ABSTRACT
Inventory
management is one of the most important functions of manufacturing firms.The flour mills companies operating in Nigeria are facing
the problems of determining appropriate inventory level that should be kept to
ensure that customer needs are met and production process is not interrupted.
Striking a balance between overstocking and running out of stock has been a
serious challenge to the flour mills companies in Nigeria. As a result
of the negative effects of inventory shrinkage, poor management and control of
inventories, operations are hampered, customers are dissatisfied and consistent
drop in the productivity of the companies are recorded. This study examined the
relationship between inventory management practices and operational performance
of flour mills companies in Nigeria.
The
study adopted cross-sectional survey and causal research design. The target
population comprised 2,237 staff of the selected flour mills companies. A
stratified random sampling technique was used to select the sample size of 776.
A structured self-administered survey questionnaire
was adapted, validated and used for collecting data for the study. The Cronbach’s alpha coefficients for the
constructs ranged between 0.783 and 0.971. The
response rate to the 776 copies of the questionnaire administered was 82.6%.
Data were analyzed using descriptive and inferential (Pearson Product Moment Correlation
and Regression) statistics.
Findings revealed that inventory shrinkage had a
significant negative effect on customers’ satisfaction of the selected flour
mills companies in Nigeria (B = -.134;
F(1,640) = 82.196; R2 = .114, p<0.05).Inventory
investment had positive and significant influence on the competitive advantage
of the selected flour mills companies in Nigeria (B = .590; F(1,639) = 9.754; r = 0.723; R2 = .522,
p<0.05).There was a significant relationship between inventory
control and the cost effectiveness of the selected flour mills companies in
Nigeria (r = 0.775, p<0.05). Inventory turnover had positive and significant
effect on the operational efficiency of the selected flour mills companies in
Nigeria (B = .339; F(1,639)
= 6.948; R2 = .364, p<0.05). There was significant
relationship between inventory record accuracy and the customer service
delivery of the selected flour mills companies in Nigeria (r = 0.559,
p<0.05). Automated inventory system had positive and significant influence
on the productivity of the selected flour mills companies in Nigeria (B = .614; F(1,639) = 62.805; r = 0.691; R2 = .477, p<0.05).
The
study concluded that inventory management practices significantly influenced
operational performance of flour mills companies in Nigeria. It recommended
that the companies should ensure that stocks were sufficient to meet production
requirements and customer demands at all times and avoid holding unnecessary
surplus stocks that might increase holding costs and thus ensure enhanced
customer satisfaction.
CHAPTER ONE
INTRODUCTION
1.1
Background to the Study
In recent
years, many firms in the world have faced several challenges particularly in
inventory management and control, thus affecting their operational performance.
There have been cases of materials overstocking which eventually got expired or
out dated, under stocking, lack of stock-taking, theft of materials by workers
and delay in delivery of materials into the organizations among others. Many
manufacturing firms have more than 50% of total assets invested in working
capital, which includes inventory, as well as accounts receivable and accounts
payable (Beheshti, 2010; Darun, Roudaki, & Radford, 2015; Gill, Biger,
& Mathur, 2010). The general business problem is that excessive levels of
working capital invested in inventory negatively affect a company’s operational
performance (Aktas, Croci, & Petmezas, 2015; Bagchi, Chakrabarti, &
Roy, 2012; Charitou, Elfani, & Lois, 2010; Chisti, 2013; Mojtahedzadeh,
Tabari, & Mosayebi, 2011). The basic business problem is that some managers
lack strategies for efficient inventory management (Basu & Wang, 2011;
Hatefi & Torabi, 2015). Hence, there is a need by manufacturing firms to
develop strategies for managing and maintaining optimal inventory level of raw
materials and saleable products.
The basic
method of managing stock by quantity by manufacturing firms are by means of
fixing for each commodity stock levels which are recorded in the stock control
system and subsequently used as a means of indicating when some actions are
necessary. Most firms cannot work properly without stock and therefore they
have to consider its management. There is a need for organization to maintain a
minimum, ordering, hastening and maximum stock levels (Harrisson, 2001 cited in
to Munyao, Omulo, Mwithiga, & Chepkulei, 2015). Bainson and Bainson (2016)
argue that stock levels should be carefully received at suitable intervals,
such as quarterly, monthly or even weekly and adjusted to meet any changes in
circumstances. If this is not done, the original fixed level will be less than
expected, become outdated and the system of stock control is rendered
ineffective. The amount of stocks held at the warehouse of manufacturing firms
can drastically affect cost and hence finances. This therefore, demands strong
monitoring of the changing conditions of stock levels in stores.
