Question

efficiency inventory management is reflected in the liquidity and profitability of the firm." explain.

Answer 1

In recent years, Inventory Management has attracted a great deal of attention from people both in academia and industries. A lot of resources have been devoted into research in the inventory management practices of organizations. It represents one of the most important assets that most businesses posses, because the turnover of inventory represents one of the primary sources of revenue generation and subsequent earnings for the company. In the manufacturing companies, nearly 60% to 70% of the total funds employed are tied up in current assets, of which inventory is the most significant component (Carter, 2002). Thus, it should be managed in order to avail the inventories at right time in right quantity. Inventory can be also viewed as an idle resource which has an economic value. So, better management of the inventories would release capital productively. Inventory control implies the coordination of materials controlling, utilization and purchasing. It has also the purpose of getting the right inventory at the right place in the right time with right quantity because it is directly connected with the production. The objective of any organization is to get a good return out of every cedi invested in the company. According to Pandey (2005) management through their policies, coordination, decision and control mechanisms must maximize the return on investment (ROI). Peterson and Joyce (2007) while supporting Pandey (2005) states that it is clear that ROI can be maximized either by increasing profit margin or by reducing the capital employed or by both. In the market situation, sales price cannot be increased (rather there is a demand to reduce it) and as such profit can be increased only by reducing the material costs. On the other hand, the opportunity to reduce the overheads and capital employed is more by inventory reduction (Drury, 2002). It is thus evident that the ROI can be maximized by either reducing the material cost or reducing the current assets by way of inventory of materials or can be optimized by increasing profits. Peterson and Joyce (2007) maintain that it is evident that the inventory management can make a direct contribution in increasing profitability in the following ways: (a) By deciding inventory norms nationally and through control systems. Inventory turnover can be maximized which in turn will maximize current assets turnover and ROI. (b) By proper planning and control of spare parts, capacity utilization can be increased which 2 will increase the turnover of fixed assets and consequently increase ROI. (c) By developing dependable sources and purchasing quantity materials at competitive prices. Materials cost per naira of sales can be brought down which will increase the profit margin. (d) By developing proper systems and control on issue of materials, the consumption can be minimized, reduction in wastes and rejects, resulting in reducing the materials cost, which will increase the profit margin. (e) Establishment of farms to grow the major raw materials and less dependent on importation. Unless operators in the manufacturing industry understand the true costs associated with inventory management and poor inventory productivity, and can review the benefits of alternative approaches, they will continue to be complacent, accepting average profit instead of better performance. This study is of the view that the operators in the industry adopting a holistic operating model that improves inventory productivity, enhances sales margin, and saves millions of Cedis in operating costs and especially on costs associated with inventory. Saving costs on inventory starts with a comprehensive organizational focus on inventory management. Therefore, the focus of this study is achieving profitability through effective management of inventory with emphasis on procurement, receipt of materials, holding and ordering costs, inventory control, and foreign currency for import.