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

(A Case Study Of Cadbury Nigeria Plc)

5 Chapters
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52 Pages
|
16,334 Words

Inventory control is a vital component of cost management within an organization, serving as an effective tool to optimize expenses and enhance profitability. By carefully managing the flow of goods and materials, companies can minimize carrying costs associated with excess inventory, reduce the risk of obsolescence, and streamline operations. Implementing efficient inventory control systems enables organizations to accurately forecast demand, procure materials at optimal prices, and minimize stockouts, thereby avoiding the costs associated with emergency orders or lost sales opportunities. Moreover, effective inventory control facilitates improved cash flow management, as resources are allocated more efficiently towards productive activities rather than tied up in excess inventory. Overall, by prioritizing inventory control measures, organizations can achieve significant cost savings while maintaining operational agility and responsiveness to market fluctuations.

ABSTRACT

The topic of this research work is inventory control as an effective tool for cost control in an organization using Cadbury Nigeria plc as a case study. Inventory control can be defined as the implementation of management’s inventory policies in a manner that assures that the goal of inventory management is met. The management of various companies is faced with the problem of at what level inventory should be held in order to have a healthy operation that is optimal stock level that will minimize the cost of stocks the (ordering and holding costs). The researcher objective is to know the effectiveness of inventory control on cost control. In this course of carrying this research work various techniques or methods of data collection were used. They include questionnaires, interviews and observations. A sample size of 73 workers in Cadbury Nigeria plc was also used and was chosen among the number of department/sections of worker using Bowley’s proportional allocation formula. The researcher makes use of three hypotheses in this study to analyze the research project. The researcher made used of Z-test in testing the formulated hypothesis. The researcher used the descriptive statistical tools (tables, figures and percentages) in the presenting and analyzing the data generated from this study. From the analysis, the researcher finds out that effective management of inventory will help a firm to control its cost and contribute to the actualization of a firm organizational goal. The researcher therefore recommends that organization should apply the technique of inventory control with the objective of cost control so as to enable the goal of profit maximization to be attained.

TABLE OF CONTENT

Approval page I
Dedication II
Acknowledgement III
Abstract IV

CHAPTER ONE 1
1.0 Introduction 1
1.1 Background of the study 1
1.2 Statements of the problem 4
1.3 Objectives of the study 5
1.4 Research Questions 5
1.5 Hypothesis of the study 6
1.6 Significant of the study 6
1.7 Scope and limitation of the study 7
1.8 Definition of terms 8
Reference 10

CHAPTER TWO
2.0 Review of related literature 11
2.1 Inventory management: Definition of concepts 11
2.2 Problems associated with inventory management 15
2.3 Impacts of improper management of inventory 18
2.3.1 Ideas for improvement 20
2.3.2 Implementation and execution 23
2.4 Benefit of inventory management and control 24
2.4.1 Process of inventory management and control 27
2.4.2 Optimum inventory level 27
2.4.3 Reasons for holding inventory 28
2.5 costs associated with inventories 31
2.6 inventory cost control management 34
2.7 inventory valuation method 37
2.8 Inventory control management and its application 41
2.8.1Technique of inventory control 42
2.9 Historical background of Cadbury Nigeria plc 45
Reference 47

CHAPTER THREE
3.0 Research design and methodology 48
3.1 Research design 48
3.2 Sources of data 49
3.3 Research instrument 50
3.4 Reliability/ validity of research instrument 51
3.5 Population of the study 51
3.6 Sample and sampling procedures 52
3.7 Administration of research instrument 55
3.8 Method of data analysis 56 3.9 Decision Criterion for the validation of hypothesis 56
Reference 57

CHAPTER FOUR
4.0 Data presentation and analysis 58
4.1 Data presentation and analysis 58
4.2 Testing of hypotheses 79

CHAPTER FIVE
Summary of findings, conclusion and recommendation
5.1 Summary of findings 87
5.2 conclusions 88
5.3 Recommendations 89
Bibliography 91
Appendix 93

CHAPTER ONE

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.

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

Inventory control is indeed a crucial tool for cost control in an organization, particularly for businesses that deal with physical goods and materials. Properly managed inventory can help streamline operations, reduce expenses, and optimize overall financial performance. Here’s how inventory control contributes to effective cost control:

  1. Reduced Holding Costs: Holding or carrying inventory incurs costs such as storage space, insurance, and utilities. Overstocking can tie up valuable resources that could be used elsewhere in the business. Effective inventory control ensures that inventory levels are optimized to minimize these holding costs.
  2. Prevention of Stockouts: Stockouts occur when a business runs out of a particular product, which can result in lost sales and dissatisfied customers. By maintaining appropriate inventory levels, organizations can prevent stockouts and avoid potential revenue losses.
  3. Minimized Obsolescence: Excessive inventory can lead to product obsolescence, where items become outdated or obsolete before they are sold. This results in losses as the business may need to sell them at a discount or even write them off entirely. Proper inventory control helps reduce the risk of holding obsolete inventory.
  4. Improved Cash Flow: Excess inventory ties up cash that could be used for other purposes, such as investments or paying off debts. By optimizing inventory levels, organizations can free up cash and improve their cash flow position.
  5. Efficient Order Fulfillment: Efficient inventory control helps streamline order fulfillment processes. With accurate and up-to-date inventory information, businesses can process orders more effectively, reducing the time and labor required to locate and ship products.
  6. Lower Ordering Costs: Placing orders for inventory incurs costs such as processing, shipping, and supplier communication. By using inventory control techniques like economic order quantity (EOQ) and just-in-time (JIT) inventory systems, organizations can minimize the frequency of orders and thus reduce associated costs.
  7. Better Supplier Relationships: Effective inventory management allows businesses to provide suppliers with accurate demand forecasts and order quantities. This can lead to better negotiations, discounts, and improved relationships with suppliers, resulting in potential cost savings.
  8. Reduced Waste: Inventory control can help prevent overproduction, which can lead to waste. By closely aligning production levels with actual demand, businesses can avoid excess production and reduce waste.
  9. Enhanced Decision Making: Accurate inventory data empowers organizations to make informed decisions about procurement, pricing, and product promotion. This helps in aligning business strategies with market demands, leading to optimized sales and profitability.
  10. Lower Costs of Transportation: Managing inventory effectively can result in more efficient transportation and logistics. By consolidating shipments and optimizing delivery routes, businesses can save on transportation costs.
  11. Mitigated Risk: Economic downturns or market shifts can impact demand for products. Effective inventory control enables organizations to respond swiftly to changing market conditions and adjust their inventory levels accordingly, reducing the risk of excess stock during downturns.

In conclusion, inventory control plays a pivotal role in cost control within an organization by minimizing holding costs, preventing stockouts, reducing waste, enhancing cash flow, and facilitating efficient operations. By employing inventory management techniques and technologies, businesses can achieve a balance between meeting customer demand and controlling costs, leading to improved profitability and competitiveness.