CHAPTER ONE

INTRODUCTION

1.1   BACKGROUND OF THE STUDY

Inventory, in most of the industries, accounts for the broad proportion of gross working capital.

Inventory management is an excessive important function within most businesses, and a tool for profit maximization in manufacturing firms. The goal of inventory management is to nurture and develop policies that will achieve the most effective inventory investment. A company can maximize its rate of return and minimize its liquidity and business risk by most effectively managing inventory.

Inventory management comprises the comparison between the costs together with keeping inventory versus the benefits of holding inventory. Successful inventory management minimize inventory, lowers cost and improves profitability. An effective inventory level is often times on the bases of consideration of the step-by-step profitability to the opportunity cost of carrying the higher inventory balances.

Another effect of operationalizing inventory management on companies and manufacturing firms is to ensure that goods will be manufactured and made available as required. The primary costs of an inventory are the opportunity cost of the capital used to finance the inventory, ordering costs, and storage costs. Inventory management seeks to maximize the net benefit– the benefits minus costs – of the inventory.

For manufacturing firms, it can manipulate their production to shift fixed costs between cost of goods sold and inventory accounts, thereby managing earnings either upward or downward.

Higher inventory levels can also result in high costs for storage, insurance, spoilage and interest on borrowed funds needed to finance and support inventory acquisition. Just as successful inventory management minimizes inventory, lowers cost and

improves profitability, managers should also adopt the habit of appraising the adequacy of inventory levels, which lies on several factors, including sales, liquidity, available inventory financing, production, supplier reliability, delay in receiving new orders, and seasonality. Acceleration in inventory lowers the possibility of lost sales from stock-outs and the production slow downs caused by inadequate inventory. Inventory levels a real so affected by short-term interest rates.

Financial managers have a responsibility both for raising the capital needed to carry inventory and for the firm’s overall profitability. The goals of inventory management are to ensure that the inventories needed to sustain operations are available, but to hold the costs of ordering and carrying inventories to the lowest possible level. There is always pressure to reduce inventory as part of firms’ overall cost containment strategies, and many firms are taking drastic steps to control inventory costs.

1.2 STATEMENT OF PROBLEM

Most companies in Nigeria are finding it difficult with complete balance of payment and stock taking (both opening and closing stock taking), the operations of the audit department and the overall organizational efficiency tends to grow at a very slower rate because of poor inventory management practice. The effect of poor inventory management has had a negative effect on the level of profit maximization of most manufacturing firms in Nigeria especially the small and medium manufacturing firms. The following setbacks found among most of these firms are due their inability to operationalize inventory management.

1.3 AIMS AND OBJECTIVES OF STUDY

The study aimed to examine the effect of operationalizing inventory management on profit maximization. The specific aim of the study as stated as follows:

1.  To examine the role of inventory management in profit maximization

2.  To examine the relationship between inventory management and organisational productivity

3.  To determine the factor affecting the implementation of inventory management

4.  To investigate the effect of inventory management on financial security of most manufacturing firms.

1.4 RESEARCH QUESTION

In order to ascerain the above objectives, the study came up with the following research question:

1.  What is the role of inventory management in profit maximization?

2.  What is the relationship between inventory management and organisational productivity?

3.  What are the factors affecting the implementation of inventory management?

4.  What is the effect of inventory management on financial security of most manufacturing firms?

1.5 STATEMENT OF HYPOTHESIS

H0: operationalizing inventory management has no significant effect on profit maximization

H1: operationalizing inventory management has significant effect on profit maximization

1.6 SIGNIFICANCE OF STUDY

The study operationalizing inventory management as a tool for profit maximization in mancufacturing firms will be of immense benefit to both students, researchers and most of the manufacturing firms in Nigeria as it will discuss concept of inventory management as a tool for profit maximization in manufacturing firms. The study will also recommend for further research on above topic in order to gain a deep understanding on the inventory management and profit maximization.

1.7 SCOPE OF STUDY

The study will be limited to operationalizing inventory management as a tool for profit maximization in manufacturing firms, it will also discuss the concept of inventory management and profit maximization in most of the manufacturing firms in Nigeria.

1.8LIMITATIONS OF STUDY

1.        Financial constraint- Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

2. Time constraint- The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work

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