Inventory Management: A Tool of Optimizing Resources in a Manufacturing Industry A Case Study of Coca-Cola Bottling Company, Ilorin Plant

Inventory constitutes the most significant part of current assets of larger majority of Nigerian manufacturing industries. Because of the relative largeness of inventories maintained by most firms, a considerable sum of an organization’s fund is being committed to them. It thus becomes absolutely imperative to manage inventories efficiently so as to avoid the costs of changing production rates, overtime, sub-contracting, unnecessary cost of sales and back order penalties during periods of peak demand. The main objective of this study is to determine whether or not inventories in the Nigeria Bottling Company, Ilorin Plant can be evaluated and understood using the various existing tools of optimization in inventory management. The study methods employed include the variance analysis, Economic Order Quantity (EOQ) Model and the Chi-square method. The answer to the fundamental question of how best an organization which handles inventory can be efficiently run is provided for in the analysis and findings of the study. Consequently, recommendations on the right quantity, quality and timing of material, at the most favourable price conclude the research study. company’s profit as well as increase its return on total assets. It is thus the management of this economics of stockholding, that is appropriately being refers to as inventory management. The reason for greater attention to inventory management is that this figure, for many firms, is the largest item appearing on the asset side of the balance sheet. Essentially, inventory management, within the context of the foregoing features involves planning and control. The planning aspect involves looking ahead in terms of the determination in advance: (i) What quantity of items to order; and (ii) How often (periodicity) do we order for them to maintain the overall source-store sink coordination in an economically efficient way? (ii) How often (periodicity) do we order for them to maintain the overall stock coordination in an economically efficient way? The control aspect, which is often described as stock control involves following the procedure, set up at the planning stage to achieve the above objective. This may include monitoring stock levels periodically or continuously and deciding what to do on the basis of information that is gathered and adequately processed. Effort must be made by the management of 136 S. L. ADEYEMI AND A. O. SALAMI any organization to strike an optimum investment in inventory since it costs much money to tie down capital in excess inventory. In recent time, attention was focused on the development of suitable mathematical tools and approaches designed to aid the decision-maker in setting optimum inventory levels. Economic order quantity model (EOQ) has thus been developed to take care of the weaknesses emanating from the traditional methods of inventory control and valuation, which to some extent has proved useful in optimizing resources and thus, minimizing associated cost. Financial analysts have sounded enough warning on the danger expose to the long run profitability as well as continuity of business concern when its inventories are left unmanaged. First, a company, which neglects it management of inventory, runs the risk of production bottlenecks and subsequently unable to maintain the minimum investment it requires to maximized profit. Second, inventories that are inefficiently managed may apart from affecting sales create an irreparable loss in market for companies operating in highly competitive industry. Invariably, a company must neither keep excess inventories to avoid an unnecessary tying down of funds as well as loss in fund due to pilferage, spoilage and obsolescence nor maintain too low inventories so as to meet production and sales demand as at when needed. Therefore, the mere fact that ineffective inventory management affects virtually the organizational objectives necessitates this type of research work. The researcher has taken Nigeria Bottling Company as a case study so as to clearly see if their resounding success can be attributed to the kind of inventory system the company embarks on. Since their production process requires a lot of raw materials and despite the economic condition of the country at any given time, production has never ceased and their products have never been scarce. The objectives of this study are as follows: (i) To describe the inventory management procedures currently in use in Nigeria Bottling Company, llorin Plant (ii) To determine whether or not inventory management in the Nigeria Bottling Company can be evaluated and understood using the various existing tools of optimization in inventory management and, (iii) To determine the optimality in the company inventory policies. 