In
addition to the foregoing facts, order lead times play a substantial effect on
operational performance and customer service of manufacturing firms. Longer
lead times for procuring and producing materials and finished goods can increase
safety stock inventory requirements and reduce the responsiveness to uncertain
customer requirements. Added to the price and quality attributes of goods,
customers are often highly sensitive to order lead times, while suppliers often
compete based on the ability to quickly respond to consumer requirements. The
goal of firms, however, is to reduce inventories without hurting the level of
service provided to customers. Olinder and Olhager (2008) cited by Agbugbla
(2014) emphasize that the requirement for short lead times are vital to the
realization of manufacturing firm’s operational performance. This implies that manufacturing
firms and other firms must put in significant efforts to reduce lead times
(Agbugbla, 2015). Olinder and Olhager (2008) further added firms that
concentrate on cycle time as a measure of productivity other things being
equal, are able to reduce delivery time and by so doing, improving quality and
ultimately, creating a satisfied customer. Therefore, the need to have an
efficient procurement lead time.
The
planning and control of inventories and related activities are critical to the
success of manufacturing industry. Managers of organizations have sought
reliable and effective inventory practices and systems to remain competitive.
Nsikan, Etim, and Ime (2015) assert that various organizations have employed
the basic inventory management techniques or inventory control methods to keep
their inventory costs in check. The various inventory management best practices
that have been adopted by organizations include Economic Order Quantity model
(EOQ), Just In Time (JIT), Vendor Managed Inventory (VMI), Collaborative
Planning (CP), forecasting and replenishment, automatic replenishment, agile
system, and material requirement planning and so on. However, some researchers
have suggested that managers who turn to inventory research may find it to be
of little significance (Boone, Craighead, & Hanna, 2008) or conclude that
it has little to offer in terms of enhancing inventory practices (Wagner,
2002). This implies that a gap exists between inventory theory and practice in
the manufacturing industry including the Nigerian flour milling industry, and
the need to bridge the theory-practice gap is imperative.
Adeyemi
and Salami (2010) and Alao (2010) in their studies attributed the gap to the
lack of knowledge and understanding of the practices, their mode of operation,
and practical relevance in the Nigerian manufacturing industry; including the
Flour milling sub-sector. In addition, this problem has accounted for the
rising increase in raw material wastages, longer lead-time, lost sales, product
shortages, backorder penalties, increasing production cost, and poor quality
issues currently ravaging the industry. It was also stated by Takim (2014) that during materials
ordering and supply, staff of flour milling companies in Nigeria responsible
for inventory control do not implement minimum, reorder and maximum stock levels,
as a result, several incidents of over stocking and stock-outs have occurred.
This has resulted into back-ordering, backlogging and lost of sales.
There are
various perspectives to the problems of inventory management by Nigerian
manufacturing industry. According to Onuoha (2012), the Nigerian manufacturing
industry’s environments are problematic and harsh. There were high and
unplanned inventories caused by lack of patronage and distress in aggregate
demand. Also, there was high cost of funds arising from depreciation of the
Naira against major currency coupled with high lending rates and extreme
difficulties in accessing credit for working capital. The small working capital
available to the majority of Nigerian manufacturing firms is managed by them to
avoid operational embarrassments. Also, raw material inputs, mostly imported,
are affected by unstable foreign exchange market and monetary policies of the
government. Raw materials inventory are then affected by inadequate foreign
exchange for importation, delays in clearing at the Nigerian ports, and poor
transportation network. Atseye,
Ugwu, and Takon, (2015) lamented that the problems
facing the manufacturing industry have negatively affected the production runs
of Nigerian firms and delivery of finished goods to customers. In addition,
many factories have been either temporarily or completely shut down whilst many
workers have lost their jobs.
The
problem was further aggravated by the bottlenecks created by Nigerian capital
and money markets with harsh requirements that could not be easily met by the
companies that are at the verge of collapse. In a study carried out by
Aro-Gordon and Gupte (2016), it was further gathered that the problems of
inventory management in the Nigerian manufacturing industry was attributed to
the failure on the part of the top management officials, to give a deserved
attention to the function of warehouses and stores as well as their inability
to employ the services of a well qualified store officers to take charge of inventory
supervision and management. Adamu (2016) added that inventory management has
been a serious challenge to many business organizations in Nigeria. Therefore,
inventory management practices in Nigeria manufacturing industry deserves
significant improvement, given the poor level of computerization,
non-determination of stock level, the involvement of illiterates and unskilled
personnel in the management of inventory (Akindipe, 2014).
