Inventory control as an effective tool for cost Control in an organisation

INTRODUCTION
1.1 BACKGROUND OF THE STUDY
In general, inventory control and cost control techniques have become a
household name in the business of manufacturing firms, that boast of the
possession of goods or stocks, that hope to sell when the demand arises. It is so
important to them, such that their survival as a corporate entity, hinges on how
they are able to coordinate and control their applications. Inventory is a term
that has been explained in various ways by various scholars, inventories are
stocks of the product a company is manufacturing for sale and components that
makes up the product. They are raw-materials, work in progress and finished
goods and they constitute various form of inventory in a manufacturing firm.
Inventories are the stocks of material or finished goods which a company keeps
in anticipation of demand or consumption.
In the past, inventory management was not seen to be necessary. In fact excess
inventories were considered as indication of wealth. Management by then
considered overstocking beneficial. But today firms have started to embrace
effective inventory control. The goal of effective inventory control is to be sure
that optimum levels of inventories are available that there are minimal stock
outs, (i.e running out of stock), and that inventory is maintained in a safe place
and is always readily accessible to the proper personnel.
Consequently, there is a need for the firms to undertake effective inventory
control with the aims of:
a) Ensuring a continuous supply of materials to facilitate
b) Maintaining sufficient stock of raw materials in periods of short supply
and anticipated price changes
c) Minimizing the carrying cost and time virtually every company has one
form of inventory or the other. The level of the forms of inventories of a firm
depends on the nature of its business manufacturing.
The scope of inventory management concerns the fine lines between the
replenishment lead time, carrying cost of inventory asset management,
inventory forecasting, inventory valuation, inventory visibility, future inventory
price forecasting, physical inventory, available physical space for inventory,
quality management replenishment, returns and defective goods and demand
forecasting. Balancing these competing requirements leads to optimal inventory
levels, which is an on-going process as the business need shift and react to the
wider environment.
Inventory management involves the monitoring of material moved into and out
of stock room locations and the reconciling of inventory balance. Management
of inventories with the primary objective of determining/controlling stock levels
within the physical distribution function to balance the need for product
availability against the need for minimizing stock holding and handling cost.
Policies relate to what levels of inventories are to be maintained and which
vendors will be supplying the inventory. How and when inventories will be
replenished, how inventory records are create, managed and analyzed and what
aspect of inventory management will be out sourced are also importance
component of proper inventory management.
On the other hand, cost control refers to steps taken by management to assure
that all segments of the organization function in a manner consistent with its
policies. For effective cost control, most organization use standard cost system,
in which the actual cost are compared against standard cost for performance
evaluation and deviations are investigated from remedial actions. Cost control is
also concerned with feedback that might change any of all the future plans, the
production method, or both. From the foregoing, it can be categorically asserted
that how strategic a firm manages its stocks or inventories will defines its cost
control techniques and budgets. It is therefore, the focus of this research study
to carry out and assessment of inventory control as an effective tool for cost
control in an organization, using the inventory and cost control techniques of
Cadbury Nigeria plc as our case study.

1.2 STATEMENT OF PROBLEMS
In the last couple of decades, the numbers of products offered to the market
have generally exploded. As the same time, the product life time has decreased
drastically. The combination of the two trends leads to increase in accuracy of
the demand forecasts, leading to firms facing an increase in demand uncertainty
resulting in the increase in inventory levels. It is important that a company
maintains adequate stocks of material for the continuous supply to the factory
for an uninterrupted production, in doing so such a company is exposed to two
undesirable points namely excessive carry cost and the risk liquidity, while
inadequate inventory can lead to production hold-ups and failure to meet
delivery commitments. The study is concerned with problem of how to
determine and maintain optimum level of inventory investment.
It cannot be over-emphasized that inventory keeping is an indispensable activity
in the activity of every business firms that deals in stocks. This is because these
stocks, depending on how they are warehoused or better still managed, can
make or mar them. It is not only just to keep record of these inventories; there is
also the need for management to maintain the cost objectives put forward in the
planning stage of inventory management. Evidence has also shown that a lot of
firms have failed management control and thus, they have been made to count
their losses. How then can the firms maintain adequate or proper inventory
control alongside with cost control? The answer to this question and many
issues from the basis for the appraisal is this research study.

