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The study was designed to find out the effects of Inventory Management on Corporate Profit using the Nigerian Bottling company as the case study. To achieve this objective, three Null Hypotheses and Alternative Hypotheses were formed to guide the study. All the staff of the Nigerian Bottling Company Plc, Lagos constituted the population of the study. A sample of thirty staff was used for the research out of which twenty five were completed and returned. Their responses to the questionnaires were presented on tables, analysed and interpreted and used in testing the validity of the Hypotheses formulated through the use of chi-square (X2) statistical test. The test rejected all the Null Hypotheses indicating that there is significant relationship between inventory management and profitability; that there is significant effect on the cost of managing inventory on profitability and that inventory management techniques impact positively on firms’ profitability. Also, based on the findings, the following recommendations were made among others: that there should be regular training of staff responsible for inventory procurement and issuance, that adequate inventory of raw materials should be maintained to cushion periods of short supply and that effective inventory management techniques should be applied always.
1.0 Background to the Study
Agara, (2005) defines inventory as the physical units of items i.e. goods that a business trades on or manufactures for sale. Inventory also includes all items required for proper packaging and raw materials. It also includes the items which are used as supportive materials to facilitate production. No manufacturing company can operate without material input(s), sourced locally or abroad, as inputs determine the company’s output and productivity. In manufacturing companies, inventory exists in various forms. These include Raw materials, Work in progress; partly finished goods/materials and sub-assemblies held between manufacturing stages, finished goods and supplies. Effective inventory management plays a critical role in the smooth and efficient running of any business. Inventory management is important from the point that it enables the firm to maintain adequate inventory for smooth production and selling activities and to minimize the investment in inventory to enhance the firm’s productivity. Many organizations, however, go out of business because of inability to handle inventory or poor inventory management. Some organizations have excellent inventory management and others have satisfactory inventory management. Management is therefore required to determine its optimum level of investment in inventories. Reducing excess inventory and investing in the right amount of inventory leads to improved customer service, increased inventory turnover, reduced costs and increased profitability. It is therefore important to manage inventories efficiently and effectively in order to avoid over or under investing in them. The study is therefore conducted to find ways of managing inventory for better profitability using Coca-Cola Company Plc as the case study.
1.1 Statement of the Problem
Managing inventory poses considerable challenges to the management of companies .This is because inventory represents high investments in businesses. This would therefore affect the liquidity position of the firm thus affecting profitability if not properly managed. Profitability represents a favorable return on investments. The profitability of a firm depends to a large extent on the ability of managers to take strategic decisions on inventory management. Some firms have encountered difficulties in inventory planning and control due to lack of qualified managers. The problem is to what extent could the right inventory level, at the right price, at the right time be achieved such that there is no stock-out costs and no over stocking or ideal working capital?
In fact, many manufacturing companies have been experiencing losses because large inventories become obsolete, damaged or lost. Thus, firms who fail to manage their inventories effectively will lose profitability in the long run or fail ultimately in business.
1.2 Objectives of the Study
This study set to achieve the following objectives:
1) To determine the effects of inventory management on firm’s profitability.
2) To ascertain the relationship between inventory management costs and profitability.
3) To show the impact of effective inventory management technique on firm’s profit.
1.3 Research Hypotheses
The following hypotheses were formulated for this study: the null hypothesis is represented by the H0 the alternative hypothesis represented by H1.
H0: There is no significant relationship between inventory management and profitability.
H1: There is significant relationship between inventory management and profitability.
H0: There is no significant effect of the cost of managing inventory on firm’s profitability.
H1: There is significant effect of the costs of managing inventory on firm’s profitability.
H0: Effective inventory management technique does not impact positively on firm’s profitability.
H1: Effective inventory management techniques impacts positively on firm’s profitability.
1.4 Significance of the Study
This study would be of great benefit to management and staff of Nigerian Bottling Company Plc, and other manufacturing companies that deal with large amount of inventories. It would also be useful to potential managers and entrepreneurs. It would provide them with information on how to manage inventory properly and reduce inventory costs. It would improve decision making on inventory management by managers and also increase customers’ satisfaction that will enhance the firm’s long term profitability.
In addition, this research will be useful to students of Business Administration/Management Sciences in Universities, Polytechnics and other tertiary Institutions. It would also be beneficial to other researchers who may be interested in this area of study. It would be useful to shareholders or owners as application of improved inventory management system would increase cash-flow and reduce losses thus improving profit and wealth maximization.
1.5 Scope and Limitations of the Study
The scope of this study is confined to Nigerian Bottling Company Plc and its operations between the years 2001 to 2016 which is a time span of 10 years. It also covers a review of inventory control and inventory valuation methods and its effectiveness in relation to profitability.
The limitations to this study include; financial constraints for getting more data, unavailability of some materials and lack of some statistical data.
1.6 Definition of Terms
Buffer Stock or Safety Stock: This is the inventory that is kept for emerging situations where, for instance, there is a sudden upsurge in demand or the fresh order is delayed over the estimated lead time. The maintenance of buffer stock should be considered in the light of the following:
· Probability of rise in demand
· Failure of suppliers to meet delivery dates
· Ability to obtain stock from alternative sources at record time.
· The durability of the goods.
These factors should be considered before maintaining safety stock because such inventories are excess inventory, which may not be touched yet they incur storage cost.
Business: A commercial activity involving the exchange of money for goods and services.
Demand: This is the quantity or sales or production required for the period.
Financial Statement: These are statement produced at the end of an accounting period, such as the income statement and statement of changes in financial position (balance sheet).
Gross Profit: This is the difference between sales revenue and the cost of goods sold.
