Inventory Management Practices and Financial the Performance of Manufacturing Companies in Nigeria

Eneje, Nweze, & Udeh (2012) investigated the effects of raw materials inventory management on the profitability of breweries in Nigeria using a cross sectional data from 1989 to 2008 which were gathered from the annual reports of the sampled firms. Measures of profitability were examined and related to proxies for raw materials inventory management by brewers. The multiple regression models were applied in the analysis. The study revealed that the local variable raw materials JAFM JAFM JAFM inventory management designed to capture the effect of efficient management of raw material inventory by a company on its profitability is significantly strong and positive and influences the profitability of the firms in Nigeria. They concluded that efficient management of raw material inventory is a major factor to be contented with by Nigerian brewers in enhancing or boosting their profitability. Another study suggesting a positive relationship between inventory management and performance was Eroglu & Hofer (2011), which used the Empirical Leanness Indicator as a measurement for inventory management. They argued that inventory leanness is the best inventory management tool. Lean production considers inventory as a form of waste that should be minimized and has become synonymous with good inventory management Their study on USA manufacturing firms covering the period 2003-2008 found that leanness affects profit margins. Mohamad, Suraidi, Rahman & Suhaimi (2016) in a case study of a textile chain store in Malaysia, examined the relation between inventory management and company performance and found that their inventory days was significantly related to return on assets (used proxy for company performance). The study identified that the textile chain store company had unorganized inventory arrangement, large amount of inventory days and lacked accurate stores balances due to unskilled workers. Prempeh (2015) studied the impact of efficient inventory management on the profitability of manufacturing firms in Ghana, using raw material inventory management and profit as variables. Cross sectional data from the annual reports of four manufacturing firms listed on the Ghana Stock Exchange were analysed using Ordinary Least Squares and multiple regression techniques. The study found a significantly strong and positive relationship between raw material inventory management and profitability. Lwiki, Ojera, Mugenda & Wachira (2013) examined the impact of inventory management on the financial performance of sugar manufacturing firms in Kenya. Both primary and secondary data were analysed using descriptive statistics and correlation analysis, and they found that inventory management had positive correlation with financial performance. Ogbo, Onekanma & Ukpere (2014) examined the relationship between effective inventory management and organization’s performance in Nigeria. This case study of a bottling company using descriptive statistics and Chi- Square non-parametric test found that inventory management enhanced return on investment. Augustine & Agu (2013) studied the effect of inventory management on organizational effectiveness and profitability of manufacturing companies in Nigeria. Using Pearson product moment correlation coefficient and linear regression techniques, the study found positive correlation between inventory management and profitability. Abdulraheem, Yahaya, Isiaka & Aliu (2011) studied the impact of inventory management on the performance of small businesses in Nigeria. Using multiple regression technique the study found that inventory management had a strong positive impact on profitability among small businesses in Nigeria. Olufemi & Olubanjo (2009) used a sample of 50 Nigerian quoted non-financial firms for the period of 1996- 2005. Their study utilized panel data econometrics in a pooled regression where time series and cross-sectional observation were combined and estimated. They found a significant negative relationship between operating profit and the inventory turnover in days for a sample of 50 Nigerian firms listed in the Nigerian Stock Exchange. Raheman & Nasr (2007) studied the effects of inventory turnover in days and current ratio of the net operating profit of Pakistani firms. They selected a sample of 94 Pakistani firms listed on the Karachi Stock Exchange for a period of six years from 1999-2004 and found a strong negative relationship between inventory conversion period and profitability of the firms. Sekeroglu & Altan (2014) investigated the effect of inventory management on the profitability of firms in the weaving, food, wholesale and retail industries in Turkey from 2003 to 2012. The study employed regression and correlation techniques using the computer software SPSS 20 version to analyse data collected from the income statements of the selected firms. The results showed positive JAFM JAFM JAFM relationship between inventory management and profitability in the food industry, but no relationship in the weaving, wholesale and retail industries. Panigrahi (2013) examined the relationship between inventory conversion period and the profitability of