The flour
milling industry comprised of 22 players segmented on the bases of their
installed capacity (Njoku & Kalu, 2015a). The industry consists of four (4)
major producers quoted on the Nigerian Stock Exchange which include: Larfage
Dangote Flour Mills Plc, Flour Mills of Nigeria Plc., Honeywell Flour Mill
Plc., and Northern Nigeria Plc (Njoku & Kalu, 2015b). These quoted flour
milling companies have a total installed capacity of 15, 360 metric tons per
day and control over 50% of the market share as well as over 85% of the flour
mill market in the Sub-Saharan African with a wider distribution network that
covers most of the countries in the Sub-Saharan African region (Njoku &
Kalu, 2015a). However, studies have reported that majority of the flour milling
companies in Nigeria are suffering from operating environment problems and
lacks a strategic operating system for inventory management and control (Njoku
& Kalu, 2015a; Takim, 2014).
In a
study on enhancing supply chain management in flour milling industry in
Nigeria, Fagade (2011) indicated that the industry faces a big challenge with
inventory management; this in turn has led to a sizeable wastage. Also
identified as associate problems include: putting materials in wrong location,
wrong labeling that come with difficulties when such materials are needed. It
was also established that the effect of this poor inventory management is not
only felt on resources wastage, it also encouraged pilfering by the custodian
of the materials as the laxity was discovered. In addition, Fagade (2011)
established that there was wrong procurement, inappropriate storage and poor
documentation of inventories in the industry. The industry also displayed gross
inability to employ qualified personnel to handle stores supervision and
management. Njoku and Kalu (2015b) discovered from the study of the effect of
strategic supply management on the profitability of flour mills in the
Sub-Saharan Africa that flour milling industry has not given inventory
management the prominence it deserves despite the varied importance of
inventory management. They also suffered from national infrastructural problems
like bad roads; unfavourable policy reforms; high cost of powering
manufacturing plants; and very high exchange rate movements (Flour Mills
Nigeria, 2014).
Nsikan et al. (2015) assert that inventory
constitutes the most significant part of the current assets of majority of the
Nigerian flour milling companies. Therefore, due to the relative largeness of
inventories maintained by the companies, considerable sum of the company’s
funds are being committed to them. It therefore becomes absolutely imperative
to manage inventories effectively so as to avoid unnecessary cost, back order
penalties during periods of peak demand by customers and ensure high level of
customer service. It is also essential for the management of flour milling
companies in Nigeria to maintain an optimum investment in inventory because it
costs a lot of money to hold down capital in excess inventory which increases
operating costs and reduces profit of the companies. In other word, when inventories
are reduced, their value is converted into cash, which improves cash flow and
return on investment.
The
studies on the relationship between inventory management practices and
performance of manufacturing companies in Nigeria have focused majorly on the
techniques for controlling inventories such as EOQ model, Just-in-Time
technique, associated with variables such as profitability, customer
satisfaction, and efficient delivery. Also, despite several models (both deterministic and stochastic) that have
been adopted in practice by manufacturing firms, an assessment of the effect of
internal inventory management practices in enhancing operational efficiency of
flour milling companies in Nigeria are currently lacking. Previous studies such
as Adamu (2016), Ogbo and Ukpere (2014), Takim (2014) and so on, have related
inventory management practices with various aspects of organizational
performance such as financial and economic performance, and most of these
studies have focused on external inventory management practices. Specific study
exclusively on the effects of inventory management practices on operational
performance of flour milling companies in Nigeria by Nsikan et al (2015) did not basically use
operational performance variables, rather used financial variables. In
addition, most studies that attempted to focus on operational performance
concentrated on solvency and operating performance of firms based in Kenya and
India such as Kamau and Kagiri (2015), Oballah, Waiganjo and Wachiuri (2015),
and Shafi (2014). Very limited studies have been carried out on internal
inventory management practices. It is therefore evident that knowledge gap
exists on the specific relationship between internal inventory management
practices and operational performance. This study intends to bridge this gap by
determining the relationship between internal inventory management practices
and operational performance of flour mills companies in Nigeria.
1.2 Statement of the
Problem
Over the
years the inventory management in most manufacturing industry like the Nigerian
Flour Mill Industry is often criticized for being a cost centre. The criticism
is raised because Purchasing Department was spending money on inventory while
Stores or Warehouses were holding huge stock of inventory, blocking money and
space (JerutoKeitany, Wanyioke, & Richu, 2014; Kimaiyo & Ochiri, 2014).
However, majority of the manufacturing firms throughout the world including the
Nigerian Flour Mills Company have recognised the importance of inventory management,
to be a source of competitive advantage, costs reduction, and customer
satisfaction. This change in the mindset of companies today has spurred an
increasing body of academic research attempting to reveal a relationship
between inventory management practices and firms performance.......
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