DEPARTMENT OF BUSINESS ADMINSRATION, PROJECT TOPIC, THE IMPACT OF AN INVENTORY CONTROL AS AN INTEGRAL PART OF PROFIT MAXIMIZATION

THE IMPACT OF AN INVENTORY CONTROL AS AN INTEGRAL PART OF PROFIT MAXIMIZATION

ABSTRACT

This project- work is carryout on the topic “Inventory Control as an integral part of profit maximization” with a case study of Nestle Food Nigeria Plc, manufactured of different kinds of consumable goods. There is need for the organization to control inventory, represent cash, and it accumulate. Seventy-five percent of the organization asset, that make. It a profit maximizing for any organization. Be it manufacturing service, profit maximizing for any organization is holding stock either for production or distribution or sales for human consumption because it is the organization only survival.

Also, the organizations need to control inventory because it will reduce the problem of obsolescence, overstocking and discrepancy etc. But with the organization control inventory such problem will be reduced all these will be discussed in this project work that may of useful to any organization that hold stock and the government.

This project work is dedicated into three chapters, chapter one contains the introduction, aims and objectives statement of problem, scope and limitation of the study. and method of the study etc. while chapter two, contains the literature review and examination of profit maximization for thestudy from part researcher, collected from text books, journals etc. chapter three contains the summary of findings, conclusion and recommendations.

TABLE OF CONTENTS

Title page

Certification

Dedication

Acknowledgements

Abstract

Table of contents

CHAPTER ONE

Introduction

1.1   Introduction to the study

1.2   Statement of problems

1.3   Objective of the study

1.4   Significant of the study

1.5   Scope and limitation of the study

1.6   Definition of terms

1.7   Method of data collection

CHAPTER TWO

Literature review

Appraisal of inventory

Review of inventory control

Examination of profit maximization 

CHAPTER THREE

3.1   Summary of finding

3.2   conclusion

3.3   Recommendation

REFERENCES

Questionnaire

CHAPTER ONE

1.1 INTRODUCTION

The basic problem faced by many organizations, most especially manufacturing company in this country is the issue of how to control stock to avoid spoilage of materials, absolute, obsolesce and pilferage in the store, because material in the store represent cash and also it accumulate seventy-five percent of the organization assets, so therefore, there is need for inventory to be controlled. Control of sock is part of the whole process by which materials and product are made available where required for production.

The basic factor that brought about this topic inventory control as an integral part of profit maximization is that, storekeeper cannot make and keep accurate record of stored materials and the aspect of inspection of income consignment supply from the supplier. Also stores discipline is one of the major problems faced by many organizations in this country.

Improper management of store in terms of decision-making that will assist the smooth running of the store is not taking by the storekeeper on the aspect of store security, which causes pilferages, thief etc.

The reason for choosing this topic is that, stock is the only part of profit maximization for any organization be it maintaining, service, profit or non profit oriented company. If such organization hold stock for any purpose. This research laid more emphasis on the need for an organization to hold, stock most especially raw materials, finished goods or work in progress etc. because it accumulate 75% of the organization asset and the major profit maximization for such organization. This is also applicable to all other organizations that hold stock either physical stock or raw materials accurate control of such materials is needed.

Also this research lay more emphasis on how the problem can be solved by the organization that face such  problem. The following methods of stock control can be employed:

v Stock level

v Impress stock

v One for one stock system

v Two bins stock system etc.

The use of computer can also be employed in inventory control exercise for record keeping and accounting purposes.

In conclusion, all the following stated above problems and solutions will be fully discussed in the chapter two of the project.

1.2 STATEMENT OF PROBLEMS

The problem faced by many organization in this country is on how materials kept in the store can be controlled, safeguarded and managed etc. and how stock can be controlled to avoid overstocking,

obso1escence, “pi1feges” and discrepancy are some of the likely problems that more emphasis will be lain on, in this project.

1.3 OBJECTIVE OF THE STUDY

The objective of the study is to evaluate the needs for inventory control as an essential part of profit maximization with a case study of Nestle Food Nigeria Plc. Lagos a Manufacturing Company. The objective of this study is not based on manufacturing company but also to all other organizations that hold stock.

