INVENTORY CONTROL AS AN EFFECTIVE TOOL FOR COST CONTROL IN AN ORGANISATION (A CASE STUDY OF CADBURY NIGERIA PLC).

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

In general, inventory control and cost control techniques have become a household name in the business of manufacturing firms, that boast of the possession of goods or stocks, that hope to sell when the demand arises. It is so important to them, such that their survival as a corporate entity, hinges on how they are able to coordinate and control their applications. Inventory 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 and components that makes up the product. They are raw-materials, work in progress and finished goods and they constitute various form of inventory in a manufacturing firm. Inventories are the stocks of material 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 then considered overstocking beneficial. But today firms have started to embrace effective inventory control. The goal of effective inventory control is to be sure that optimum levels of inventories are available that there are minimal stock outs, (i.e running out of stock), and that inventory is maintained in a safe place and is always readily accessible to the proper personnel.

Consequently, there is a need for the firms to undertake effective inventory control with the aims of:

  1. a) Ensuring a continuous supply of materials to facilitate
  2. b) Maintaining sufficient stock of raw materials in periods of short supply and anticipated price changes
  3. c) Minimizing the carrying cost and time virtually every company has one form of inventory or the other. The level of the forms of inventories of a firm depends on the nature of its business manufacturing.

The scope of inventory management concerns the fine lines between the replenishment lead time, carrying cost of inventory asset management, inventory forecasting, inventory valuation, inventory visibility, future inventory price forecasting, physical inventory, available physical space for inventory, quality management replenishment, returns and defective goods and demand forecasting. Balancing these competing requirements leads to optimal inventory levels, which is an on-going process as the business need shift and react to the wider environment.

Inventory management involves the monitoring of material moved into and out of stock room locations and the reconciling of inventory balance. Management of inventories with the primary objective of determining/controlling stock levels within the physical distribution function to balance the need for product availability against the need for minimizing stock holding and handling cost. Policies relate to what levels of inventories are to be maintained and which vendors will be supplying the inventory. How and when inventories will be replenished, how inventory records are create, managed and analyzed and what aspect of inventory management will be out sourced are also importance component of proper inventory management.

On the other hand, cost control refers to steps taken by management to assure that all segments of the organization function in a manner consistent with its policies. For effective cost control, most organization use standard cost system, in which the actual cost are compared against standard cost for performance evaluation and deviations are investigated from remedial actions. Cost control is also concerned with feedback that might change any of all the future plans, the production method, or both. From the foregoing, it can be categorically asserted that how strategic a firm manages its stocks or inventories will defines its cost control techniques and budgets. It is therefore, the focus of this research study to carry out and assessment of inventory control as an effective tool for cost control in an organization, using the inventory and cost control techniques of Cadbury Nigeria plc as our case study.

1.2 STATEMENT OF PROBLEMS

In the last couple of decades, the numbers of products offered to the market have generally exploded. As the same time, the product life time has decreased drastically. The combination of the two trends leads to increase in accuracy of the demand forecasts, leading to firms facing an increase in demand uncertainty resulting in the increase in inventory levels. It is important that a company maintains adequate stocks of material for the continuous supply to the factory for an uninterrupted production, in doing so such a company is exposed to two undesirable points namely excessive carry cost and the risk liquidity, while inadequate inventory can lead to production hold-ups and failure to meet delivery commitments. The study is concerned with problem of how to determine and maintain optimum level of inventory investment.

It cannot be over-emphasized that inventory keeping is an indispensable activity in the activity of every business firms that deals in stocks. This is because these stocks, depending on how they are warehoused or better still managed, can make or mar them. It is not only just to keep record of these inventories; there is also the need for management to maintain the cost objectives put forward in the planning stage of inventory management. Evidence has also shown that a lot of firms have failed management control and thus, they have been made to count their losses. How then can the firms maintain adequate or proper inventory control alongside with cost control? The answer to this question and many issues from the basis for the appraisal is this research study.

1.3 OBJECTIVES OF THE STUDY

v To know how effective inventory control is when it comes to controlling cost in an organization.

v To outline the relationship that exists between inventory control and the cost control system of an organization.

v To know how effective inventory control technique.

