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THE IMPACT
OF INVENTORY MANAGEMENT AND CONTROL
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Inventory in
the form of raw materials, work in progress and finished goods constitute
significant proportion of assets of most organization. But why is it pertinent
to keep any eye on these items in other words, why do we engage in inventory
management?
Inventory
items cost money to acquire, they cost money to store and to look after, which
means storage facilities has to be provided so as to make sure that these
materials or items do not get spoilt until they are turned into sellable goods,
they do not produce money. When stock are held, it means tying down capital
that would have been used in other areas, so it all represent cost and should
be managed properly to acquire efficiency.
We must however,
hold stock to meet production needs and sales needs. This is because if we do
not hold stocks in sufficient quantities, we stand the risk of running out of
stock.
Similarly,
if we are short of finished goods, we may disappoint our customers. Inventory
shortages in both of these forms will likely lead to loss of customers and
money. For the organization not have the above problems, they should strike a
balance between carrying too much stock (over stocking) and carrying too little
stock (under stocking).
This is
essentially the importance of inventory management. Managing assets of all
kinds is basically an inventory problem, the same methods of analysis applies
to cash and fixed assets as to inventory themselves.
First of
all, a basic stock must be on hand to balance in flows and outflows of items.
The size of the stocks depends on the pattern of flows whether fast moving or
regular items, slow moving or irregular items.
Secondly,
because the unexpected may occur, it is necessary to have safety stock on hand
representing, extra stock to avoid the cost of not having enough to meet
current needs.
Thirdly,
additional amount may be required to meet future growth needs these are called
anticipation stocks, related to anticipation stocks, is the recognition that,
these are optimum purchases sizes defined as economic order quantity (EOQ).
In borrowing
money, for buying raw material for production or purchasing plants and
equipment, it is cheaper or more economical to buy more than just enough to
meet immediate needs.
Manufacturing
firms generally have three kinds of inventories:
a) Raw material
b) Work in-progress
c) Finished goods
(a) The
level of raw materials; inventory is influenced by anticipated production,
seasonality of production, reliability of sources of supply and efficiency of
scheduling purchases as well as production operations.
(b) Work
in-progress inventory is greatly influenced by the length of the production
period, which is the time between planning raw material in production and
completing the finished products. Inventory turn over can be increased by
increasing the production. One means of accomplishing this is to perfect
engineering techniques there by spreading up to manufacturing process. Another
means is to buy rather than make them. The level of finished goods inventory is
a matter of coordinating production and sales.
Holding
stock in whatever form cost money. The capital tied down by the stock itself
has to be serviced by the payment of interest and the land or warehouse needed
for the stock has to be bought or rented. The handling of the securing of the
stock and any quality deterioration that occurs also cost money. The sample
type of stock control system used in most organizations is two, the bin system
of stock control and is of two quantities.
The first
quantity is the stock level below which is new order is to be placed. Under
this system, the units of stock are held in two: one and two stock is taken
from bin as required until this bin is empty.
More are
then order by the quality being determined by the rate of usage or consumption
rate; comprehensive inventory, planning and control system have been
successfully installed or established in many organizations. The major
objectives of inventory management is to discover and to optimum level of
investment in the inventory. Inventories may be too high or too low, if too
high there are unnecessary carrying cost and risk of obsolescence. If too low,
production may be disrupted or sales permanently lost and loss of good will,
reputation, and customers to other firms in the same industry.
The optimum
inventory level is that which minimize the total cost associated with
inventory.
1.2 STATEMENT OF THE PROBLEM
The life
blood of any organization both private and public sector is material and this
has been neglected long ago by various business concerned. The survival of any
business set up depends upon sufficient application of material functions,
policies involved and recognition according to the function.
Up till now
inventory management has not been able to occupy it rightful position due to
one reason or the other. There has been infringement on the right of inventory
management personnel. They are often restricted to mere clerical work in many
organizations.
The lack of
recognition for inventory management function in many organizations has caused
so many havoc.
For instance
where the function is forced to be recognized and established because of the
demand to manage the affairs of various activities. To compound these problems,
the functions responsible for the manpower operations have few or no plans for
the low level personnel to benefit from the staff training programmes which
would have enhanced the basic skills professionally.
1.3 AIM OF THE STUDY
The aims and
objectives of this research work are to take a general look at inventory
management as a tool for enhancing profitability in manufacturing organization.
The project
is also aimed at providing information on how effective inventory management
can enhance profitability.
Furthermore,
the project is geared towards analyzing how issues of inventory is done as well
as its inspection and stock taking in the organization and how it affects
inventory management. The project also tends to reveal to the management of the
organization their proper implementation of inventory can reduce wastage cost
and filferages will be minimized. Therefore, this research work seeks to focus
on the following questions:
1. Where is good delivered to in the
organization?
2. Does the organization always keep store
records for accountability?
3. Where does purchase requisition originated?
4. How are goods located in the warehouse?
1.4 STATEMENT OF HYPOTHESIS
He following
are the hypothesis developed to guide this research work
Ho:
Effective inventory management will not reduce material wastage/cost and hence
cannot improve profitability.
Hi:
Effective inventory management will reduce material wastage/cost and will
improve profitability.
1.5 RATIONALE OF THE STUDY
The study is
aimed at having a look at inventory management as a tool for enhancing
profitability and come out with some problems associated with the function and
necessary ways of solving such problems. The researcher choose Natec Aluminium
Company Limited, Uyo as its case study.
It is
equally an attempt to disabuse the impression of manufacturing organization
that inventory is not a profit generating center but to see inventory
management as a managerial function which need to be accorded a proper
attention than merely treating it as a dumping ground.
The work can
be very useful and helpful to those engaged in inventory management function in
organization and to students studying production operation management in
various institutions of higher learning. The study is also a partial
fulfillment for the award of higher national diploma in all colleges of
technology and polytechnic. The study is also to improve the function of
inventory management in the organization under study and the entire
manufacturing industry at large.
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