The following are tie objectives:

Ø To protect the organization from obsolescence and

discrepancy

Ø Also, to help the organization to reduce unnecessary cost by employing the use of value analysis.

Ø To regulate the rate and level of which material is stored, issued and dispatched from the store.

Ø To ensure easy accountability of materials held in store.

Ø Protecting the organization from running out of stock.

Ø Lastly, protect the organization from store discrepancy by

engaging in store taking and store checking.

1.4   SIGNIFICANCE OF THE STUDY

This project is important to all organizations that hold stock either manufacturing or service etc. bit emphasis is laid on manufacturing organization of the fact 75 % of the organization asset is tired up by stock in store. It can also be significance to top level managers of the organization and store manager in decision making process for the growth of the organization on method of inventory control to be adopted, also it can be an important document for another research when carrying out research on topic that is related to this project.

Another significant of this study is that, this project is among the courses that students in Kwara state polytechnic must fulfill to obtain the award of National Diploma and Higher National Diploma in purchasing and supply. The major significance is on the case study but can be applicable to all other organizations.

1.5 SCOPE AND LIMITATIONS OF THE STUDY

Due to financial and time constraints, this project was limited to a manufacturing company in Lagos, which the researcher intended to sample Nestle Food Nigeria Plc., manufacturing of different kinds of consumable goods, such as Nescafe, Milo etc. This organization is a much National organization, but for the purpose f this project work, it is limited to Nigeria also in Nigeria there are many branches but emphasis is laid only on Agbara Branch of the organization so as to carry out this research work in a limited time. Therefore, the managerial scope of this project is limited to the store department of the organization where the major problem that faced the organizations will be solved. The scope of this study is limited manufacturing organization but after project has been completed it will be generative to all other manufacturing organization, service, profit or non-profit and distributing company, the fact is that if such organization hold stock.

1.6 DEFINITION OF TERMS  INVENTORY CONTROL

Is concerned with the control of the qualities monetary value of all the materials, parts and work in progress or finished products recorded on the books by an organization and kept in the store.

        Note: inventory control is the same thing as stock, meaning that, inventory can also be referred to as stock.

DISCREPANCY

This is a disagreement between the stock record detail at the actual physical stock, caused by pilferages, theft etc.

VALUE ANALYSIS

Is the study pf the relationship of design, functions and cost of any product, material or service with the objective of reducing cost through notification.

OBSOLESCENT

An items is said to be absolvent when it is going out of use, but is not yet completely omissible.

OBSOLETE

An item is regarded as obsolete when it is no longer useable by  the business concerned, because of a change in operational practice or production process.

REDUNDANT

When the quantity of an item in store is more than the space of storage, the left over materials that are store is known as redundant material.

SURPLUS

This is a situation where the quality of materials produced is more than the necessary quantity that the organization can sale, store such material is refer to as surplus because they are sold at a lesser price.

SCRAP MATERIAL

These are materials that are not of use for one organization but can be used to another organization. Scrapped material fall into two classes, namely, ferrous and non ferrous. Ferrous are materials that can be reprocess by another organization for used (mental). Non-ferrous are materials that cannot be reprocessed non metal.

WORK IN PROGRESS

W.I.P these are materials that the production process is incomplete in the course of manufacture. Work in progress can also be referred to as semi —finished goods, it also represent cash.

STANDARDIZATION

Is the process of reducing the number of varieties stocked to a controlled workable minimum.

1.7   METHOD OF INVENTORY CONTROL

a. Cyclical ordering system: This is the time base system which involve schedule periodic review of the stock level of the items when the stock of a given items is not sufficient to sustain the production until the nest schedule review.

b. flow control system: This method of managing inventories represents a special variation to cyclical ordering system.

        This method applicable in continues manufacturing operation that produced the same basic production in large qualities daily. Most of the materials used in such an operation are purchase in term of contract and schedule for daily or weekly delivery throughout the period of the term.

c.     Fixed order quantity system: This inventory control system is based on the order quantity factor rather than passed it own unique order quantity. Operating a fixed order quantities require that for each inventory items a pre-determined fixed quantity of that items is to be ordered based on price. Usage rate and other necessary productive and administrative factors to each time the supply of the item is replenished.   

