CHAPTER
ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Inventory
is one of the resources that are managed by business organizations and it was
first recorded in 1601. The need for inventory control cannot be overemphasized
as it is a means for improving the performance of manufacturing industries.Inventory can be defined as a record of a business current assets including
property owned, merchandise on hand and the value of work in progress and work
complete but not sold and it is classified as a current asset because it can be
turned into liquid cash within a short period of time. Inventory has created a
great impact on the profitability of the manufacturing firm which resulted to
the deep research of this topic. Effectiveness of inventory management in a
manufacturing company.
Inventory
plays a major role in the operation of many businesses and manufacturing
companies. In manufacturing, inventories of raw materials allow companies to
operate independently of their sources of supplies. Day to day operation are
not dependent on deliveries from supplies since stock of the necessary materials
are maintained and used is needed. Without inventory control, millions of naira
could be lost year because of non-accountability of stocks and inaccurate
checks and balances.
The
process of control and management of inventory is a very important factor in
the success or failure of any business for example, little stock will result in
stock out which will disrupt the production distribution cycle that is crucial
to the survival of all manufacturing companies while too much stock will tie
down the resources of a company. Poor or inadequate inventory management can
present a serious challenge to the productive capacity of a manufacturing
organization. In addition to raw materials and finished goods, many companies
also maintain items of assets, property, inventories of work in progress,
office supplies, business firms and general operation supplies.
Inventories
often constitutes the most significant part of current assets of large
companies. In the public limited companies, inventories are approximately 60%
of current assets on the average. The US Burean of the census stated that
inventory and accounts receivable ate the two largest accounts of equal
magnitude and together they comprise almost 80% of current assets and over 30%
of total assets for all manufacturing companies in 1982.
Considering
the large sum of money that are committed to the stocks of raw materials, work
in progress and finished goods, it is therefore of paramount necessity that
these stocks be managed efficiently and effectively in order to avoid the
jeopardizing of the profit position of the firm.
In
inventory, there is an optimum level therefore inadequate inventory causes loss
of sale and disrupts the production process while excessive stock level leads
to unnecessary carrying cost and obsolescence or spoilage risks. According to
Charles T. Horngren (2007), the optimum inventory. Level lies between the
inadequate inventories and the excessive inventories. Inventory management aims
at maintaining an optimum inventory level that will be carried at the least
cost.
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