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PROJECT TOPIC AND MATERIAL ON INVENTORY MANAGEMENT PRACTICES AND OPERATIONAL PERFORMANCE OF SELECTED FLOUR MILLS COMPANIES IN NIGERIA

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  • Name: INVENTORY MANAGEMENT PRACTICES AND OPERATIONAL PERFORMANCE OF SELECTED FLOUR MILLS COMPANIES IN NIGERIA
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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.

 

Keywords:    Inventory management practices, Operational performance, Cost effectiveness, Flour mills companies, Automated inventory system

 

Word Count: 436

TABLE OF CONTENTS

Content                                                                                                                               Page

Title Page                                                                                                                                i

Certification                                                                                                                            ii

Dedication                                                                                                                              iii

Acknowledgements                                                                                                                iv

Abstract                                                                                                                                  vi

Table of Contents                                                                                                                   vii

List of Tables                                                                                                                          xii

List of Figures                                                                                                                         xiv

 

CHAPTER ONE: INTRODUCTION

1.1 Background to the Study                                                                                                 1

1.2 Statement of the Problem                                                                                                 5

1.3 Objective of the Study                                                                                                     11

1.4 Research Questions                                                                                                           12

1.5 Hypotheses                                                                                                                       12

1.5.1 Rationale for Hypotheses                                                                                              13

1.6 Operationalization of Variables                                                                                        17

1.7 Scope of the Study                                                                                                           20

1.8 Significance of the Study                                                                                                 21

1.9 Operational Definition of Terms                                                                                       22

1.10 Brief Historical Background of the Selected Flour Mills                                               26

CHAPTER TWO: REVIEW OF LITERATURE

2.1 Conceptual Review                                                                                                           29

2.1.0.1 Inventory                                                                                                                    29

2.1.0.2 Inventory Management                                                                                               31

2.1.0.3 Supply Chain Management                                                                                         35

2.1.1 Inventory Management practices                                                                                   37

2.1.1.1 Inventory Shrinkage                                                                                                   38

2.1.1.2 Inventory investment                                                                                                  41

2.1.1.3 Inventory control                                                                                                        42

2.1.1.4 Inventory Turnover                                                                                                     48

2.1.1.5   Inventory Record Accuracy                                                                                                50

2.1.1.6   Automated Inventory System                                                                                  53

2.1.2      Overview of Operational Performance                                                                     55

2.1.2.1   Customer Satisfaction                                                                                               57

2.1.2.2   Competitive Advantage                                                                                            58

2.1.2.3   Cost Effectiveness                                                                                                    59

2.1.2.4   Operational Efficiency                                                                                              61

2.1.2.5   Customer Service Delivery                                                                                       62

2.1.2.6 Productivity                                                                                                                63

2.2 Theoretical Review                                                                                                           64

2.2.1    Deterministic Inventory Model                                                                                  64

2.2.2    Resource Based View Theory                                                                                                66

2.2.3    Adaptive Structuration Theory                                                                                   68

2.2.4    Theory of Constraints                                                                                                 71

2.3       Empirical Review of Literature                                                                                  74

2.3.1     Inventory Management Practices                                                                              74

2.3.1.2 Inventory Shrinkage                                                                                                   78

2.3.1.3 Inventory Investment                                                                                                 70

2.3.1.4 Inventory Control                                                                                                       82

2.3.1.4 Inventory Turnover                                                                                                     86

2.3.1.5 Inventory Record Accuracy                                                                                       87

2.3.1.6 Automated Inventory System                                                                                                88

2.3.2     Operational Performance                                                                                           90

2.3.2.1   Customer Satisfaction                                                                                               92

2.3.2.2   Competitive Advantage                                                                                            94

2.3.2.3   Cost Effectiveness                                                                                                    95

2.3.2.4   Customer Service Delivery                                                                                       96

2.3.2.5   Operational Efficiency                                                                                              97

2.3.2.6    Productivity                                                                                                             99

2.3.3    Inventory Management Practices and Operational Performance                               99

2.4       Summary and Gaps in the Literature                                                                          105

2.4.1    Summary of the Literature                                                                                          105

2.4.2    Gaps in the Literature                                                                                                 119

2.5       Conceptual Model                                                                                                      137

CHAPTER THREE: METHODOLOGY

3.1 Research Design                                                                                                               138

3.2 Population                                                                                                                         138

3.3 Sampling Frame                                                                                                                139

3.4 Sample size and sampling Technique                                                                                140

3.5 Method of Data Collection                                                                                               143

3.6 Research Instrument                                                                                                         144

3.7 Pilot Study                                                                                                                        145

3.8 Validity of the Research Instrument                                                                                146

3.9 Reliability of the Research instrument                                                                              148

3.10 Method of data analysis                                                                                                 150

3.10.1 Research Model                                                                                                           155

3.10.2 Research Conceptual Model                                                                                        157

3.10.3 Measurement of Variables                                                                                           157

3.11 Apriori expectation                                                                                                         161

3.12 Ethical Consideration                                                                                                     162

CHAPTER FOUR: DATA ANALYSIS, RESULTS AND

DISCUSSION OF FINDINGS

4.1 Data Analysis and presentation of Findings                                                                     164

4.1.1 Response Rate                                                                                                               164

4.2 Data Analysis, Interpretation and Discussion of Findings                                               165

4.2.1 Restatement of Objective and Research Question 1                                                     165

4.2.2 Restatement of Objective and Research Question 2                                                     171

4.2.3 Restatement of Objectives and Research Question 3                                                    177

4.2.4 Restatement of Objective and Research Question 4                                                     183

4.2.5 Restatement of Objective and Research Question 5                                                      189

4.2.6 Restatement of Objective and Research Question 6                                                     196

4.2.7 Analysis of Secondary Data                                                                                          204

4.3       Summary of Hypotheses                                                                                             210

 

CHAPTER FIVE: SUMMARY, CONCLUSION,

AND RECOMMENDATIONS

5.1 Summary                                                                                                                           212

5.2 Conclusion                                                                                                                        214

5.3 Recommendations                                                                                                            215

5.4 Implication of the Findings                                                                                              216

5.4.1 Implication for Management Practice                                                                            216

5.4.2 Implication for Academics                                                                                            216

5.4.3 Implication for Government                                                                                          217

5.4.4 Implication for General Public                                                                                       217

5.5 Contributions to Knowledge                                                                                            217

5.5.1 Theory                                                                                                                            217

5.5.2 Concepts                                                                                                                        218

5.5.3 Empirics                                                                                                                         220

Content                                                                                                                                 Page

5.6    Limitation of the Study                                                                                                 221

5.6.1 Methodology                                                                                                                 221

5.7 Suggestion for Further Studies                                                                                         222

References                                                                                                                  224

Appendices

 

LIST OF TABLES

Table                                                                                                                                     Page

2.1       Objective of Inventory Management                                                                          34

2.4.1    Summary of literature table                                                                                        108

2.4.2    Summary Table of Gap in Literature                                                                          122

3.1       Quoted Flour Milling Companies in Nigeria                                                              140

3.2       Distribution of sample by levels of management                                                        142

3.3       Table of Required Sample Size                                                                                   142

