IMPACT OF INVENTORY MANAGEMENT AND
PERFORMANCE OF PRIVATE ORGANIZATIONS IN NIGERIA .
CHAPTER ONE
INTRODUCTION
1.0 Introduction
This chapter of the study presents the background of the
study, statement of the problem, general objective, specific objectives,
research questions, scope of the study, significance of the study and
definition of key terms
1.1 Background of the study
Companies face a dilemma in today's competitive marketplace,
where on one hand, customers demand customized products and services and
require that their orders are filled quickly, but on the other hand they do not
want to pay a premium for this customisation and availability (Graman and
Magazine, 2006). Therefore, organisations are exploring ways toward
postponement strategy in response to constantly changing demands (Yang et
al.(2004). Graman and Magazine (2006) argued that today, the cost of holding
inventory, extensive product proliferation and the risk of obsolescence,
especially in rapidly changing markets, make the expense of holding large
inventories of finished goods excessive and that high demand items naturally
have safety stock assigned to them, but in many organisations there are so many
very-low-demand items that keeping any stock of these items is unreasonably
expensive, so they argue that companies must now provide good service while
maintaining minimal inventories. Therefore, inventory management approaches are
essential aspects of any organisation.
In traditional settings, inventories of raw materials,
work-in-progress components and finished goods were kept as a buffer against
the possibility of running out of needed items. However, large buffer
inventories consume valuable resources and generate hidden costs. Consequently,
many companies have changed their approach to production and inventory
management. Since at least the early 1980s, inventory management leading to
inventory reduction has become the primary target, as is often the case in
just-in-time (JIT) systems, where raw materials and parts are purchased or
produced just in time to be used at each stage of the production process. This
approach to inventory management brings considerable cost savings from reduced
inventory levels. As a result, inventories have been decreasing in many firms
(Chen et al., 2005), although evidence of improved firm performance is
mixed (Kolias et al., 2011).
The role of inventory management is to ensure faster
inventory turn over. It increases inventory turn over by ten (10) and reduce
costs by 10% to 40%. The so called inventory turn over is not yet right to sell
products on the shelves based on the principle of FIFO cycle (Kenneth lysons
and Michael gilligham, 2003).
Inventory is classified basing on the business undertaking
from organization to organization. Common criteria used and are nature of
inventory for example manufacturing, sale or retail, purpose for which inventory
is being held in stock or function and the related usage in the supply chain.
Typical classifications are raw materials (items in unprocessed state awaiting
conversion e.g. timber, steel and coffee seeds), components and sub-assembles.
These are for incorporation into the end product e.g. side mirrors, glasses for
car assembling company and monitors or keyboards for a computer assembling company), consumable (all supplies
in an undertaking which are classified as indirect and which do not form part
of saleable product. (Divided into production, maintenance, office and
welfare). Proper classification of inventory and its control improve the
financial position of a business (David Jessop and Alex Morrison 1994).
Inventory management is primarily about specifying the size
and placement of stocked goods. Inventory management is required at different
locations within a facility or within multiple locations of a supply network to
protect the regular and planned course of production against the random disturbance
of running out of materials or goods for improved performance (Garry, 1997).
The scope of inventory management also concerns the fine lines between
replenishment lead time, carrying costs 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 (Lau A., and Snell, 2006).
Inventory management involves
the planning, ordering and scheduling of the materials used in the
manufacturing process. It exercises management over three types of inventories
that is raw materials, work in progress and finished goods. Purchasing is
primary concerned with management over the raw materials inventory, which
includes; raw materials or semi-processed materials, fabricated parts and MRO
items (Maintenance, Repair and Operations) (Garry, 1997).
However, Lau and Snell (2006)
argued that inventory management is primarily about specifying the size and
placement of stocked goods. Inventory management is required at different
locations within a facility or within multiple locations of a supply network to
protect the regular and planned course of production against the random
disturbance of running out of materials or goods for improved performance. The
scope of inventory management also concerns the fine lines between
replenishment lead time, carrying costs 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.
Poor inventory management had become an issue of great concern since
performance is regarded as the main stream for development of organizations. A
truly effective inventory management system minimizes the complexities involved
in planning, executing and controlling a supply chain network which is critical
to business success. The opportunities available by improving a company’s
inventory management can significantly improve bottom line business
performance. According to Jayeff (1998) argued that from a financial perspective, inventory management is no small matter. Oftentimes, inventory is the largest asset item on a manufacturer’s or distributor’s balance sheet. As a result, there should be a lot of management emphasis on keeping inventories. The objectives of inventory reduction and minimization are more easily accomplished with modern inventory management processes that are working effectively for improved performance.
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