CHAPTER TWO

LITERATURE REVIEW

2:1 APPRAISAL OF INVENTORY

Control of stock is part of the whole process by which materials and products are made available where required for production. The basic problem faced by many organizations, most especially manufacturing company, is the issue of how to control stock to avoid spoilage, obsolete and obsolescent in the store.

This research work is carried out to appraise the significance of inventory control as integral part of profit maximization. Therefore, more emphasis will be laid on inventory control exercise from different authors under this field of study.

According to Asaju [1983] in his book titled principle and practice of purchasing defines inventory control as

Inventory control is concerned with the control of quantity and or monetary value of all the materials, parts and work in progress or finished products recorded on the books by and organization and kept in it stores, ware house and plants, at predetermined levels.

Also, the author goes further in defining inventory control as the function of ensuring that sufficient goods are retained in stock to meet all requirements without carrying unnecessary large stock.”

He also, defines inventory control and planning as the “part of the whole process by which materials and part and product are made available where and when required”

From the above three definitions, it will be seen that inventory represent cash and that it is necessary for such to be control because it is the means of maximizing profit of the organization.

     Asaju (1983), gave three different stages that a stock is carried as part of the production process.

PRE-PRODUCTION STOCKS

Compare parts and materials purchased from outside the organization for manufacturing into finished product.

IN-PRODUCTION STOCKS

Compare the parts and assembles manufactured inside the organization, which inform of work in progress.

POST-PRODUCTION STOCKS

Post-production stocks are the finished products head neither at the factory or at ware house and distribution centers.

Stock represent the organization cash and most be controlled and accounted for as such the responsibility of stock demands that the stock perform regular and complete physical control of all the items held in stock and verified that count in items of the Calculated stock figures contained in the stock record.

THE BASIC FEATURES OF INVENTORY CONTROL

A typical inventory control system has the following regulation which must be followed by the store manager to help the organization in maximization of their profit. And to prevent over stocking, obsolescence etc. of the materials hold in store because stock represent asset which make it to be the major organization survival:

Ø Each component is treated individually.

Ø The order quantity is generally design for each items

Ø The order intervals is varied to regulate the material flow

Ø The system generate multi cycle phase flow

Ø New other are released when the stock drops to a predetermine order level.

Ø Also, the system is based on the idea that each other should be delivered in one batch by the due special to each component order.

NEEDS FOR INVENTORY CONTROL

 Asaju (1983) give some of the needs for controlling inventory in an organization is necessary so as to prevent serious damages of over stocking, under stocking, obsolete and obsolescence redundant and discrepancy etc.

By over stocking, the following costs are incurred proportionate to the material over stocked.

Capital costs: Capital tied down in essence stock could be employed else where.

Space costs: The cost of incurring space will increased (rent, lightening) etc.

Equipment cost: The cost of maintain the equipment used such has bins, racks, materials handling equipment.

Personnel cost: are the cost of stock keeper, store security, etc. also, under stocking lead inevitable to materials running out of stock at times, and the consequence of under stocking are wages and fines costing cost incurred without any compensating output loss of profit on lost sales.

Greatly increased procurement cost such as emergency price, transportation charges above normal must often be paid to obtained quick supply.

Delivery delays resulting in counseled orders, lost of goods will or even penalty payments.

Obsolescence in the sense that the higher the stock level, the longer the time materials is in the stock and so the greater the risk of obsolescence of materials hold in stores and in the ultimate cost of obsolescence.

Morison (1981) in his book titled “Storage and Control of Stock” as “the clerical control .of the movement of material into and out of the store, and of the level of stock in the store at the time with due regard to the economy in storage as well as on ordering cost, purchasing price agreed and the level of the organization working capitals”.

The author expresses that stock control is concerned in the clerical control of movement of materials in and out of the store, because the materials hold in store represent cash, which is one of the organization survival. He also laid more emphasis on the objective of stock control system as one of the profit maximization for service, profit or non profit oriented organization.

To maintain adequate availability of correct materials with minimum investment in inventory efficient use of plants, building and equipment also responsible for the protection of stock against pilferage.

Necessary information for financial control is readily and accurately provided. Lastly, regulate the issue of stock from the storehouse.

