The Use of Supply Chain Management in Manufacturing Organisation to Control Inventory Levels While Providing Adequate Service to Customers

 The Use of Supply Chain Management in Manufacturing Organisation to Control Inventory Levels While Providing Adequate Service to Customers

Inventory has been defined in so many ways by different authors. The various definitions given by these authors are influenced by their orientations and their specific fields or areas of interest. Among these definitions are the following.

Garet and Silver (1973), define inventory as an idle resources of any kind that posses economic value. It includes physical goods, stock, pile of managerial and personal information, cash and production equipment. It is a list or schedule of articles, human or material resources that are needed in the production process.

The American institute of certified Accountants (1961) committee on accounting procedure in it accounting research bulletin No. 43 used the world inventory to designate the aggregate of those items of tangible personal property which are:

1. Held for sale in the ordinary course of business
2. Use in the process of production for sale.
3. To be consumed in the production of goods and services.

Woodlyn A. Johnson and Douglas C. Montgometry (1976) defined inventory as an accumulation that will be used to satisfy some future demand for that commodity. This embraces raw materials, purchased parts, semi finished product and finished product in manufacturing, spare parts in maintenance operations, purchased product in retailing and purchase supplies in service operations.

The above definition emphasizes the significance of inventory in any organization. Inventory represents and investment and therefore consist of the aggregate of those items of tangible personal property which are made up of:

1      Raw Material inventory:- This serves as the basic material input that passes through the manufacturing process to be converted into finished products. In order words, it is the value of materials and components used in the manufacturing of products.

• Work–in-progress inventory:- These are products that are not fully completed in the manufacturing process. The level of work in progress inventory held by the length of production process.
• Finished goods inventory:-These are items that are fully completed and ready for sale.
• Supplies:- These are items, which are required to manufacture the products, but do not form part of the finished products. Examples of supplies are tools, materials, oil and lubricants, spare parts e.t.c.

Having known what inventory is from the various definitions given above, it is necessary to state that this study will not focus on inventory generally but will be limited to raw materials inventory and finished goods held in Nigeria Bottling Company Plc.

• REASONS FOR HOLDING INVENTORIES

Manufacturing companies do hold inventory for so many reasons. Among the important reasons for carrying inventories are:-

1 Anticipated changes in the cost of materials:

Inventories are sometimes carried by companies because of anticipated changes in the cost of raw materials. For instance, if a company expects that the price of the supplies of it basic raw material will in crease in the near future, the company may stock large quantities to take advantage of the lower price prevailing.

2. To meet variation in product Demand:

Companies are often faced with fluctuation in demand over time and as a result, they might want to build inventory during the period of low demand in anticipations of peak demand period. The inventory which is built up by the company will enable it operate at a fully constant production rate over the entire season, there by avoiding the cost of changing production rates. Also it will help in avoiding overtimes, subcontracting, cost of sales, back order penalties during period of peak demands.

• Inventories may be carried because of uncertainties that exist:

Future requirement for an item are usually not known with certainty but instead must be forecasted and these forecasts are of cause subject to errors. To project against loses resulting from shortages when the actual demand exceeds the forecast, it is often economical to carry inventory above that level which would result from planning strictly based on fore cast. This extra inventory is called safety stock and the amount required for that purpose is a function of the uncertainty in the forecast.

5. To meet the Technical Requirement of a production system:

Some inventory are carried for some period of time, to meet the technical requirement of the production system e.g storage of cassava for some days for fermentation in garri processing industry.

6. To Take Advantages of Bulk purchase Discounts:

Inventory is often carried by companies because they purchased in larger quantities to take advantage of bulk purchase discounts.

In summary therefore, inventories are held to absorb planning errors and unforeseen fluctuation in supply and demand and to facilitate smooth production and marketing functions. In other words, inventory is held by companies for precautionary, transaction and speculative purposes.

• INVENTORY MANAGEMENT

Any management team that hopes to succeed must as a matter of necessity pay special attention to inventory management. Inventory management involved inventory planning and inventory control.

The objective of inventory planning and control is mainly to avoid economic consequences of stock –out and over stocking.

STOCK OUT

Stock out can be defined as a situation where an organization has insufficient material required for production. It refers to a situation where customers demand cannot be met because the stock is exhausted. The effect of such a situation are:-

1. Machines are left idle and some of them may develop technical problems such as rusting corrosion etc.
2. Workers are paid for the period idle time so that they will remain stand by far commencement of production on arrival of materials
3. Customer supply may be interrupted and they may look for alternative sources.
4. A long delay in the supply of materials may lead to complete liquidation of the business
5. Loss of goodwill
6. Loss of qualified employees.