3.4       Summary of Sample Size                                                                                            143

3.5       Summary of the questionnaire                                                                                    145

3.6       KMO and Bartlett Test for Each Variable in the Research Instrument                     148

3.7       Reliability Test Results                                                                                               150

3.8       Summary of Tests Carried Out                                                                                   156

4.1       Response Rate                                                                                                            165

4.2       Descriptive Analysis of Inventory Shrinkage                                                             166

4.3       Descriptive Analysis of Customer Satisfaction                                                          167

4.4       Summary of the Results of Regression Analysis of the effect of Inventory

shrinkage on customers’ satisfaction                                                                          168

4.5       Descriptive Analysis of Inventory Investment                                                          172

4.6       Descriptive Analysis of Competitive Advantage                                                       174

4.7       Summary of the Results of Regression Analysis of the effect of Inventory

investment on Competitive Advantage                                                                      178

4.8       Descriptive Analysis of Inventory Control System                                                    177

4.9       Descriptive Analysis of Cost Effectiveness                                                               178

4.10     Pearson Correlation Coefficient Inventory Control System and

Cost Effectiveness                                                                                                      179

4.11     Descriptive Analysis of Inventory Turnover                                                              184

4.12     Descriptive Analysis of Operational Efficiency                                                         186

4.13     Summary of the Results of Regression Analysis of the effect of

Inventory Turnover on Operational Efficiency                                                          189

4.14     Descriptive Analysis of Inventory Record Accuracy                                                 190

4.15     Descriptive Analysis of Customer Service Delivery                                                   191

4.16     Pearson Correlation Coefficient for Inventory Record Accuracy

and Customer Service Delivery                                                                                  193

4.17     Descriptive Analysis of Automated Inventory System                                              197

4.18     Descriptive Analysis of Productivity                                                                          199

4.19     Summary of the Results of Regression Analysis of the Influence

of Automated Inventory System on Productivity                                                      200

4.20     Correlation matrix for main effects of the pooled panel regression                           205

4.21     Summary of the Results of Pooled Panel Regression Analysis on

the Influence of Inventory Management Practices on Operational

Performance of Flour Mills Companies in Nigeria                                                     205

4.22     Summary of Hypotheses                                                                                             211

 

  

LIST OF FIGURES

Figure                                                                                                                                    Page

2.1       Three ways to the ultimate system goal                                                                      72

2.2       Researcher Model                                                                                                       137

3.1       Researcher’s Conceptual Model                                                                                 138

 

 

LIST OF ABBREVIATIONS AND ACRONYMS

EOQ    –           Economic Order Quantity

JIT       –           Just In Time

VMI    –           Vendor Managed Inventory

CP       –           Collaborative Planning

LIT      –           Low Inventory Turnover

HIT     –           High Inventory Turnover

INVS  –           Inventory Shrinkage

INVI   –           Inventory Investment

INVCS –         Inventory Control Systems

INVTO –         Inventory Turnover

INVRA –         Inventory Record Accuracy

AINVS –         Automated Inventory System

OPP     –           Operational Performance

SCM    –           Supply chain management

ABC    –           Always Better Control

SKU    –           Stock Keeping Units

COS    –           Cost of Goods Sold

RFID   –           Radio Frequency Identification Data

ERP     –           Enterprise Resource Planning

MRP    –           Manufacturing Resource Planning

TFP     –           Total Factor Productivity

DIM    –           Deterministic Inventory Model

RBV    –           Resources Based View

AST     –           Adaptive Structuration Theory

TOC    –           Theory of Constraints

 

CHAPTER ONE

INTRODUCTION

  • 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.

It has been confirmed that organizations worldwide have adopted inventory management systems into their operations (Swaleh & Were, 2014). However, despite the increasing attention given to inventory management in the practical and academic fields, the performance of manufacturing firms in Nigeria including Nigerian flour milling companies have been very disappointing (Njoku & Kalu, 2015a). The flour milling manufacturing firms operating in Nigeria are facing problem in 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 for the companies. They are confronted with the challenges of stock out of goods or materials during production (Ikon & Nwankwo, 2016; Takim, 2014). Due to stock-outs, the companies received a lot of complaints and criticism by the customers, so this causes a lower sales and decrease in revenue. Nsikan et al (2015) also indicated flour milling companies in Nigeria have a problem of inaccurate forecasts mainly because they lack real time inventory information on customers demand. This has in turn led to late deliveries, inadequate deliveries and lack of consistency in the delivery of products and thus leading to lack of customer satisfaction. Further, more flour milling companies in Nigeria have been accused of poor inventory management techniques and this has greatly affected their ability to satisfy their customers (Nsikan et al., 2015; Njoku & Kalu, 2015a).

Njoku and Kalu (2015a) further explained that Nigerian flour milling companies faced problems of instability in inventory levels, reduced customers effective demand and high cost of production due to poor inventory management techniques leading to customers dissatisfaction. As a result, the productivity of the companies have declined, making loyal consumer to switch to their foreign competitors to find the desired product. Olowe (2007) explains that if products are always available in stock, customers are not going to buy goods from somewhere else. On the other hand, if the items are out-of-stock, customers have two options, either to wait until the product is in stock again or to go buy elsewhere. The latter would result in loss of customer’s goodwill and it is unfavourable for businesses.

Nyabwnga and Ojera (2012) in their study expressed that when faced with a stock-out, a consumer may find, try, and untimately prefer a substitute product. This consumer may be lost forever, resulting in a negative impact on the long-term value of the firm’s market share. The researchers further explained that repeated stockouts negatively affect retailers through the loss of customers, and to the manufacturer there are lost of sales, brand switching, and a loss of brand. The researchers concluded that almost half of the customers who looked for an out-of–stock commodity finally stopped the search, thereby leading to the negative effect of stock-outs. The issue of dissatisfied customers as a result of missing items on the shelf often cost an organisation a fortune in terms of reputation and trust which in turn result in loss of  sales. The problem of inventory shrinkage has not been resolved by many flour milling companies in Nigeria due to materials and operational challenges amongst others. This problem has led to customer dissatisfaction and several backorders. The extent to which inventory shirinkage affects customers satisfaction in flour milling industry in Nigeria has not been addressed in the literature. How often does inventory shrinkage affects customer satisfaction of flour mills companies in Nigeria?

Investment in inventories creates opportunity for manufacturing organisations to gain market advantage by outperforming competitors in terms of attracting more customers with distinguished products and charge premium prices (Marfo-Yiadom & Kweku, 2008). According to Barine (2012), investment in inventory is also a function of the cost of holding such inventory, storage, obsolescence, opportunity cost of investments in inventory, rate of return on other equivalent-risk investment opportunities. However, excessive inventory investments can tie up capital that may be put to better use with other areas of the business. Inventory problems of too great or too small quantities on hand caused business failures. In a study carried out by Peavler (2009) it was observed that most failed businesses (up to 60%) were of the opinion that all or most of their failures were due to inventory problems. This view is supported by the study of Adeyeye, Ogunnaike, Amaihian, Olokundun, and Inelo (2016) that manufacturing firms in Nigeria are finding it difficult in determining how much of the inventory is the ideal stock. Therefore, a balance must be struck and maintained. Maintaining an appropriate level of inventory, according to Shin, Ennis, and Spurlin (2015) is a key issue to firm’s operational performance.