cement companies in India for the period 2001 to 2010. The study adopted gross operating profit as the dependent variable and proxy for profitability and inventory conversion period as the independent variable. In addition, current ratio, size of the firm and financial debt ratio were used as control variables. The study found significant negative linear relationship between inventory management and profitability. Deloof (2003) studied the relationship between inventory conversion period and corporate profitability, using a sample of 1,009 large Belgian non-financial firms for a period of 1992-1996. The study employed correlation and regression analysis and found a significant negative relationship between gross operating income and inventory turnover days for the firms. Lyndon & Paymaster (2016) examined the effect of inventory cost management on the profitability of listed breweries in Nigeria. Inventory cost management proxied by raw materials cost, work in progress cost and finished goods cost was regressed against profitability proxied by gross profit margin. Secondary time series data were collected from the annual reports and accounts of selected breweries from the Nigeria Stock Exchange for the period 2005 to 2014. A multiple regression technique was used to analyze the data obtained from NSE. The study revealed that efficient inventory cost management has positive influence on the profitability of breweries in Nigeria. Based on the findings, the study recommended that breweries should adopt effective and efficient inventory cost management practices; deploy appropriate modern technology for effective inventory cost management; and employ capable and qualified staff who should be trained regularly on proper and efficient inventory cost management. Methodology 3.1 Research Design The researcher used descriptive research survey design in building up this project work the choice of this research design was considered appropriate because of its advantages of identifying attributes of a large population from a group of individuals. The design was suitable for the Inventory Management and Financial Performance of Manufacturing Companies in Nigeria. Population of a study is a group of persons or aggregate items, things the researcher is interested in getting information to assess the relationship that exists between the surveys of the language of newspaper advertisement. A total of three hundred twenty-eight (328) respondents formed the population of the study. Sample is the set people or items which constitute part of a given population sampling. Due to large size of the target population, the researcher used the Taro Yamani formula to arrive at the sample population of the study. n= N____ 1+N (e)2 n: describes the sample size. N: describes total number of population of the area e: describes maximum variability or margin of Error = 0.09. 1: describes the probability of the event occurring. n= 328_______ 1+328(0.05)2 n= 328_______ 1+328(0.0025) JAFM JAFM JAFM n= 328 / (1+0.5) = 200 / 1.5 = 180. Data were collected from two main sources namely primary source and secondary source Primary source: These are materials of statistical investigation which were collected by the research for a particular purpose. They can be obtained through a survey, observation questionnaire or as experiment; the researcher has adopted the questionnaire method for this study. Secondary source: These are data from textbook Journal handset etc. they arise as byproducts of the same other purposes. Example administration, various other unpublished works and write ups were also used. 3.2 Method of Data Collection The data collected was not an end in itself but it served as a means to an end. The end being the use of the required data to understand the various situations it is with a view to making valuable recommendations and contributions. To this end, the data collected has to be analyzed for any meaningful interpretation to come out with some results. It is for this reason that the following methods were adopted in the research project for the analysis of the data collected. Questionnaire Due to resource and time constraint, the research could not entertain large number of people in case studies, in depth interviews and wider focus group discussions. Therefore, questionnaires were used to fill the gap and support the representative sample to address as many individuals as possible to help gather relevant firsthand information. Two different sets of questions were prepared: close-ended and open-ended questions (see Appendix-A). For those respondents who could not understand English, the questionnaire was prepared and translated in to Amharic while asking them, so that the respondents could easily understand. The items of the questionnaires were classified based on the objectives of the study. Interview The researcher used semi-structured interview in order to gather data from, administrative bodies or government officials, key informants and experts (see Appendix-A). This was preferred because it is flexible, allowing new questions to be brought up during the interview and also it gives equal chances for both interviewers and interviewees. This was aimed at obtaining background information