• OVER STOCKING

Overstocking is a term used to describe a situation where a business organization maintains more than necessary materials at any given time. One of the objectives of materials planning and control is to ensure that such a situation does not arise. The economic implications of over stocking are

1. Capital is unnecessarily tied up to the excess stock
2. There is risk of deterioration and obsolescence if materials are not used up after a period of time.
3. Cost of storage will increase.
4. There is risk of damages, pilferages and evaporation etc. particularly where the materials are perishable in nature.
5. There is increased risk of theft of the materials or careless usage of the materials because of the erroneous notion by staff that materials are surplus.

2.11 INVENTORY PLANNING

Planning involves setting objectives and the strategies, policies and procedure for achieving them. It is a decision making since it involves selecting from among alternatives plans are not self-achieving, therefore activities need to be monitored to ensure that they conform to plan action inventory planning takes into consideration the type and quality of materials required. This must be defines exactly and ordered at right price, delivered on time and inspected for faults. In all cases of planning, adequate information is inevitable. Data relating to past usage, current requirements and anticipated future needs are some of the vital information needed for effective planning. It is with this information that management can formulate inventory policies which relate to the procurement, storage, utilization and pricing of materials as well as internal control procedures.

In anticipation of requirement, management employ, forecasting tools. It is the accuracy of fore casting that determines the success or failure of inventory planning.

A key aspect of any decision making situation is being able to predict the circumstances that surround the decision and that situation, such prediction being considered as part of the fore casting process and identified as a sub-part of the decision making process.

A forecasting may be made by means of sophisticated analysis or may be the result of intuition. In the production environment, a major needs for forecasting is in the area of sales. Firms have to plan production schedule and inventories to meet sales and demand at a reasonable cost. Other areas that need forecasting are materials requirement, maintenance requirement and plant capacity available for production. Inventory planning is there fore essential for high production and cost advantages.

• INVENTORY CONTROL

Inventory control relate to the steps taken by managers to confirm to the plan. The control process involves maintaining various accounting records, which will be compared with the plan to evaluate the conformity with the plan. Reports are usually demanded from various units associated will material handling. The report helps to evaluate the accuracy of the plan and identify where corrective actions should be taken.

Controlling is a follow-up activity to planning, which involves comparing actual and planned inventory position.

Controlling is the measurement; evaluation and correction of activities to ensure that event conform to plans. It is a measure of performance against goals and plans showing where negative deviation exists and taking the necessary steps to correct them.

Erbert, R.J. defined inventory control as a systematic method of recording and reporting the movement of materials, work in progress and finished goods through out a company, it is the technique of maintaining stock and keeping items as desired.

Control process commences once planning is accomplished. It’s basic function revolves around comparing of actual and planned inventory position, including taking necessary action if need be to ensure that the inventory, terms would be available when they are required.

To sum up, inventory control will involve the following functions.

1. Planning the inventory requirement of the company.
2. Purchasing raw inventory
3. Receiving raw materials
4. Storage and issue of materials
5. Storage and issue of finished goods
6. Controlling of the materials usage and levels
7. Controlling of the work in progress

Control is exercised by the use of Bin-cards, store ledger, cards, store issue and receipt, voucher, local purchase orders, material return note, scrap reports and other document. This function is also facilitated where computer based system are installed.

• INTERNAL CONTROL

Without a proper system of internal control, not all the plans and decision on with respect to inventory (stock and work-in-progress) may be achieved. This is because inventory is easily exposed to theft, pilferage, deterioration and obsolesce. An adequate system of internal control should guard against the misuses and wastage of inventories internal control may act as a complement of other methods of control.

Some ways of exercising control internally are:

1      Setting maximum and minimum levels for each item of inventory

2. Independent recording of inventory in store ledger control accounts and other continues record like bin cards.
3. Periodic reconciliation of inventory records and financial account.

4      Periodic review of conditions of inventory to determine damaged, slow –moving and obsolete inventory.

5      Responsibility for safe–guarding inventory should be properly assigned to particular individual.

• RE-ORDERING ARRANGEMENT FOR EFFECTIVE CONTROL SYSTEM.

—-This article is not complete———–This article is not complete————

This article was extracted from a Project Research Work Topic

“THE USE OF SUPPLY CHAIN MANAGEMENT IN MANUFACTURING ORGANISATION TO CONTROL INVENTORY LEVELS WHILE PROVIDING ADEQUATE SERVICE TO CUSTOMERS”

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