The flour milling companies in Nigeria has had problems of investments in less critical stocks leading to unnecessary costs, inaccurate forecasts, and poor responsiveness to customers’ orders leading to decline performance (Njoku & Kalu, 2015). Njoku and Kalu (2015) observed that majority of the flour milling companies in Nigeria are in the mature stage of their operations and localized in nature thereby making them less competitive. The poor investment in inventories have undermined operational performance of flour milling companies by losing out on potential sales, and potential market share as well (Chukwuemeka & Onwusoronyem, 2013). As a result there is the danger of falling behind the market which would be detrimental to the overall profitability of the company (Awuor, 2013). Nwachukwu, Odo, and Nwachukwu (2016) added that flour mills companies in Nigeria are faced with issues in determining the optimal amounts of account receivable, account payable and inventory that they will choose to maintain in order to enhance operational performance. In addition to these optimal amounts, flour mills companies also faced with challenge of determining the most economical way to finance these working capital investments in order to produce the best possible results. This resulted to a significant loss of customers to competitors in the industry. It is necessary to manage inventories effectively and efficiently avoid unnecessary investment. The literature have shown that the problem of poor inventory investment in flour mills industry in Nigeria is yet to be practically addressed. Can it then be inferred that poor inventory investment influence Nigeria flour mills companies competitive advantage?

There are numerous risk factors associated with the current supply chain environment that have negatively affected internal supply chain operations of manufacturing company including flour mills companies. Several operations and production professionals have described these factors as supply chain risks. Thus, for an organization to successfully operate and compete in the current risky supply chain environment, the organization must put into place effective control measures within its internal supply chain. One of the strategies currently adopted by manufacturing company is development of an effective internal inventory control system (Onchoke & Wanyoike, 2016; Posazhennikova, 2012).

The problem of inventory control is one of the most important concept in organizational management (Ziukov, 2015). Research has shown that inventory control was one of the most neglected management areas in most firms, thus straining on a business operations (Mogere, Oloko, & Okibo, 2013). Empirical evidence has shown more and more manufacturing firms have failed inventory control, and therefore suffered losses (Kariuki, 2013). Moreover, Jefwa and Everlyn (2015) indicated that most firms have not yet adopted inventory control tools and systems in their operations. In Nigeria manufacturing industry, Gbadamosi (2013) explained that it is far more difficult to control inventories effectively. The reason was linked with the expansion of product lines and models. Also, it was realized that most of the components going into the typical forms products are purchased as assembled parts, rather than being produced from basic materials in the firm’s own shops (Gbadamosi, 2013). These  factors have led to the growth of more items to be managed by firms and subsequent high costs of operation.

Nsikan et al. (2015) noted that most of the Nigerian flour milling companies were still using traditional methods of inventory control and valuation which was considered inappropriate and unsophisticated. In addition, Owoeye et al. (2014) reacting to the observations available from extant literature responded that inventory managers in flour milling companies tend to shun change to the modus operandi- manual inventory management. This clearly depicts that the responsibility and success of inventory control lies majorly with top management of firms. The implication is that poor inventory control leads to high cost of operations. Anichebe and Agu (2013) stated that flour milling companies at times do not control their inventory holding, resulting in under stocking and causing the organizations to stay off production, thereby resulting to high cost overrun. Kilonzo et al. (2016) assert that poor inventory control leads to obsolete inventory which is a cost and has negative effect on operational performance of a firm. The findings of several studies consulted on inventory management and control revealed that inventory control systems in flour mills companies in Nigeria are still based on traditional and mathematical models which often leads to higher operational costs. Can it then be inferred that poor inventory control increase cost associated with storage and handling of merchandize or materials thereby impeding cost effectivess of flour mills companies in Nigeria?

Another inventory management system that could influence organizations business and operational performance is the inventory turnover. Inventory turnover refers to the efficiency of firms in producing and selling its products (Mburu, 2013). It is the number of times that inventory “turns over” or cycles through the firm in a year (Rao & Rao, 2009). Controlling inventory turnover has been affirmed as one of the fastest ways to get more money out of business without having to increase sales. It has been reported in the literature that a high inventory turnover ratio indicated how best the firm is operating economically in selling its products. Inventory turnover is a measure of management’s ability to use resources effectively and efficiently. However, in spite of the large size of Nigeria flour mill industry, the industry is suffering from low level of operational performance. According to Adesiyan (2015), flour milling companies are not performing up to average. Their dismal performance has been attributed to poor inventory turnover, deficient pricing policies, inappropriate inventory investment decisions, capacity underutilization, inability to generate adequate working capital and maintaining existing investments in inventories, and high level of inventories in the stores and warehouses. These has led to lower operational efficiency (Nwachukwu et al., 2016)

 

Lawal, Abiola, and Oyewole (2015) established that most managers in the industry fight to increase inventory turnover in a bid to increase profitability without being mindful of the need to speed up the debtor collection period and to delay creditor payment period as far as possible, so as to provide the funds needed to keep the cycle flowing. This puts the companies in poor liquidity position and it consequently reduce their operational efficiency. Onyoni (2015) added that low inventory turnover in flour milling companies have kept many items in stock while others have become obsolete, leading to a halt in production. Njoku and Kalu (2015) reported in their study that most firms in the flour mill industry are in the mature stage of their life cycle. There is overcapacity in the flour mills industry as capacity far outweighs the demand for flour. According to Njoku and Kalu (2015), this situation has severely undermined the operational efficiency of flour mills companies in Nigeria over the years. The problem of inventory turnover and its effects on operational efficiency of flour mills companies in Nigeria is yet to be addressed and investigated in the literature. Hence, to what extent has inventory turnover affects operational efficiency of flour mills companies in Nigeria?

Research has shown that the issue of inventory record inaccuracy is a common problem affecting manufacturing firms in achieving their goals and objectives (Oballah et al., 2015). The problem of inventory record accuracy relates to the discrepancy between recorded inventory and physical inventory (Ruankaew & Williams, 2013). The problem of ineffective stock records system has existed for too long in manufacturing firms and is a universal rather than a peculiar problem (Burton, 1989). Research evidence has shown that stock control in flour milling companies in Nigeria are inadequate and in conflict with specification (Okiridu, 2014). As noted by Okiridu (2014) and Ayomoh, Oladeji and Oke (2004), many firms in Nigerian flour mill industry have not established the central purchasing department, lack computerized stock management and were not able to employ the services of well qualified stores officers to take charge of record management. The problems have made the raw material control policies and internal control measure very weak. It has also led to the failure to meet delivery commitment and consequent loss of sales (slow sales growth).

Furthermore, inventory record inaccuracy has a significant effect on the firm’s cashflow strength and its competitive advantage (Ruankaew & Williams, 2013). Rajeev (2008) cited in Ruankaew and Williams (2013) indicated that the effecct of inventory record inaccuracy on the organization include productivity loss, expediting shipping costs, potential losses due to the inability to meet customer demand, and frustration. Thiel, Hovelaque and Vo (2010) proposed that excessive amount of inventory (that is, stock pile) in the supply chain as the means by which management could address the problem which in turn is a danger to the firm. The problem of inventory record inaccuracy in flour mills companies in Nigeria and the its relationship with delivey commitment is yet to be given adequate attention in the literature. What is the relationship between inventory record accuracy and customer service delivery of flour mills companies in Nigeria?