Morison (1981) also give some general principles of controlling stock by physical or visual which are:

Ø Stock level

Ø Economic order quantity

Ø Two bins system

Ø One for one system

Ø Impress stock level

STOCK LEVEL

The basic method of controlling stock by quantity is by means of facing for each commodity stock level. Which are noted on the stock record and subsequence use as a means of indicating in some action is necessary. There are various kind of stock level e.g minimum, maximum level, reorder level etc

MAXIMUM STOCK LEVEL: maximum level is the maximum quantity of materials that may be held in store or the level above which stock should not normally be allowed to raised, before it is fined. It normally take into account the following factors.

v Rate of consumption

v Lead time to necessary to obtain new delivery

v Amount of capital involved and available

v Risk of deterioration or evaporation

v Storage space’

v Risk of obsolescence

v Cost over stocking

MINIMUM STOCK LEVEL: Minimum level is the lowest to which stock should or level below stock normally be allowed to fall. If stock go below or fall below this level, there is a danger of storage of supply which may result to stoppage of production. In the invent of any items below it minimum level, priority should be given to the acquisition of new supplier. The level is set after the considering the following factors.

·                    Rate of consumption

·                    Nature of materials

·                    Reliability of supply

·                    Storage space available

·                    Change in demand

·                    The lead time

RE-ORDER LEVEL: This is the point between the minimum

and maximum level at which time is essential of purchase requisition, for fresh supplier of materials by ordering when the stock falls to the reorder level, then in the normal cause of event new supplier could be required just before the minimum level is reach to set the level, the following should be considered:

·        Rate of consumption

·        Leads time

·        Reliability of supply

·        Maximum level

·        Cost of storage

·        Cost of purchase

ECONOMIC ORDER QUANTITY: this is the other site (quantity) of materials that can be bought at which both cost of holding stock and the cost of ordering stock are equal given a minimum total cost. By setting the level, the buyer is saved the task of recalculating how much should be bought each time he orsders.

The economic order quantity is therefore calculated by balancing two opposing types of cost which decreases when the order quantity increases. The following point should be considered before setting the economic order quantity.

·        Rate of consumption

·        Bulk purchase discount

·        Transportation cost

·        Risk of obsolescence and deterioration

Cost of holding stock compared with cost of buying small lots.

The economical order quantity is therefore calculated by balancing two opposing types of cost. The cost of ordering and the stock out cost which decreases when the order quantity increases. The following points should be considered before setting the economic order quantity.

Ø Rate of consumption

Ø Bulk purchase discount

Ø Transport cost

Ø Risk of obsolescence and deterioration

Ø Cost of holding stock compared with cost of buying small lots.

TWO BIN SYSTEMS: - this term should be reserved for stock control in this case of method. Two actual separated bins are used for materials such as bots, not of small items, one bins is then used until empty and replenishment order takes place at this point. This two bins system of controlling stock is basically used to control materials of low value which is used in the store of reduction and production and replacement part of equipment used by the organization.

THREE BIN SYSTEMS: - This system also some time used to illustrate the physical natural of control. The first contains free stocks,

when this is used up, if bin two is exhausted before the new supply arrive, switch to the emergency stock bin three and also urge delivery of the order. These kinds of materials that are controlled through this system are materials of high value which are absolute material i.e. ‘‘ cannot be eliminated from materials needed for production to complete.

           ONE FOR ONE STOCK CONTROL

This system of control is that each issue is dependent on the return of the items being replaced. Alternatively, each issue in initial replacement as in the case of machinery spares. This method of stock control is suitable for items such as spare part, tools etc.

Another respect that inventory can be control is that, the store manager should make and keep adequate record of all store materials, so as to avoid stock discrepancy and to enhance easy stock taking and stock checking as a means of controlling stock. Also, another area of concentration is the security and safety of store as another way of controlling inventory in the sense that materials stock in the stored, if they are not properly secured, it may lead to theft, damage and store deterioration which will affect the profit maximization of the organization, because stock represent cash.

According to Aremu T.O (2002) in his book titled “appreciation of material management” define stock control as: “the means by which materials of the correct quantity is made available as when required with due regard to economic in storage, ordering costs and purchase prices and working capital”.

Another author, in his book titled “principle and practice of material management by Ademosu, K.A (2003) define inventory control management as “a vital element in the management of material, it is the development of analytical techniques and computer capability to transform inventory that require the professional management skills”.