2. INVENTORY MANAGEMENT: DEFINITIONS AND CONCEPTS There is need for installation of a proper inventory control technique in any business organization in developing country like Nigeria. According to Kotler (2000), inventory management refers to all the activities involved in developing and managing the inventory levels of raw materials, semi-finished materials (workin-progress) and finished good so that adequate supplies are available and the costs of over or under stocks are low. Rosenblatt (1977) says: “The cost of maintaining inventory is included in the final price paid by the consumer. Good in inventory represents a cost to their owner. The manufacturer has the expense of materials and labour. The wholesaler also has funds tied up”. Therefore, the basic goal of the researchers is to maintain a level of inventory that will provide optimum stock at lowest cost. Morris (1995) stressed that inventory management in its broadest perspective is to keep the most economical amount of one kind of asset in order to facilitate an increase in the total value of all assets of the organization – human and material resources. Keth et al. (1994) in their text also stated that the major objective of inventory management and control is to inform managers how much of a good to re-order, when to re-order the good, how frequently orders should be placed and what the appropriate safety stock is, for minimizing stockouts. Thus, the overall goal of inventory is to have what is needed, and to minimize the number of times one is out of stock. Drury (1996) defined inventory as a stock of goods that is maintained by a business in anticipation of some future demand. This definition was also supported by Schroeder (2000) who stressed that inventory management has an impact on all business functions, particularly operations, marketing, accounting, and finance. He established that there are three motives for holding inventories, which are transaction, precautionary and speculative motives. The transaction motive occurs when there is a need to hold stock to meet production and sales requirements. A firm might also decide to hold additional amounts of stock to cover the possibility that it may have under estimated its future production and sales requirements. This represents a precautionary motive, which applies only when future 137 INVENTORY MANAGEMENT demand is uncertain. The speculative motive for holding inventory might entice a firm to purchase a larger quantity of materials than normal in anticipation of making abnormal profits. Advance purchase of raw materials in inflationary times is one form of speculative behaviour. 2.1 Inventory Model: The Economic Order Quantity (EOQ) Model Undoubtedly, the best-known and most fundamental inventory decision model is the Economic Order Quantity Model. Its origin dated back to the early 1900s. The purpose of using the EOQ model in this research is to find out the particular quantity, which minimize total inventory costs that is the total ordering and carrying costs. 2.1.1 EOQ Assumptions The EOQ has been previously defined by Dervitsiotis (1981), Monks (1996), Lucey (1992), and Schroeder (2000) as the ordering quantity which minimizes the balance of cost between inventory holding cost and re-order costs. Lucey (1992) stressed further that to be able to calculate a basic EOQ, certain assumptions are necessary: (i) That there is a known, constant, stock holding costs; (ii) That there is a known, constant ordering costs; (iii) That the rates of demand are known (iv) That there is a known constant price per unit (v) That replenishment is made instantaneously, that is the whole batch is delivered at once. (vi) No stock-outs are allowed. It would be apparent that the above assumptions are somewhat sweeping and that they are a good reason for treating an EOQ calculation with caution. Also, the rationale of EOQ ignores buffer stocks, which are maintained to cater for variations in lead-time and demand. The above assumptions are wide ranging and it is unlikely that all could be observed in practice. Nevertheless, the EOQ calculation is a useful starting point in establishing an appropriate reorder quantity. The EOQ formula is given below; it’s derivation and graphical presentation. EOQ = 2CoD ........ (1) Cc Where Co, Cc and D denote the ordering costs, carrying cost and annual demand respectively. Note also that Annual stock = Q/2, Total annual carrying cost = CcQ/2, Number of orders per annum = D/Q, Annual ordering costs = CoD/ Q and Total cost = CcQ/2 + CoD/Q..(2) In the above formula, Q is defined as the result of the calculated EOQ. The order quantity, which makes the total cost (TC) at a minimum, is obtained by differentiating with respect to Q and equating the derivative to zero the above total cost equation 2. Thus, dTc/ dQ = Cc/2 – CoD/Q and when dTc/dQ = 0 cost is at minimum. DCo/Q = Cc/2 Q = 2DCo / Cc and Q which represent the EOQ formula would now be The EOQ formula is given below; it’s derivation and graphical presentation. EOQ = 2CoD Cc Graphically, the EOQ can be represent in the Figure 1.