From the literature, it is observed that inventory management is a critical management issue for manufacturing companies across the world (Mukopi & Iravo, 2015). In order to realize the benefits of effective inventory management, manufacturing firms should attempt to automate their inventory management operations (Kitheka, 2012). The research by Owoye et al. (2015) and complemented by Nsikan et al. (2015) showed that majority of manufacturing companies in Nigeria and flour mills companies in particular, have not yet adopted computerized inventory management system or automated management system (Kitheka, 2012; Kitheka & Gerald, 2014). They have majorly concentrated on manual and mathematical models of inventory management. The studies also reported that majority of inventory managers and staffs responsible for stock management in these companies do not adequately have knowledge or mechanics and applications of modern inventory management models and tools.

The reasons highlighted by researchers for the non-adoption of computer system in inventory management include the cost of installation, management support, maintenance costs amongst others. These challenges do not enable the flour mills companies in Nigeria to properly predict production requirements (Owoeye et al., 2015). It further created minimal utilization of resources, high operating costs and inappropriate planning leading to poor work efficiency, and low productivity (Nsikan, et al., 2015; Owoeye et al., 2015). Moreover, Chandra (2010) lamented that most companies set profit goals but few set productivity goals. The productivity aspect of inventory management is often overlooked or is not adequately looked after in most of the industrial undertakings (Chandra, 2010). Automated inventory management systems have not been extensively embraced by many flour mills companies in Nigeria. In addition, existing studies on inventory management in flour mills companies in Nigeria have not address the extent to which the failure to adopt computerized inventory management has influence the productivity of flour mills companies. Therefore, to what extent has automated inventory management influence productivity of flour mills companies in Nigeria?

From the above discussions, adoption of effective inventory management practices have been a serious challenge to many flour mills companies in Nigeria. There have been a lot of difficulties in determining the desired stock levels that ensures a free flow of materials without incurring heavy expenses in stocking those materials and without any stock being rendered obsolete. There have been loss of sales or business of the company as a result of insufficient inventories of finished goods. In addition, there have been low productivity in many flour mills companies as a result of poor inventory model used by the companies. There is poor level of computerization in many flour mills companies in Nigeria. Obviously, there is ineffective management and control of inventories in many flour mills companies leading to the decline in their general operational performance.

1.3       Objective of the Study

The general objective of this study is to examine the relationship between inventory management practices and operational performance of flour mills companies in Nigeria.

The specific objectives are to:

  1. determine the effect of inventory shrinkage on customer’s satisfaction of the selected Flour Mills companies in Nigeria;
  2. examine the influence of inventory investment on the competitive advantage of the selected Flour Mills companies in Nigeria;
  3. find out the relationship between inventory control and cost effectiveness of the selected Flour Mills companies in Nigeria;
  4. assess the effect of inventory turnover on the operational efficiency of the selected Flour Mills companies in Nigeria;
  5. identify the relationship between inventory record accuracy and the customer service delivery of the selected Flour Mills companies in Nigeria and
  6. establish the influence of automated inventory system on the productivity of the selected Flour Mills companies in Nigeria.

 

 

1.4       Research Questions

Based on the stated objectives of the study, the following research questions become pertinent:

  1. How does inventory shrinkage affect customer’s satisfaction of the selected Flour Mills companies in Nigeria?
  2. How does inventory investment influence the competitive advantage of the selected Flour Mills companies in Nigeria?
  3. What is the relationship between inventory control and the cost effectiveness of the selected Flour Mills companies in Nigeria?
  4. What effect does inventory turnover have on the operational efficiency of the selected Flour Mills companies in Nigeria?
  5. What is the relationship between inventory record accuracy and the customer service delivery of the selected Flour Mills companies in Nigeria?
  6. How does automated inventory system influence the productivity of selected Flour Mills companies in Nigeria?

1.5       Hypotheses

The study formulates the following null hypothesis:

H01:      Inventory shrinkage has no significant effect on customer’s satisfaction of the selected Flour Mills companies in Nigeria.

H02:      Inventory investment has no significant influence on the competitive advantage of the selected Flour Mills companies in Nigeria.

H03:      There is no significant relationship between inventory control and the cost effectiveness of the selected Flour Mills companies in Nigeria.

H04:      Inventory turnover has no significant effect on the operational efficiency of the selected Flour Mills companies in Nigeria.

H05:      There is no significant relationship between inventory record accuracy and the customer service delivery of the selected Flour Mills companies in Nigeria.

H06:      Automated inventory system does not have significant influence on the productivity of the selected Flour Mills companies in Nigeria.

 

 

 

 

1.5.1    Rationale for Hypotheses

H01: Inventory shrinkage has no significant effect on customer’s satisfaction of the selected Flour Mills companies in Nigeria

 

There are many studies carried out on the area of inventory shrinkage and its implication towards customers’ satisfaction (that is, operational performance) of manufacturing firms. The findings from these studies have been mixed; while some reseachers established positive results, others discovered negative effects of inventory shrinkage on customers satisfaction. The reason for the contradiction was based on level of error acceptable. According to Jacob and Chase (2011), every production system must have agreement, within some specific range, between what the records says is in inventory and what actually is in inventory. Therefore, to keep the production system flowing smoothly without parts shortages and efficiently without excess balances, record must be accurate. Fariza, Rushami, and Rohaizah (2014) discovered that effective inventory management has become a potential way nowadays to improve performance through customers’ satisfaction, matching supply chain practices and competitive advantages in the competitive world. Ogbo and Onekanma (2014) agree that having inventory in firm store has an added advantage for the organization since customers will be satisfied instantly leading to improved performance rating. With inventory in the warehouse, an organization has the advantage of timely delivery and stock out are not experienced. Also, Li, Ragu-Nathan, Ragu-Nathan, and Subba (2006) found out that implementation of inventory management practices have greater impact on achieving customer satisfaction as well as improving a firm’s performance.

On the other hand, other studies have shown that inventory shrinkage create a huge negative impact to a manufacturer that leads to reduction in the overall performance such as customer’s satisfaction and profitability (Fariza et al., 2014). Oballah et al. (2015) conducted a study on effect of inventory management practices on organizational performance in public health institutions in Kenya. The research findings revealed that losses resulting from medicine expiration leads to increased inventory shrinkage, losses resulting from medicine damages leads to increased inventory shrinkage, losses resulting from medicine obsolesce (medicine purchased not meeting intended purposes leads to increased inventory shrinkage and that losses resulting from medicine theft leads to increased inventory shrinkage. As such inventory shrinkage affects customer satisfaction. Moreover, Fischer and Green (2004) discovered that firms experience a diminishing customer base and thus a further reduction in profits due to the inventory shrinkage. Mazanai (2012) expressed that stock shortages are a headache for most organizations and it leads to customer’s dissatisfaction which eventually leads to low performance of a firm. Furthermore, Afande (2015) noted that running out of stock is risky for production and marketing consequences in shortage cost. In the light of these previous findings, this study proposes that inventory shrinkage has no significant effect on customer’s satisfaction of selected Flour Mills companies in Nigeria.