From the above definition, it will be seen that inventory control is more important in profit maxination of any organization that hold stock either for production, storage and distribution.

IMPORTANCE OF COMPUTER IN INV1NTORY CONTROL

Computer for stock recording operates on a set of visible records which are individual stock cards typed entrance similar to those that are fund on manual stock records. Translations are entered via typewriter, keyboard by an operator, assisted by stored programmes which enables the machine to do necessary calculations, the point on the card where entire have to be made. Computer programmes are

commercial available for the purpose of stock control. Most of the programmes cover the updating of stock records and printing of stock exception reports and stock balance. Additionally, some programmes raise orders for bought-out of stock and act as progress chaser on supplier. The importance of computer in inventory control cannot be over emphasized, it gives adequate record of all the materials held in stock, the quantity and quality.

THE IMPORTANCE OF INVENTORY CONTROL SYSTEM TO AN ORGANIZATION AS A MEANS OF PROFIT MAXIMIZATION

There are many advancement attached to control system. It increases the profit maximization of any organization that holds stock. Because, material hold in stock represents each and also accumulate. Seventy-five percent of the organization asset that is why is needed to be control in maximizing profit of the organization.

The following are some of the advantages inventory control in maximizing profit of the organization.

Easy identification of needs: Inventory control makes it possible for an organization to identify their needs; in the sense that if the materials held in store are not properly controlled, it will not be possible for the organization to know the stock level of materials in the store know when to re-order so as to meet up their needs, and to avoid production stoppage.

Accountability: On the aspect of accountability, inventory control makes it possible for the organization to t4e level at which theorganization is operating, either at profit or loss, also it gives room for the organization to know the number of stock that are still in the store.

Inventory control is also important in decision making for the organization top level management i.e. inventory control exercise makes it possible for the level manager in the sense that, they will know the best method of inventory control be to be used in reducing cost of holding stock, reduce obsolete, obsolescence, pilferage and on the aspect of store security, because the management know that inventory is one of the major profit maximization for the organization.

Also inventory control is also important in the aspect of reducing store discrepancy, obsolete, obsolescence etc. of the stored material, in the sense that inventory control makes it possible to reduce the level at which the materials in the store are damaged, and that affects the profit maximization of the company.

Cost reduction, inventory control reduces cost of holding stock, cost of production etc. in the sense that if the materials are not controlled by the store keeper unnecessary cost will be inquired, which will affect the profit level of the organization. Also, cost of production will be reduced of the fact that inventory control will control the level of materials used in production i.e. when should materials be released for production etc.

Stock location and stock classification is another advances that inventory control will bring to the profit maximization of an organization i.e. the store manager will be able to locate the area in which materials in store for easy identification, the store manager will be able to classify material according to their nature, range of use age etc.

EXAMINATION OF PROFIT MAXIMIZATION

          In a large organization preparation of a simple balance sheet will be necessary. It will reveal at a glance the financial position of the business.

        Profit/Loss in a simple arithmetic is the difference between the cost price and the selling price. The formula goes

Thus:

        Profit = selling price (S.P  cost price (CP)

        P      = Sp  Cp  i.e.  Sp  >  Cp

        L      = Cp  Sp  i.e.  Cp  >  Sp

Example

        Cost price of an article is 1000 and the selling price = 1,5000 therefore, profit is the difference between cost price and selling price.

        i.e.    Cp   =  1000,   Sp = 1500

                    p     =   Sp    Cp = 1500 ,  1000

                    p     =   500

From the accounting perspective profit is the difference between the net sales (or total sales if there are no returns) and the cost of good sold i.e difference between the selling price and cost price it is important to always make this comparison because it help to tell how well our business has done this year compared to the previous result.

NET PROFIT it is inevitable that business will incure some expenses in the cause of the year trading activities. Expenses like advertisement wages and salaries, rent, stationeries, postages e.t.c

Thee expenses must be deducted from the gross profit N.P. = G.P” Expenses.

TURNOVER: Otherwise called SALES. It is the total amount of sales for the year. If there is any returns on sales, it is deducted from the sales this return is known as sales return or return inward.