Indent: This is the actual inventory ordered. It equally refers to the written (i.e. memo) itself.
Industry: This is an organized economic activity concerned with the production, manufacture or construction of a particular product or range of products. It is also used to refer to a particular branch of economic or commercial activity.
Inventory Turnover: This is the number of times stock is sold in an accounting period.
Lead Time or Delivery Period: This is the time between when an order is placed and when the supplier delivers the goods to the store. A lead time of 20 days will mean that it takes a period of 20 days for goods to be ordered and received into the sore.
Maximum Inventory Level: This is the highest inventory level over which materials are not allowed to exceed in order not to incur or have excess cost of storage. It is the level of inventory over which the company should not stock to avoid surplus inventory, obsolescence and huge storage cost in order to minimize the total cost of production. If inventories are allowed to exceed the maximum inventory level, more costs of pilferage, obsolescence, cost of capital tied down and so on will be incurred. Maximum stock level= safety stock=maximum usage during the maximum lead time.
Minimum/Maximum Delivery Period: The earliest time possible for delivery to get to the organization is known as minimum delivery period while the longest period for delivery to reach the organization is known as the maximum delivery period. The average of the minimum and the maximum delivery periods is called normal delivery period.
Minimum Stock Level: This is the inventory below which the Company may be running at a risk of stock out. It is normally kept to ensure that the safety stock is maintained and enough inventory to cover minimum usage during the average delivery period. Management, after considering the minimum consumption during the minimum delivery period, normally fixes this level.
Net Profit: This refers to when sales revenue plus other income such as rent received exceed the sum of cost of goods sold plus other expenses.
Output: This refers to goods or services produced by an organization
Productivity: This is the rate at which a company produces goods and services, in relation to the amount of materials and employees needed.
Re-Order Level: This is the balance which the existing inventory will get to before a new order is placed.
Re-Order Quantity: This is also called the Economic order Quantity (EOQ). It is the optimum quantity to order for per order period. The quantity to order should be that which has the minimum ordering and storage cost. The re-order quantity of a firm may or may not minimize the cost of storage and the cost of ordering. If the re-order quantity of the firm is the one that minimizes the cost of holding and ordering, such a re-order quantity will become EOQ or Economic Batch Size.
Stock Out: This term refers to the situation where the store runs out of inventory to be issued to user departments or for sale. Where there is stock out, requisitions are normally returned to user departments not honoured or customers’ orders are not met. Inventory management should prevent this situation because of the adverse effects it could have on the company.
Usage or Consumption of Inventory: This is the quantity of inventory used during the period of expectation of delivery to arrive. The highest level consumption possible during this period is known as minimum usage or consumption. The minimum usage + maximum usage divided by 2 = Average or normal usage. Calculation could be made in units, kilogram or litres.
1.7 Organisation of the Study
This study is organized into five chapters. Chapter One contains the Background of the Study which consists of the Introduction, Statement of the Problem, Objectives of the Study, Research Hypothesis, the Significance of the Study, Scope and Limitations of the Study, Definition of terms used in the Study, Organization of the Study, and the Brief History of the Company under study. Chapter Two deals with the Review of Related Literature. It shows the various standpoints of previous researchers, their theories, perspectives, arguments and empirical work with their approaches and outcomes. Chapter Three presents the design of the study; sources of data collection, procedure for gathering data, research methodology, instrument used in gathering data, method of choosing respondents are stated clearly in this Chapter.
In Chapter Four, the data collected is presented, analyzed, and interpreted through the use of tables and figures to fully explain the findings. Chapter Five is the final Chapter and contains the Summary, Conclusions and Recommendations.
1.8 Historical Background of Nigerian Bottling Company Plc, Lagos.
The Nigerian Bottling Company Plc was incorporated in 1951 to bottle and sell carbonated non-alcoholic beverages. NBC Plc has the sole franchise to bottle and sell Coca-Cola products in Nigeria. Production began in 1953 at a bottling Plant in Ebutte-Metta, Lagos state. That same year, the company opened its first bottling plant in Apapa, Lagos. In 1972, its shares were listed on the Stock Exchange and became a publicly quoted company. Since production started, NBC Plc has remained the largest bottler of non-alcoholic beverages in the country in terms of sales volumes, with about 1.7 billion bottles sold per year, making it the second largest market in Africa.
The Company serves approximately 160 million people in Nigeria by producing and distributing a unique port folio of quality brands, bringing passion to the market place and demonstrating leadership in corporate social responsibility. From a humble beginning as a family business, the company was an instant hit with the Nigerian consumers and has remained so.NBC Plc has grown to become a predominant bottler of non-alcoholic beverage in Nigeria, responsible for the manufacture, sale and distribution of various Coca-Cola product brands. Other popular brands produced by the company are Eva water, Five Alive fruit juice, Fanta, Sprite, Schweppes and the newly introduced Burn energy drink. Presently, the company has 13 bottling plants and 59 depots (distribution warehouses) and over 200,000 sales outlets nationwide.
The Company was recognized for its Corporate Social Responsibility activities as ‘The most Socially Responsible Company in Nigeria’ and ‘Most Environmental Friendly Company’ in 2011 at the Social Enterprise Reporting Awards .The Company also obtained Nigeria’s First Food Safety Systems Certification (FSSC) 22000. In 2000, the Company became a member of the newly formed Coca-Cola Hellenic Company, one of the largest anchor bottlers worldwide and the biggest in Europe. Coca-cola Hellenic group operates in 28 countries, serving more than 2.1 million unit case sales in 2009.The Company is headquartered in Athens and listed on the Athens, New York and London Stock Exchanges.
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