H02:     Inventory investment has no significant influence on the competitive advantage of the selected Flour Mills companies in Nigeria

 

Empirical research has shown that the objectives of inventory management practices are to minimize inventory investments and to maximize customer service (Kamau & Kagiri, 2015). Naliaka and Namusonge (2015) show that effective inventory management provide opportunities to create sustainable competitive advantage and enhance the competitive position of companies. This entails reduction in cost of holding stocks by maintaining just enough inventories, in the right place and the right time and cost to make the right amount of needed products. Some other studies also supported the findings that inventory investment contributes to the profitability of firms by minimizing costs associated with storage and handling of materials as well as improving firm’s market position (Inyama, 2006; Lysons, 2006; Oballah et al., 2015). In addition, Hansen and Mowen (2007) argued that reducing the inventory level would give organization a competitive advantage due to production of quality products at lowering prices and it will respond faster to customer needs.

Conversely, other studies revealed that inventory investments do not promote competitive advantage (Afande, 2015; Kamau & Kagiri, 2015; Keown, Martin, Petty, & Scott, 2006). Kamau and Kagiri (2015) study on the “Roles of inventory management practices in organizational competitiveness in Kenya” revealed that many business owners have difficulty throwing away products they paid good money for, forgetting that keeping many obsolete products in the store would additionally consume even more investments and space. This view is supported by the study of Keown, Martin, Petty, & Scott (2006) who found out that if  the  size  of  inventory  increases,  consequently  holding  costs  of inventory increases, such as  storage, insurance, cost of goods deterioration, damage and losses, moreover the demand of return on capital investment in inventory is expected more. So the inventory of firm is increased, the risk of running of stock is reduced, but cost of holding inventory rises. Similarly, Afande (2015) argued that holding inventories causes the costs, such as the funds which are tied up in inventories, could not have the interest earnings instead; storage and insurance have to be paid, furthermore, spoilage, damage and loss of goods lead to the costs to firms. Excessive stocking reduce the profitability of firm’s results in holding cost (Afande, 2015). From these arguments and findings, it is hypothesized that inventory investment has no significant influence on the competitive advantage of selected Flour Mills companies in Nigeria.

H03:     There is no significant relationship between inventory control and the cost effectiveness of the selected Flour Mills companies in Nigeria

 

The effect of inventory control systems on cost reduction effectiveness of manufacturing firms have been widely researched by many researchers (Kumar & Suresh, 2008; Mogere et al., 2013). However, the direction of the relationship between inventory control systems and cost reduction effectiveness of business firms has not been cleared (Mathuva, 2013). Furthermore, studies on the relationship between inventory control systems and cost reduction effectiveness had produced mixed results (Gill, Biger, & Mathur, 2010). While some argued that inventory control ensures that the cost incurred in inventories is minimal and promotes economy in purchase (Kumar & Suresh, 2008; Mwangangi, Guyo, & Arasa, 2015), others indicated the possession of inventory, through judicious purchasing and manufacture, can in times of escalating prices generate cost savings (Christopher & Falconer, 2012). Also, Mogere et al. (2013) revealed that some previous studies did not indicate the extent to which inventory control systems reduce cost of the firm. This study proposes that inventory control has no relationship with the cost reduction effectiveness of selected Flour Mills companies in Nigeria.

H04:     Inventory turnover has no significant effect on the operational efficiency of the selected Flour Mills companies in Nigeria

 

Rao and Rao (2009) carried out a research on the inventory turnover ratio as to supply chain performance measure and discovered that information technology, internal operations, customers and supplier relationship and information sharing had significant influence on inventory turnover performance. This finding is supported by results of similar studies which established positive relationship between inventory turnover and operational efficiency in organizations (Kamau & Kagiri, 2015; Oballah et al., 2013). Kamau & Kagiri (2015) found a a statistically significant effect of inventory turnover on the competitiveness of Safaricom Ltd in Kenya. Oballah, et al (2015) in their empirical study on roles of inventory management practices on organizational performance in public health institutions in Kenya, also discovered that inventory turnover have positive effect on service level and low cost of operations.

In contrast, Saravanan, Tarun and Vishal (2015) found a negative financial impact of an excess amount and shortage of inventory eight times more severe for Low Inventory Turnover (LIT) retailers compared to High Inventory Turnover (HIT) retailers in U.S. Similarly, other researchers found no significant influence of inventory turnover on operational efficiency (Ashok, 2013; Chen, Frank & Wu, 2007; Oballah et al., 2015). Chen et al. (2007) found in their study of US retailers and wholesale firms that, the average inventory that the firms carry decrease in manufacturing and wholesale firms, so wholesale firms increased their inventory turnover year by year. The study of Oballah et al. (2015) showed that effect of inventory turnover on a firm depends on the ratio of inventory turns. The higher the turnover the better the performance of the organization and vice versa. Related to Chen et al. (2007) and Oballah et al. (2015), it is reported in the literature that if the inventory performance of a company is poorer than the average, the firm has poor long-term stock market performance. Therefore, it is hypothesized that inventory turnover has no significant effect on the operational efficiency of selected Flour Mills companies in Nigeria.

H05: There is no significant relationship between inventory record accuracy and the customer service delivery of the selected Flour Mills companies in Nigeria

 

The effect of inventory record accuracy on customers service delivery is advocated in the literature (Oballa et al., 2015; Thongori & Gathenya, 2014; Ogonu, Ikegwuru & Nwokah. 2016). Ogonu  et al. (2016) found out that inventory record accuracy has a significant positive impact on customers service delivery in Supermarket Industry in Nigeria. Similarly, Okiridu (2014) discovered inventory record accuracy has positive effect on the performance of Nigeria Engineering works Limited. The findings is also supported by the study of Imeokparia (2013) who found significant relationship between inventory record accuracy and customers service delivery. Also, Aro-Gordon and Gupte (2016) show that the adoption of an appriopriate combination of emerging inventory management approaches will engendered accurate record of inventory leading to the steady flow of materials and customers service delivery.

On the other hand, other studies have shown that inventory record accuracy has an inverse relationship with customers service delivery (Thongori & Gathenya, 2014; Thiel et al., 2010). These studies indicated that a discrepancy between the recorded inventory quantity and the actual inventory quantity physically present on the shelf greatly affected the firm ability to satisfy customers demands. On the basis of these findings, it is hypothesized that there is no significant relationship between inventory record accuracy and the customer service delivery of selected Flour Mills companies in Nigeria.