Rate of turnover is the number of times the average stock is sold during a given period of time. The number Average Stock =

opening stock  +  closing stock

                  2

=      op st  +  C st

                2

G.P as % Turnover. It is called ratio of G.P to turnover expressed as a percentage =G.p. × 100%

                                Turnover

Example: A firm has a gross profit of 25% on sales, if the turnover for a particular year was  # 800

Calculate G.P. and Cost of goods sold.

G.P. = 125 ×800       = #1000

              100

        = 1000 – 800 = 200

Cost of good sold = Turnover G.P

                        = 800 – 200

                        = 600

The above is as per Abdussalam (2008)

CHAPTER THREE

    SUMMARY CONCLUSION AND RECOMMENDATION

3.1 SUMMARY OF FINDING

There is no doubt of the fact that inventory or stock represents cash and only organization survival, from series of information gathered from the respondent used in data presentation and analysis of this study has show that inventory represent cash and accumulate seventy-five percent of the organization asset, so therefore, they should be a need for such to be controlled so as to increase the profit maximization of the organization.

Form the data and information gathered shows that the organization and also it has reduced the level of problems faced by the organization or in terms obsolete, obsolescence, pilferages and discrepancy, also it protects the organization from under-stocking, and over-stocking because they have a fixed level at which the material in the store will be re-ordered.

     Also, this research has shown how important inventory control is useful the management decision making for the organization in terms of when should stock be taking and check to avoid discrepancy, also on the issue of stock security it show that it is the responsibility of both the store to protect the store against store deterioration, theft etc.

The research also shows that inventory control is more important for any organization that hold stock either for production, distribution or sales to the consumer and also, the research finding applicable to any organization be it service, manufacturing, profit or non-profit oriented organization not but only the case study and. also the government.

3.2 CONCLUSION

          From the research work, it can be noted that inventory control is the only effective ways of minimizing profit •for any organization that hold stock either for production, distribution or sales. It also enables the researcher to know the important of inventory control on any organization that hold stock be manufacturing, service, profit or non-profit organization.

The success of any organization on depends on the effectiveness of how inventory is controlled in the organization to help in maximizing the profit of the organization. The research concluded that the importance of inventory control couldn’t be over emphasis in the profit maximization of the organization because it represents cash and accumulate seventy five percent of the organization, asset. And also it concluded that inventory control could not be underrated in the decision making of the organization, because it can be use in forecasting for the future and also to reduce some of the problems faced by the organization such as the obsolete, discrepancy etc.

Also, the research concluded that inventory control cannot be under listed in determining the profit level of the organization, i.e.’ when preparing the final account of the organization, inventory must be included because it represent cash and is an asset of the organization, which will make the organization to determine the level of which the organization is running either at profit or lost.

3.3 RECOMMENDATIONS

The basic problem faced by many organization must especially manufacturing company in this country is on the aspect of how to control stock to avoid spoilage of material, obsolete, obsolescence and pilferages in store.

From the series of information gathered, it shows that inventory control is a major problem faced by many organization and the government parastatals is not left out of this problem of “How to control stock” so therefore, this makes the researcher to research on this problem and come out with the following recommendations or solutions for any organization that hold stock, which can be applicable when necessary to be used. The organization should adopt a periodic stock taking and stock checking to help in reducing the problem of stock discrepancy.

Also the management should make a proper decision on the method of inventory control that is suitable for the organization to adopt to avoid spoilage etc.

The store manager should make proper and adequate security of the store to avoid store deterioration and thief with the help of the security officer in charge.

The organization should regulate the issuing and dispatched of material for the store to protect an authorized from coming into the store.

The incoming consignment should be properly inspected so as to avoid spoilage, obsolete, obsolescence of materials in the store.

The finding of this research can be applicable to any organization that holds stock when necessary to be use.

REFERENCES

Ademosu K.R (2003): Principle and Practice of Material Management, Kola Salau press, Offa

Ajanaku F. (1985): Fundamental of Store Management and Inventory Control, Ibadan, Oyo state Valuer Published, Nigeria Ltd.

Aremu T.O (2003): Appreciation of Material Management, Olad Publishers Ilorin Kwara State.

Asaju R.O (1983): Principle and Practice of Purchasing, Kaduna Gbabeks Association (Nig.) Production.

A . F. Abdul - Salam  (2008):  management  practice  and

            development.

Folashade (2003): Unpublished Project on Inventory Control.