THE IMPACT OF EFFICIENT MATERIAL MANAGEMENT IN MANUFACTURING COMPANY

CHAPTER ONE

1.0   INTRODUCTION

1.1       Background of the study

Manufacturing companies have efficient material management as one of their functions. They also focus on the management of their resources to produce or deliver the product or services provided by the organization. Many specific decisions fall under the operation of management umbrella. Examples include the mix of product or services to sell or manufacture the layout of retail outlet, distribution, ware house or manufacturing plants and the purchasing and handling of inventories by retailers and manufactures.

Therefore, inventories and stocks are used interchangeably, stocks or inventories constitute the most significant part of current assets of large companies. Industries such as engineering garages, transport equipment, hydrogenated oil and mooting textiles, inventories constitutes three quarters of current assets while it account for only 30% or less in trading and shipping industries, printing and publishing, electricity generation and water supply.

Inventories are the stock of product, a company is manufacturing for disposal and product is made up of component, the components are the raw materials, work-in-progress and finished goods. Raw materials as the basic input of material that are turned into finished goods through the process of manufacturing raw material stocks are those inputs purchased and stored in the ware house for the future production. Then work in progress or goods-in progress inventories are used interchangeably.

Inventories can be of three kinds but depending on the volume of business operation. A manufacturing company will have substantially high levels of all the three kinds of inventories while retail and wholesales company will have a very low level.

In order not to jeopardize the profit position of the firm, efficient stock of materials,, work in progress, finished goods should be maintained. In some ways, planning for an inventory of cash is much like planning for the inventory of raw materials and finished goods. The firm must hold a minimum amount of stock or inventory to satisfy production and sales demand.

According to Don T. Deconster if the rate of usage and delivery (1979: 564) “if the rate of delivery cloud be predicted with certainty, the firm would need to hold only the minimum inventory level necessary for the known transactions”. However, business activities are not certain and provision must be made for contingencies as well as for expected transactions for a company to avoid the risk of inefficient stock management, an undertaken monitoring of the management of inventory will be instituted. To avoid this, sound and efficient stock management system should be maintained.

According to Horgreen (1992), the optimum inventory level is some where between the two danger points, the two danger points are inadequate inventories and excessive inventories. At inadequate inventories, inputs production may endanger sales. The other danger points which is the excessive stock level introduces unnecessary carrying cost and obsolesce risk. Optimum level is somewhere between these danger points. Prime objective of this research is to x-ray the computation and the maintenance of the level which guarantees the maximization profit and this is the essence of efficient and effective management of stocks.

There is an optimum level of investment for any stock whether it is cash at hand or bank, physical plant or inventories. The balance of cash may be large or small. The reason for having large cash balance might be the sacrifice of earning made by stock or shareholders. It is low cash holding that leads to poor credit rating of the firm to help maximize profit at the long-run, optimum level of investment must be held.

1.2       Statement of the Problem

The non-challant attitudes of most Nigerian manufacturing establishments is the persistent increase in price of commodities produced in our country is a cause for consideration and public concern. This increase in process most often is attributed to high prices for raw-materials.

The problems associated with inventory management is that of maintaining an optimum level of inventory. Too large of an inventory will not be in the interest of the organization as it will lead not only to the tying down of funds but also brings about high carrying cost and even obsolence of stock. On the other hand too little of an inventory will result to idle time and loss of sale.

According to Wasting, Fine and Gray (1979), they contended that “the efficiency of any business is predicated upon having adequate material supply equipment available in the right quantities, quality at the proper time and place and at the proper price. It was against this background that the study “The impact of efficient material management in the manufacturing company” was based, to critically analyze the impact of efficient material management in the overall profit of the organization.

The inventory need to be financed and the efficient management can increase the firm’s profit margin. The amount of inventories the company requires is not easy to control; this is because it is influenced by endogenous and exogenous factors such as sales, production and economic factors. It was discovered that if the materials for production can be delivered to the company immediately as they are desired, then there would be no need to hold inventories. Unfortunately, there are many problems associated with distribution of goods and services. The study focuses mainly on finding out some of the difficulties that will impede the efficiency of the organization, if not put in-check.

1.3       Objectives of the Study

One cannot completely estimate the cost of the organization of customer coming to purchase stock only to be told that there is no stock left due to poor inventory management.

Therefore, the following are the objectives of this study:

1)          To determine the effect of inefficient stock management on the profit of the firm

2)          To determine the effect of loss of goodwill through unfulfilled orders as a result of not holding adequate inventories.

3)          To find out if holding adequate stock will serve as precautionary measure against scarcity.

4)          To find out if adequate stock will alos serve as a precautionary measure against expected price increase.

5)          To determine whether efficient material management in East Chase Aluminum company will help to meet all production requirement and thus prevent production stoppages.

1.4       Research Hypothesis

To make sure that this research is carried out successfully, research hypothesis were formulated on the basis of the need for efficient stock management as regard manufacturing organizations.

According to Baridan (1977) Hypothesis formulation is an important stage in research process, in that it provides specific guidance for the research as to the inherent problems associated with such inadequacies.

i)      Ho:   Material management problems do not revolve on the problems of determining the optimum level of stock.

        Hi:    Material management problems revolve on the problems of determining the optimum level of stock.

ii)     Ho:   Inadequate stock level does not lead to disruption of production and loss of sales.

        Hi:    Inadequate stock level leads to disruption of production and loss of sales.

iii)    Ho:   Over stocking does not introduce unnecessary carrying and ordering cost, obsolesce risk of deterioration and tieing of fund on stock.

        Hi:    Over stocking introduces unnecessary carrying and ordering cost, obsolesce risk of deterioration and tieing of fund on stock.

1.5       Significance of the Study

This study is of greater importance to all manufacturing firms both small and large. It finds solutions to the problems of material management in companies mostly manufacturing industries. It aims at showing how much material an organization can maintain without adverse financial effect on the company’s profitability. Since companies have many other obligations that need fund, investing too much on stock or inventories means that there will be little or no fund to meet up with the expenditure of other operations. Therefore, wise commitment of funds to materials by companies should be adopted.

This study will also aid the manufacturing organizations against looses through.