H06:     Automated inventory system does not have significant influence on the productivity of the selected Flour Mills companies in Nigeria

 

Many studies have been done on the influence of design and implementation of automated inventory system on the productivity of firms (Nsikan et al., 2015; Mbuvi, et al., 2016; Kitheka & Gerald, 2014; Wanjohi, Mugo, & Wagoki, 2013; Namagembe & Munene, 2016; Susan & Joseph, 2015; Kitheka & Gerald, 2014; Haiyan & Sarathchandra, 2015). Haiyan and Sarathchandra (2015) argued that many organizations are still using manual-tracking systems to manage their inventories, which is very time-consuming. But some researchers emphasize that companies that adopted modern technology in managing its inventories succeed more than those who rely on outdated methods of inventory control (Wanjohi, et al., 2013). As noted by Susan and Joseph (2015), automated inventory system could influence all stages of inventory management, as well as counting and monitoring of inventory and anticipating inventory needs, including inventory handling requirements. The influence of automated inventory system on a firm’s operational performance is well documented in the literature. Wanjohi, et al. (2013) found positive linear relationship between electronic inventory system and customer service delivery. Kitheka and Gerald (2014) found that inventory management automation influenced the performance of the Supermarkets in Western Kenya. Susan and Joseph (2015) find out that many business firms have adopted automated inventory system in their operations and it has brought more positive effects than negative effects.

However, other researchers have concluded that automated inventory system usage has had little application in many manufacturing firms which leads to the problems of stock–out and low productivity (Kitheka & Gerald, 2014; Mbuvi & Namusonge, 2016; Namagembe & Munene, 2016). Mbuvi and Namusonge (2016) found out that majority of staff of manufacturing firms do not have adequate skills of information technology and this has slowed down the automation of inventories. It was also found out that automated inventory system with regards financial accessibility was disappointing, resulted into little investments. On the basis of the foregoing, it is hypothesis that automated inventory system does not have statistically significant influence on the productivity of selected Flour Mills companies in Nigeria.

1.6       Operationalization of Variables

The inventory management practices and operational performance of selected flour mills companies in Nigeria have two main variables that have been operationalised for the purpose of this study. These are:

Independent Variable

X = Inventory Management Practices (IMP)

The independent variable (X) can be disaggregated into the following sub-variables:

X = (x1, x2, x3, x4, x5, x6)

Where:

x1 =  Inventory Shrinkage (INVS)

x2 = Inventory Investment (INVI)

x3 = Inventory Control Systems (INVCS)

x4 = Inventory Turnover (INVTO)

x5 = Inventory Record Accuracy (INVRA)

x6 = Automated Inventory System (AINVS)

Dependent Variable

Y = Operational Performance (OPP)

The dependent variable (Y) can further be disaggregated into the following sub-variables:

Y = (y1, y2, y3, y4, y5, y6)

Where:

y1 = Customers’ Satisfaction

y2 = Competitive Advantage

y3 = Cost Effectiveness

y4 = Operational Efficiency.

y5 = Customer Service Delivery

y6 = Productivity

The equation that explains the functional relationship between the two variables can be written as:

Y = f (X)

Where

Y = Operational Performance(Vector of Dependent Variable)

X = Inventory Management Practices (Vector of Independent Variable)

The operationalization of the variables for each of the hypothesis can be summarized in these models:

Hypothesis One

y1i = α0 + β1x1i + ɛ ………………………………………………………………………. (eq.i)

Hypothesis Two

y2i = α0 + β2x2i + ɛ ………………………………………………………………………. (eq.ii)

Hypothesis Three

y3i = f(x3i) ………………………………………………………………………………. (eq.iii)

Hypothesis Four

y4i = α0 + β4x4i + ɛ ……………………………………………………………………… (eq. iv)

Hypothesis Five

y5i = f(x5i) ……………………………………………………………………………… (eq. v)

Hypothesis Six

y6i = α0 + β6x6i + ɛ ……………………………………………………………………… (eq.vi)

Where:

α0 = Constant term

β1 – β6 = Coefficients of the Independent Variables

ɛ = Error term

Equations i, ii, iv and v were formulated following the empirical studies of Kamau and Kagiri (2015) and Oballa et al. (2015) that inventory management practices influence organizational competitiveness/performance. However, equations iii and vi were added as re-modification of Kamau and Kagiri (2015) and Oballa et al (2015) models. Inventory control and automated inventory systems were added respectively to the existing models. Operational performance is used as dependent variable in this study because it serves as a significant indicator to determine how well Flour Mills company are progressing towards achieving their predetermined objectives. Therefore, equations i to vi formed the equations of this research work that were estimated.

The general econometric model for the study is expressed as follows:

OPPit = α0 + β1INVSit + β2INVIit + β3INVCSit + β4INVTOit + β5INVRAit + β6AINVSit + ɛit – (vii)

Where:

            OPPit   =          Operational Performance

α0            =          Constant Term

β1β6    =          Parameters to be Estimated

INVSit =           Inventory Shrinkage

INVIit  =          Inventory Investment

INVCSit =       Inventory Control Systems

INVTOit =       Inventory Turnover

INVRAit =      Inventory Record Accuracy

AINVSit =       Automated Inventory System

ɛit         =         Error term       

1.7       Scope of the Study

The study focused on the relationship between inventory management practices and operational performance of selected Flour Mills companies in Nigeria. The research was limited to the four Flour Mills companies that are quoted on the Nigerian Stock Exchange (that is, Dangote Flour Mills, Flour Mills of Nigeria Plc, Honeywell Flour Mill Plc and Northern Nigeria Flour Mill Plc). Out of which three (3) companies constitute the focus of this study. The three selected Flour Mills companies are Dangote Flour Mills, Flour Mills of Nigeria Plc (FMN), and Honeywell Flour Mill Plc (HFM). These companies control over 65% of the market (Leadcapital, 2008). They have a total installed capacity (production) of 15, 360 metric tons per day with Flour Mills of Nigeria Plc controlling 49% (Sterling Capital, 2015). These three flour mills companies are located in Lagos State. The choice of Lagos State was as result of the preponderance of flour milling companies in the State as a result of presence of modern sea ports that facilitate importation and efficient operational handling of wheat, being the major raw material in the industry (Nsikan et al., 2015). The population of the study were the employees (2, 237) of these three selected Flour Mills companies. The sample size was 776 respondents which was derived using table of sample size determination obtained from Research Advisor (2006). A multiple sampling technique was adopted in selecting the sample from the population of this study. This study adopted a cross sectional survey research design which tries to study a group of people or items known as sample to collect and analyze data which are considered representative of a bigger population.

1.8       Significance of the Study

This present study contributes to the existing literature by examining the relationship between inventory management practices and operational performance in manufacturing setting in Nigeria. The study is significant because the results can provide useful insight into minimizing inventory problems for business enterprises by suggesting techniques and methods necessary for effective inventory records and management. The significance of this study to various stakeholders are discussed under the sub-headings:

Flour Mills Companies

The study would help the flour mills companies recognizes the areas where cost can be minimized while ensuring that total efficiencies of the companies are sustained. The study would avail the flour mills companies to develop a method that can be used to improve inventory management policies. It would provide adequate information that flour mills companies in Nigeria needed to improve their operational performance through inventory management practices. In addition, the outcome of this research would help flour mills companies in assessing their level of inventory management practices and also would be a guide on what they need to do in order to outperform their operational performance by using a proper inventory management practices as a tool. Moreover, the outcome of this research would be of great benefits to the inventory control managers who would have to  define how  often  inventory  levels  are  reviewed to determine when and how much to order and whether it is performed on perpetual or periodic basis so as to maximize profit. It would also help the flour mills companies in Nigeria to understand the benefits of using automated or computerized systems in inventory management.

