CHAPTER ONE
INTRODUCTION
1.1 Background of the StudyÂ
Stock or Inventory constitutes a substantial proportion of the current asset group. It represents investments made for obtaining a return (Duru, Oleka & Okpe, 2014). Inadequate inventory has an adverse potential effect on the smooth running of the business, while excess inventory involve extra cost, which can reduce the firm’s profits (Panigrahi, 2013). Excessive stock is not desirable for longer periods because high inventory levels increase carrying cost and as inventory is increases; the profitability decreases (Priyank & Hemant, 2015). Hence, a suitable inventory control strategy will help in ensuring that the companies always keep an optimal amount of assets. Freeing frozen amounts in the form of stocks or inventories increases the firm’s efficiency in the use of its resource (Ziukov, 2015). As such, a well-functioning inventory system has a great effect on total firm’s performance as well as that of the firm’s managers (Akindipe, 2014).
Inventories are part of current assets, which are convertible to other forms of working capital (cash and other receivables) in less than one year (Milicevic, Davidovic & Stefanovic, 2010). The theory of inventory management involves making decisions that are in line with basic trade off among firm’s objectives, costs and other constraint (Mathuva, 2013). The economic order quantity theory, suggests that companies should maintain the quantity of inventory which provides the lowest total holding cost and acquiring cost (Milicevic, Davidovic & Stefanovic, 2010). Thus, inventory management is vital to for an effective and efficient firm. It is also important since it helps the firm in determination of the optimal amount of materials and goods a firm can hold at any given time (Kumar & Bahl, 2014).
Profit of an organization can easily be maximized with the help of an effective inventory management system in places. Profit maximization is all about cost minimization and revenue maximization. An effective inventory management improves the firm’s total performance through matching inventory management practices and a competitive advantages especially now that most organizations operates in a more competitive industries or sectors all over the world (Mahidin et al., 2015). The main goal and objective of inventory management system is to keep at the necessary required inventory at any time so that production runs smoothly without interruption whatsoever (Panigrahi, 2013). Inventory is the second largest assets as shown in the statement of financial position in brewery industry. It’s only exceeded by equipment and the physical facilities (Eneje, Nweze, & Udeh, 2012)
1.1.1 Inventory ManagementÂ
Inventory management refers to keeping or maintaining the firm’s stocks at a level that a firm will only incur the least cost consistent with other management’s set objectives or targets (Kwadwo, 2016). Inventory management is about ensuring that all input materials of production available to the firm are maintained at a level where production is not interrupted as well as ensuring that operational cost is kept at a minimal level without affecting operation efficiency (Eneje, Nweze, & Udeh, 2012). Inventory management entails planning, organizing, controlling and directing. All these coordinated efforts are meant to ensure achievement of efficiency in all operations of the firm. Such operations may include procurement, stocking and transportation (Akindipe, 2014). Mismanagement of Inventories may lead to significant financial problems for a firm (Muhayimana, 2015). Inventory management is of high importance in financial management decision. This is because excess or shortage of this may bring danger to the company (Duru, Oleka & Okpe, 2014). The objective of inventory management is to maintain a system that minimizes total cost, while specifically, it establishes that the amount of stock to be ordered is optimal as well as the period between orders (Anene, 2014). Excess inventory consumes a lot of space, can increase possibility of spoilage, leads to a financial burden and loss while insufficient inventory has the potential of interruping business operations
(Swaleh & Were, 2014).
Inventory management is vital and needed in various areas within the firm especially in a supply network so as to protect production against any disturbance of running out of production inputs or materials and goods (Ogbo, Onekanma & Ukpere, 2014). Management of Inventory is crucial to a firm since it plays a decisive role to enhance efficiency and improve the firm’s competitiveness ability against the firm’s competitors. Effective inventory management ia all about holding the right amount of inventory required by the business at any point in time (Swaleh & Were, 2014). Inventory management involve creation of a purchasing plan which will help to ensure that all items or materials are available when needed as well as and tracking the existing inventories and its use (Muhayimana, 2015).