regarding the affordable housing problem in the study area. 3.3 Validation of Research Instrument The major research instrument used is the questionnaires. This was appropriately moderated. The respondents were administered with the questionnaires to complete, with or without disclosing their identities. The questionnaire was designed to obtain sufficient and relevant information from the respondents. The primary data contained information extracted from the questionnaires in which the respondents were required to give specific answer to a question by ticking in front of an appropriate answer, the questionnaires were administered to the respondents, however, some respondents were asked the questions orally and their responses were noted in the questionnaire. The questionnaires contained about 15 structured questions which were divided into sections A and B. 3.4 Model Specification For a comprehensive analysis of data collected, emphasis was laid on the use of absolute numbers frequencies of responses and percentages. Answers to the research questions were provided JAFM JAFM JAFM through the comparison of the percentage of workers response to each statement in the questionnaire related to any specified question being considered. Frequency in this study refers to the arrangement of responses in order of magnitude or occurrence while percentage refers to the arrangements of the responses in order of their proportion. The simple percentage method is believed to be straight forward easy to interpret and understand method. The researcher therefore chooses the simple percentage as the method to use. The formula for percentage is shown as. % = f/N x 100/1 Where f = frequency of respondents response N = Total Number of responses of the sample, 100 = Consistency in the percentage of respondents for each item contained in questions. 3.5 Method of Data Analysis Demographic study of the Inventory Management and Financial Performance of Manufacturing Companies in Nigeria was described using descriptive statistics including percentages, and frequencies. All analysis was conducted using SPSS version 11 software. The statistical method was chosen to help in the interpretation of the data collected during the investigation the null hypothesis (H0) stated in the first chapter was verified to determine it accountancy or other wish the acceptance of the alternative hypothesis (H1) The chi-square (X2) distribution was chosen and this tested at 5% level of significance. Decision for the acceptance or rejection of the hypothesis as stated are as follows: 1. If X2 which is the critical value calculated less than the critical value tabulated accept the null hypothesis (H0) But if critical value calculated is greater than critical value tabulated you reject null hypothesis and accept the alternative hypothesis. Chi-square test is the goodness of fit test used to determine whether a significant number of object or responses falling in each category and an expected number based on the null hypothesis. Chi-square is applied in the following situations. a) When there are two variables drawn from independent samples each of which is categorized in two ways e.g. Yes or No responses. b) When the data are non-numeric, that is when the data are expressed in frequencies. Chi-square is noted with X2, it is defined as X2c = ∑Co-E)2 E Where X2c = chi-square calculated O = observed frequency E = expected frequency. Data Presentation and Analysis 4.1 Presentation and Analysis of Data The data collected from the respondents were analyzed in tabular form with simple percentage for easy understanding. A total of three hundred twenty-eight (328) questionnaires were distributed and 177 questionnaire were returned. JAFM JAFM JAFM 4.2 Test of Hypothesis 1 Hypothesis One H0; Effective inventory control does not ensure continuous production of goods in Pabod and Palm Nectar Breweries H1; Effective inventory control ensures continuous production of goods in Pabod and Palm Nectar Breweries Table I: Effective inventory control does not ensure continuous production of goods in Pabod and Palm Nectar Breweries onse Observed N Expected N Residual Agreed 42 45 -3 strongly agreed 55 45 10 Disagreed 45r 45 1 strongly disagreed 36u 45 -8 Total 178 Figure I: Effective inventory control does not ensure continuous production of goods in Pabod and Palm Nectar Breweries Test Statistics Effective inventory control does not ensure continuous production of goods in Pabod and Palm Nectar Breweries Chi-Square 19.321a Df 3 Asymp. Sig. .000 a. 0 cells (0.0%) have expected frequencies less than 5. The minimum expected cell frequency is 45.0. 