process and other business operations.
1.4 RESEARCH HYPOTHESIS
To address the issue as stated in the significant of study below, the following hypothesis have been drawn.
1. H0: Holding large stock of materials introduces unnecessary carrying cost, ordering costs, obsolesce risk and flying of fund in inventories.
H1: Holding large stock of materials does of introduced unnecessary carrying cost, ordering cost, obsolesce risk and tying of fund in inventories.
2. H0: Having too low stock of materials leads to disruption in production and loss of sales.
H1: Having too low stock of materials does not leads to disruption in production and less of sales.
3. H0: Determination of optimal stock level is not the main problem of efficient inventory management.
1.5 SIGNIFICANT OF THE STUDY
Inventory in a large organization constitute the largest item of working capital and its control is very essentials. It is important to recognize that to a company, stock holding or inventory holding are essentially viewed as a necessary evil. They are costly to maintain, both tie up working capital and also incurring what may be substantial expense for the company in respect to storage (eg warehousing, Rent, Security and so forth) Determining the optimum level of inventory and appraisal of the decision rules for ordering inventory constitutes the most important difficult problms f acing the management. The acquisitions of raw materials has become for most Nigerian firms an important aspect of the overall policy decision. The need has therefore arises for companies to evolve on efficient and effective system of inventory management.
1.6 DEFINITION OF TERMS
A: MANAGEMENT :
Drucker in his book titled management (Drucker P. 1984) defined management as task and furthermore went on the say that , management is a discipline but management also people. Every achievement of management is the achievement of manager and every failure is a failure of the manager. People manager rather than forecast.
In the light of the above definitions, management can therefore be defined as the practice of determining what has to be done and accomplishing the goals in the best way through other people.
Inventory is the aggregate of those items of tangible personal property which are held for sale in the ordinary course of business or use in the process of production of goods and services to be made available for sale (Hendricsen, 1961, page 64)
Inventory comprises of the following:
i. Raw materials: These are brought in materials which are used in the manufacturing of products
ii. Work in progress: These are partly completed assemblies and product in corporation raw materials and / pr sub assemblies.
iii. Finished goods: Complete products ready for sales or distribution.
iv. Consumable stores: Supplies and minor components which hare consumed in the production of goods and services (Hendricksen 1961 page 330)
C. INVENTORY COST:
This is a measure of the various of the imputes in the acquisition of materials or merchandise in the present condition and location (Hongren C.T, 1970 page 501)
There are four types of inventory cost they include: Ordering cost, carrying cost stock – out, and set up cost.
i. ORDERING COST : There are the costs associated with producing inventory. They increase as the number of order increase.
ii. CARRYING COST: These cost are constant despite changes in the number of orders. They are the costs of holding items in inventory, storage changes, stores staffing, maintenance, issuance for stocks an security.
iii. STOCK – OUT COSTS : This is the cost associated with being out of stock when the units are demanded but are favourable for example, the cost of productions stoppages caused by stock –out work in progress and raw materials, cost contributions through lost sales.
SET UP COST : These are cost incurred to start productions or adjust production line for the manufacturing of other products.
D. ECONOMIC COST: E.O.Q is the economic order quantity and it refers to the optimum order of either a normal purchase for a production run. That is the size that will result in minimum total annual cost of the item. ( Drucker 1954, page 309)
E. LEAD TIME The period of time between ordering and replenishment that is when the goods are available for use.
F. BUFFER OF SAFETY STOCK :This is the stock allowance to cover errors in for – casting the lead or the demand during lead – time.
G. MAXIMUM LEVEL : A stock level calculated as the maximum desirable which is used as an indication to management to show when stocks have risen too high.
H. RE – ORDER LEVEL : This means the level of stock at which a further replenishment order should be placed . The re – order level is department on the lead – time.
I. INTERNAL CONTROL : This is the whole system of control, financial or otherwise established by management in order to carry on the business of an enterprise in an orderly and efficient manner, ensure adherence to management policies, safe guards the assets and secure as far s possible, the completeness and accuracy of records.
The various components of internal control system are called controls (Consultative council of Accounting bodies, 1961 page 6)
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