OPERATIONALIZING INVENTORY MANAGEMENT AS A TOOL OF PROFIT MAXIMIZATION IN MANUFACTURING FIRMS (A CASE STUDY OF NIGERIAN BREWERIES PLC, ABA)

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 betweenthe costs together with keeping inventoryversus the benefits of holding inventory. Successfulinventory management minimize inventory, lowerscost and improves profitability. An effectiveinventorylevelis often times on the bases of consideration of thestep-by-step profitability to the opportunity cost ofcarrying the higher inventory balances.

Another effect of operationalizing inventorymanagementon companies and manufacturing firms is to ensure that goods will be manufactured and made available asrequired. The primary costs of an inventory are theopportunity cost of the capital used to finance theinventory, ordering costs, and storage costs. Inventorymanagement seeks to maximize the net benefit– the benefits minus costs – of the inventory.

For manufacturing firms, it can manipulate their productionto shift fixed costs between cost of goods soldand inventory accounts, thereby managing earningseither upward or downward.

Higher inventory levels can also result in high costs forstorage, insurance, spoilage and interest on borrowedfunds needed to finance and support inventory acquisition. Just as successful inventorymanagement minimizes inventory, lowers cost and

improves profitability, managers should also adopt the habit of appraisingthe adequacy of inventory levels, which lies on several factors, including sales, liquidity, availableinventory financing, production, supplier reliability,delay in receiving new orders, and seasonality. Acceleration in inventory lowers the possibility of lostsales from stock-outs and the production slowdownscaused by inadequate inventory. Inventory levels arealso affected by short-term interest rates.

Financial managers have a responsibility both forraising the capital needed to carry inventory and forthe firm’s overall profitability. The goals of inventorymanagement are to ensure that the inventoriesneeded to sustain operations are available, but tohold the costs of ordering and carrying inventoriesto the lowest possible level. There is always pressureto reduce inventory as part of firms’ overall costcontainmentstrategies, and many firms are takingdrastic 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