1.4 RESEARCH QUESTIONS

v How effective is inventory control when it has to do with an organization cost control practices?

v What are the essential relationship existing between inventory control and cost control?

v How can planned effective inventory control techniques contribute to the profitability in a firm?

1.5 HYPOTHESES OF THE STUDY

H0: Inventory control management is not an effective tool for cost control in an organization.

H1: inventory control management is an effective tool for cost control in an organization.

H0: There is no relationship existing between cost control and inventory control.

H1: There is relationship existing between cost control and inventory control.

H0: A well-planned and effective inventory control technique does not contribute to the profitability in a firm.

H1: A well-planned and effective inventory control technique contributes to the profitability in a firm.

1.6 SIGNIFICANCE OF THE STUDY

Prior to the eighteenth century, possessing inventory was considered a sign of wealth. Generally, the more inventories you had, the more prosperous you were. As at then, inventory existed in stores of wheat, herd of cattle and rooms full of pottery and other manufactured goods. While these inventories were been kept, their effective cost objective were also being defined at the same time, in order to allow the firm achieve its objectives.

Based on this, when this research study is completed, it will be beneficial to:

 

  • The management of Cadbury Nigeria plc and other manufacturing firms in the country. It will essentially help to bring out how relevant inventory control and effective cost control are to their organizations if well manipulated. It also let them see how important it is to take stock and evaluate it correctly.
  • Academic student: it will allow the student to have an insight of what the practice of inventory control is outside school environment. It will also provide them with information for their further study.

1.7 SCOPE AND LIMITATION OF THE STUDY

The research study will basically focus on Cadbury Nigeria plc, taking into cognizance its inventory control practices and technique or steps and try to bring out how relevant it can be to the organization’s activities. An attempt will also be made to assess the cost control technique of the company in order to see how they synergize with their inventory control practices.

The limitation that will likely be faced in the course of this project shall include; limited timing for the completion of the project, shortage of required finances for the work, non-cooperation on the part of some of the respondent will be given the questionnaire.

1.8 DEFINITION OF TERMS

The following are defined in the work

INVENTORIES: These are stock of materials or finished goods which a company keeps in anticipation of demand or consumption. They constitute a sizeable portion of the 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.

RAW MATERIAL: Inputs into the production process that will modify or transform into finished goods.

WORK IN PROGRESS: Semi finished products found at various stages in the production operation.

STOCK LEVEL- One of the most objective of a stock control system is to ensure that “stock-out” do not carry occur and that surplus stock are not carried.

STOCK OUTS: Occurs when there is insufficient stock to meet production demands and this can lead to loss of customer goodwill, reduced profit etc

MINIMUN STOCK LEVEL: The minimum stock level is below which stock should not be allowed to fall. If stock so below this level there is a danger of the stock out resulting in production stoppage.

MAXIMUM STOCK LEVEL: The maximum stock level above which stock should not be allowed to rise. It is desirable that the level should be as low as possible but of course it must all forecast usage of materials and time type in delivering.

CONTROLS: The activity of determining the range and quantity of material which should be stocked and regulation of receipts and issues of the materials.

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 of its receipts.

CARRYING COST: Expenses incurred from storing raw materials

ORDER COST: The variable cost of placing an order for raw materials.

RE-ORDER LEVEL: This is also known as economic ordering quantity (E.O.Q). It is the most economic quantity to order; in order words, it is the ordering quantity at which the controllable cost of ordering is minimized.

RE-ORDER LEVEL: This is the point at which is essential to initiate purchase requisition for fresh supplies of the materials. This point will be higher than the minimum stock level, so as to cover such emergencies as abnormal usage of material.

REFERENCE

Ama.G.A.N. (2006).Management and cost Accounting. Nigeria: Amason

Publication venture.

Atkison.C. (2005).Inventory Management Review. London: Heinemann

Publisher.

Chukwuma.C.U. (2010).Management Accounting. Enugu:Dikasinma

Publisher.

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