4.3 Test of Hypothesis 2 Hypothesis Two H0; Ineffective management of inventory in Pabod and Palm Nectar Breweries Limited Company in Port Harcourt has caused low productivity in the company H1; Ineffective management of inventory in Pabod and Palm Nectar Breweries Limited Company in Port Harcourt has caused high productivity in the company JAFM JAFM JAFM Table II: Ineffective management of inventory in Pabod and Palm Nectar Breweries Limited Company in Port Harcourt has caused low productivity in the company Response Observed N Expected N Residual Yes 87 60 33 No 57 60 -3 Undecided 30 60 -30 Total 177 Decision rule: The researcher therefore rejects the null hypothesis which states that Ineffective management of inventory in Pabod and Palm Nectar Breweries Limited Company in Port Harcourt has caused low productivity in the company, as the calculated value of 6.4454 is greater than the critical value of 5.99. Therefore, the alternate hypothesis is accepted which states that Ineffective management of inventory in Pabod and Palm Nectar Breweries Limited Company in Port Harcourt has caused high productivity in the company. Summary of Findings, Conclusion, and Recommendation 5.1 Summary of the Findings Firm financial performance is generally defined as a measure of the extent to which a firm uses its assets to run the business activities to earn revenues. It examines the overall financial health of a business over a given period of time and can be used to contrast the performance of identical firms in similar industries or between industries in general (Ajirole, 2009). The main source of data for determining firm financial performance is the financial statements, the product of accounting, which consist of the statement of financial position which shows the assets, liabilities and equities of a business; the income statement records the revenues, expenses and profits in a particular period; the cash flow statement which exhibits the sources and uses of cash in a period; and the statement of changes in the owners’ equity which represents the changes in owner’s wealth. The motivation that led to embarking on this research work is as a result of ineffective management of inventory in the manufacturing company specifically Pabod and Palm Nectar Breweries Limited Company and Loss of sales or business of the company as a result of insufficient inventories of finished goods. The study scrutinized the Inventory Management and Financial Performance of Manufacturing Companies in Nigeria. In achieving this aim, the following specific objectives were JAFM JAFM JAFM laid out to determine to what extent the ineffective management of inventory in Pabod and Palm Nectar Breweries plc has caused low productivity in the company and identify the degree to which poor inventory modern used by the company has resulted to low productivity in the company. The research design used in this report is descriptive design, utilizing questionnaire method to obtain information from the respondents for this project. A total of 180 (one hundred and eighty) respondents were selected for this study to represent the entire population of the study. For null hypotheses were formulated and tested using the one-way ANOVA and the t-test statistical tools at zero point zero five (0.05) level of significance. Primary data were collected from the primary source which questionnaire was used as an instrument of data collection while secondary data were sources from textbooks, journals, newspapers and the internet were employed. The data were presented on a frequency distribution table and analyzed using simple percentage, while hypothesis was tested using chi-square test. The study will be significant to manufacturing companies, firms and businesses as it will enable them keep an adequate inventory control and ensure that they do not run out of stock or have excess stock which can endanger their liquidity position. It will also help to meet consumer’s demands or quest. It is recommended that Management should improve in their communication with the suppliers and hold regular meetings with the suppliers to disseminate important issues relating the inventory procurement. 5.2 Conclusion In Essence, The Research Work Was Successfully Researched to meet the objectives set at the beginning of the project work. While one cannot completely rule out one form of limitation or the other, it was a success to a greater extent. On the whole, the research has been a worthwhile exercise. It has afforded the researcher the opportunity to really appraise the situation on the ground and allow one to bring out areas that might need attention for the improvement of the research work. 5.3 Recommendation The following are recommendations for further study on this research work; 1. Management should improve in their communication with the suppliers and hold regular meetings with the suppliers to disseminate important issues relating the inventory procurement. 2. The management should strive to maintain good suppliers’ chain management of inventory to avoid pilferage; and the management should ensure that adequate security is in place to enforce restrictions on unauthorized access to the inventory. 3. The company should employ the economic order quantity method when placing orders. The economic order quantity model puts into account the relevant costs associated with ordering and carrying inventory. Every business organization aims at reducing cost to the barest minimum and one of the avenues by which this could be achieved is adopting the economic order quantity method of placing order. JAFM JAFM JAFM REFERENCES Abdulraheem, A., Yahaya, K. A., Isiaka, S. B. and Aliu, O. A. (2011). Inventory management in small business finance: Empirical evidence from Kwara State, Nigeria. 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