Inventory and operations managers in other firms would find this research useful for knowledge and operational implementation. The outcomes of the study through its findings would enlighten the inventory management practitioners in manufacturing industry on the role of inventory management and the relevance in promoting the operational performance

and would also assist the inventory managers in decision making regarding the appropriate level of inventory to be kept in the firm store in order to guarantee that customers are accorded proper service level. In addition, the outcomes of the study would help finance managers in determining what factors to consider when making inventory decisions.

Government and Policy Makers

This research has the potential to provide important insight for the government and policy makers with regards to making policies and taking the appropriate measures towards designing strategies for improving efficiency and effectiveness of inventory management and control system in the public sector. Inventory control effectiveness would bring about judicious resources utilization leading to the better services to the citizens. This would bring about good performance economy of the country as whole and further contributed to high standard of living of the citizens. Also, the research outcome of the study would help private sectors to adopt inventory management practices that would increase organizational financial and operational performance.

Researchers

Researchers and academicians would find the outcome of this research valuable to their study and advancement of knowledge. This research would provide useful contributions to the literature on the effectiveness of inventory management and control system. Furthermore, it would help to advance academic and scientific knowledge on inventory management practices and operational performance in firms. This research is also intended to fill some of the existing gaps that have been identified in the literature. Moreover, the study would help researchers to build knowledge and set the stage on which future researches could be built in the area of inventory management.

  • Definition of Operational terms

The following terms required special conceptual and theoretical definition in this study. Inventory: This is the summative of those items of tangible personal asset of a company which are: held for sale in the day to day activities of the business, such as finished goods; in the process of production for sale; work in progress; are to be currently consumed in the production of goods and services (Robert, 1998). It consists of raw materials, semi-finished goods and finished goods.

Direct inventories – These include items which play a direct role in the manufacturing process and become an integral part of the finished goods. They include raw materials, work in progress inventories, finished goods inventories, spare parts, and many others (Kitheka & Gerald, 2014).

Capacity:  the  total  amount of  things  that  something  can  hold  (Cambridge  Business Dictionary, 2012).

Practices: actual application or use of an idea, belief, or method, as opposed to theories relating to it (William, 2007).

Indirect inventories – include those items necessary for manufacturing but do not become an integral component of the finished product. It include lubricants; machinery/equipment; labour, and so on (Kitheka & Gerald, 2014).

Inventory Management: Refers to the process to define right inventory levels at various nodes within a supply chain network to minimize stock out; wastage of material due to expiry; optimize investment in inventory and storage facilities as per the available budget (Okanda, Namusonge, & Waiganjo, 2016). It deals essentially with balancing the inventory levels.

Inventory Management Practices: Refers to the set of policies and controls that monitor levels of inventory and determine what levels should be maintained, when stock should be replenished, and how large orders should be (Waters, 2003). In this study, Inventory Management Practices Comprises: Inventory Shrinkage, Inventory Investment, Inventory Control, Inventory Turnover, Inventory Record Accuracy, and Automated Inventory System.

Inventory Shrinkage: This is variance in the recorded value of stock in the inventory stock system, which records merchandise received at the store, and the value of actual inventory in the store, as determined by a physical count of inventory (Carl & Shaun, 2014: 101).

Inventory Investments: Refers to the investment in raw materials, work in progress and finished stock (Telsang, 2007).

Inventory Control: These are activities that maintain stockkeeping items at desired levels (Everett, Adam, & Ronald, 2010). It is also involves the procurement, care and disposition of materials (Onchoke & Wanyoike, 2016)

Inventory Turnover: Refers to the number of time that items of stock or inventory turns over or cycles through an organization in a year (Rao & Rao, 2009). It is a measure of management’s ability to use resources effectively and efficiently.

Inventory Record Accuracy: This is regarded as the least number, size and values of inventories held in stock (Wild, 2004). It is measured by how closely a firm official inventory records is equal to the physical inventory.

Automated Inventory System: This is a set of hardware and software based tools that automates the process of inventory management (Mbuvi, et al., 2016).

Operational Performance: Refers group of standards and benchmarks that are adopted and used by the organizations to achieve competitive advantage, customer satisfaction, and maximum level of profitability (Saleh, 2015). In this study flour mills companies’ operational performance was measured by the following variables: Customers’ Satisfaction, Competitive Advantage, Operating Cost Reduction, Operational Efficiency, Customer Service Delivery, and Productivity.

Customers’ satisfaction: Refers to the quality of products, service, price performance ratio including when a company meets and exceeds customers’ needs (Eckert, 2005).

Competitive Advantage: This is the capability of an organization to create a defensible position over its competitors (Li, Ragu-Nathan, Ragu-Nathan, & Rao, 2009). It is is obtained when an organisation develops or acquires a set of attributes (or executes actions) that allow it to outperform its competitors.

Cost Effectiveness: This is the extent to which the program has achieved or is expected to achieve its results at a lower cost compared with alternatives (DAC Glossary and IEG evaluation criteria, 2016). In this study, it is referred to as the inventory related costs.

Operational Efficiency: refers to the capability of an organization to deliver products or services to its customers in the most cost-effective manner possible while still ensuring the high quality of its products, service and support (Nasra, 2014).

Customer Service Delivery: refers to the meeting customers’ expectations with regard to order fulfillment through shorter lead times, consistent and on time delivery, complete orders, quicker response to customer requirements and ability to meet unique and special requests of the customers (Chopra & Meindl, 2004).

Productivity: It is an overall measure of the ability to produce a good or service by an organization or firm (Telsang, 2007). Productivity is particularly intended to enhance the ways and means in methods, equipment, and use of materials systems procedure, manpower and application of diagnostic and better techniques.

Stock: It is a wide range of goods or materials such as stationery, office equipment, plant, machinery, consumables, and so on available for use or sale (Aro-Gordon & Gupte, 2016).

Minimum Stock Level: Also known as buffer stock or safety stock. Is the amount expressed in units below which the stock of any given commodity should not be allowed to fall (Munyao, et al., 2015). It is the additional stock needed to allow for delay in delivery or for any higher than expected demand that may arise due to lead time.

Re-order Level: is the amount expressed in units of issue at which ordering action is indicated in time for the materials to be delivered before stock falls to a minimum (Munyao, et al., 2015).

Hastening Stock Level: is the amount expressed in units of issue at which it is estimated that the hastening action is necessary to request suppliers to make early delivery (Munyao, et al., 2015).

Maximum  Stock Level: It is the amount expressed in units of issue above which  the stock should not be allowed to rise (Mogere, Oloko, & Okibo, 2013). It helps avoid excess investments in stock, which is very critical.

Lead time – time between placing an order and actual replenishment of item. Also referred to as procurement time (Mogere, et al., 2013).

Safety Stock: the small extra supply of goods, materials, etc. that a company keeps in case the demand for them is greater than is expected (Cambridge Business Dictionary, 2012).

Setup  Cost;  the  amount  of  money  needed  to  start  a  business,  service,  process,  etc. (Cambridge Business Dictionary, 2012).