1.3 OBJECTIVES OF THE STUDY
To know how effective inventory control is when it comes to
controlling cost in an organization.
To outline the relationship that exists between inventory control and
the cost control system of an organization.
To know how effective inventory control technique.

1.4 RESEARCH QUESTIONS
How effective is inventory control when it has to do with an organization
cost control practices?
What are the essential relationship existing between inventory control and
cost control?
How can planned effective inventory control techniques contribute to the
profitability in a firm?

1.5 HYPOTHESES OF THE STUDY
H0: Inventory control management is not an effective tool for cost control
in an organization.
H1: inventory control management is an effective tool for cost control in
an organization.
H0: There is no relationship existing between cost control and inventory
control.
H1: There is relationship existing between cost control and inventory
control.
H0: A well-planned and effective inventory control technique does not
contribute to the profitability in a firm.
H1: A well-planned and effective inventory control technique contributes
to the profitability in a firm.

1.6 SIGNIFICANCE OF THE STUDY
Prior to the eighteenth century, possessing inventory was considered a sign of
wealth. Generally, the more inventories you had, the more prosperous you were.
As at then, inventory existed in stores of wheat, herd of cattle and rooms full of
pottery and other manufactured goods. While these inventories were been kept,
their effective cost objective were also being defined at the same time, in order
to allow the firm achieve its objectives.
Based on this, when this research study is completed, it will be beneficial to:
The management of Cadbury Nigeria plc and other manufacturing firms
in the country. It will essentially help to bring out how relevant inventory
control and effective cost control are to their organizations if well
manipulated. It also let them see how important it is to take stock and
evaluate it correctly.
Academic student: it will allow the student to have an insight of what the
practice of inventory control is outside school environment. It will also
provide them with information for their further study.

1.7 SCOPE AND LIMITATION OF THE STUDY
The research study will basically focus on Cadbury Nigeria plc, taking into
cognizance its inventory control practices and technique or steps and try to
bring out how relevant it can be to the organization’s activities. An attempt will
also be made to assess the cost control technique of the company in order to see
how they synergize with their inventory control practices.
The limitation that will likely be faced in the course of this project shall include;
limited timing for the completion of the project, shortage of required finances
for the work, non-cooperation on the part of some of the respondent will be
given the questionnaire.

1.8 DEFINITION OF TERMS
The following are defined in the work
INVENTORIES: These are stock of materials or finished goods which a
company keeps in anticipation of demand or consumption. They constitute a
sizeable portion of the total assets of many firms.
INVENTORY MANAGEMENT: Is the process which integrates the flow of
supplies into, through and out of an organization to achieve a level of service.
RAW MATERIAL: Inputs into the production process that will modify or
transform into finished goods.
WORK IN PROGRESS: Semi finished products found at various stages in the
production operation.
STOCK LEVEL- One of the most objective of a stock control system is to
ensure that “stock-out” do not carry occur and that surplus stock are not carried.
STOCK OUTS: Occurs when there is insufficient stock to meet production
demands and this can lead to loss of customer goodwill, reduced profit etc
MINIMUM STOCK LEVEL: The minimum stock level is below which stock
should not be allowed to fall. If stock so below this level there is a danger of the
stock out resulting in production stoppage.
MAXIMUM STOCK LEVEL: The maximum stock level above which stock
should not be allowed to rise. It is desirable that the level should be as low as
possible but of course it must all forecast usage of materials and time type in
delivering.
CONTROLS: The activity of determining the range and quantity of material which should be stocked and regulation of receipts and issues of the materials.
LEAD TIME: The time normally taken in replenishing inventory after the order has been placed. It is the time interval between the ordering of inventory and time of its receipts.
CARRYING COST: Expenses incurred from storing raw materials
ORDER COST: The variable cost of placing an order for raw materials.
RE-ORDER LEVEL: This is also known as economic ordering quantity
(E.O.Q). It is the most economic quantity to order; in order words, it is the
ordering quantity at which the controllable cost of ordering is minimized.
RE-ORDER LEVEL: This is the point at which is essential to initiate purchase
requisition for fresh supplies of the materials. This point will be higher than the
minimum stock level, so as to cover such emergencies as abnormal usage of
material.