Procurement: Is determining order quantity, work processing, store requisitions, issue of  enquiries, evaluation of quotations, supplier appraisal, negotiations, placing of contracts,  progressing  of  deliveries  and clarifying payments (Ogbadu, 2009).

Time horizon – this is the period over which the inventory level will be controlled (Namagembe & Munene, 2016).

Reorder quantity – the quantity of the replacement order (Namagembe & Munene, 2016).

Economic batch quantity – quantity of stock within the enterprise. Company orders form within its own warehouses unlike in EOQ where it is ordered from elsewhere (Naliaka & Namusonge, 2015).

Production Control: Involves forward ordering, arrangement of materials for production, preparation  of  production  schedules and sequences,  issue  of  order  to  production  emergency action  to  meet  material  shortages,  make  or  buy  decisions, quality and reliability, feedback, and adjustment of supplies flow to production lines or sales trends (Ogbadu, 2009).

Buffer Stock: This is used to to compensate for the uncertainties inherent in the timing or

rate of supply and demand between two operational stages (Albert, 2009). It is used in order  to prevent stock out from occurring. It provides an extra level of inventory above that needed to meet predicted demand, to cope with variations in demand over a time period (Albert, 2009).

Service Level: Is a measure of the level of service, or how sure, the organization is that it can supply inventory from stock (Albert, 2009).

Shortage: a situation in which there is less of something than people wants or need (Cambridge Business Dictionary, 2012).

Shortage costs: costs when demand exceeds supply (Stevenson, 2010).

Inventory planning: Is the determination of the type and quantity of inventory items that would be required at future points for maintaining production schedules (Aarti & Dhawal, 2013)

Manufacturing companies:- These are establishments that combine men, materials and machinery in an effective manner with the aim of producing goods for human consumption and also to make profit for the on going of the business (Morgan, 2012).

1.10     Brief Historical Background of the Selected Flour Mills

Dangote Flour Mills Plc

Dangote Flour Mills Plc commenced operations in 1999, as a division of Dangote Industries Limited – one of Nigeria’s largest and fastest growing conglomerates. Following the strategic decision of DIL to unbundle its various operations, Dangote Flour Mills Plc was incorporated in 2006. The restructuring was completed in January,  2006,  when  the  Federal  High  Court sanctioned  a  Scheme  of  Arrangement  wherein  all  the  assets, liabilities and undertakings of the erstwhile flour division of DIL was transferred to Dangote Flour Mills Plc.

From an initial installed capacity of 500 MT per day at its Apapa mill, Dangote Flour has expanded rapidly by opening, in quick successions, three other flour mills in Kano (2000), Calabar (2001) and Ilorin (2005).  Each of the mills started with an installed capacity of 500 MT per day but three of them were subsequently expanded resulting in a total installed capacity of 4,000 MT per day, distributed as follows: Apapa – 1,000 MT per day; Kano – 1,500 MT per day; Calabar – 1,000 MT per day; and Ilorin – 500 MT per day.

These expansions were  in  response  to  a  growing  national  demand  for  flour  and  flour-based  products in addition to the Company’s drive for increased market share. Thus, from a modest beginning, the Company has grown to become one of the industry leaders within a six year period. The Company has 2 wholly owned subsidiaries, namely: i. Dangote Agro Sacks Limited; and, ii. Dangote Pasta Limited.

The Company is in the business of flour milling, processing and marketing of branded flour. Its product portfolio comprises of the following: i. Bread Flour; ii. Pasta Semolina; and, iii. Wheat Offals (Brans). In order to transform wheat into high-quality flour, the deployment of state-of-the-art plant and equipment as well as technical expertise is critical. DFM’s mills across the country are equipped with the latest flour milling technology available in the world. All mills were purchased, installed and commissioned by world-renowned milling equipment supplier- The Buhler Group of Switzerland (“Buhler”).

Flour Mills of Nigeria Plc (FMN)

Incorporated in September 1960, Flour Mills of Nigeria Plc (FMN) is one of Nigeria’s leading food and agro-allied companies which has grown into a diversified group with a broad product portfolio, an iconic brand – “Golden Penny”, and robust distribution network. The Group is primarily engaged in flour milling; production of pasta, noodles, edible oil and refined  sugar; production of livestock feeds; farming and other agro-allied activities; distribution and sale of fertilizer; manufacturing and marketing of laminated woven polypropylene sacks and flexible packaging materials; cement manufacturing; operation of Terminals A and B at the Apapa Port; customs clearing, forwarding agents, shipping agents and logistics; and, management of the mills of Maiduguri Flour Mills Limited  and  Port  Harcourt Flour Mills Limited.

FMN’s shares were listed on The Nigerian Stock Exchange in 1978 and had a paid-up Share Capital of N1.193 billion and Market Capitalization of N155.1billion on 31st March 2014. With the current ownership structure of 55.73% overseas shareholders and 44.27% Nigerian and institutional investors, there is a broad ownership base with over 77,500 shareholders. The Group employs over 12,000 direct and indirect employees with diverse ethnic, cultural and religious background who work harmoniously together to deliver superior value to customers and other stakeholders. Recently, the Company’s flour operations witnessed major strategic investments in milling technology and gained accreditation to the Quality Standard ISO 9001:2008 recognizing that its flour manufacturing facilities are world class and operating within an internationally recognized Quality System. The Company which delivered  N246  billion Revenue for the year ended 31st March, 2014 and posted an After Tax Profit of N10.47 billion is poised to continue to deliver meaningful top and bottom line growth.

Honeywell Flour Mills Plc

Honeywell Flour Mills Plc (HFMP) is one of the top three flour milling companies in Nigeria and was initially registered as Gateway Honeywell Flour Mills Limited in 1985. However, in June 1995, a change in the company’s ownership structure led to a change of name to Honeywell Flour Mills Limited (HFML). After its initial public offering (IPO) in 2008, the company became a public liability company and was listed on the Nigerian Stock Exchange (NSE) in 2009.

The entry of the company into the flour milling industry in Nigeria redefined industry standards as its high quality compelled an improvement in the quality of flour products by other players. Over the years HFMP has positioned itself as a market leader in milling, processing & packaging of flour and other wheat based products.

Honeywell Flour Mills Plc (HFM Plc) has its offices in Tin Can Island Port Industrial Estate, Apapa and Mobolaji Johnson Avenue Alausa, Ikeja. The Tin Can Island factory produces Honeywell Superfine Flour, Honeywell Wheat Meal and Honeywell Semolina while the Ikeja Factory produces Honeywell Noodles and Honeywell Pasta. The Company is principally involved in the manufacturing and marketing of wheat based products including flour (i.e. superfine, composite, and brown flour), semolina, whole wheat meal, noodles and pasta. The Company’s products are distributed through many distributors across the country.

As part of its vertical integration strategy, the Company acquired 100% ownership of Honeywell Superfine Foods Limited, manufacturers of pasta and noodles in 2008. However, in March 2013, the Company carried out a business combination in the nature of an internal restructuring with Honeywell Superfine Foods Limited. The business combination was in the form of merger by absorption with Honeywell Flour Mills Plc as the surviving Company while Honeywell Superfine Foods Limited was dissolved.

 

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