CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
        One of the major assets of any company or business are their inventories and they represent a large proportion of total investment of their business. Inventory constitutes one of the largest controllable assets of a business. Survey carried out by accountant international study group in 1968 shows that inventories generally constitutes after assets, the largest balance sheet item in the financial report of manufacturing and merchandizing firm expressed as a percent of net total assets. Managing assets of all kinds is basically an inventory problems. The inefficiency of an inventory may result in an unbalanced inventory. The firm may frequently be out of stock of certain type of inventory and overstock of other type as follows: Raw materials, work in progress and finished goods.
        It is pertinent at this juncture to point out that inventory policy cannot be established by a single executive. A sound inventory policy can be obtained by concerted efforts of the films executive committee. This is because production, marketing, financial and purchasing department all have a stake in inventory policy is to be adopted by any organization is as complex as it is important. There is a optimum level of investment for any inventory be it cash, physical plant and other inventories. A mistake in inventory policy may result in either too large or too little of being kept. If production and delivery of goods were instantaneous there would be need for inventory policy except as hedge against changes.
        Inventory must be maintained so that the customers may be saved immediately or at least quickly enough so that he does not turn to another source of supply. On the other hand, production operations cannot flow smoothly, without having inventories of work in progress direct materials, finished parts and supplies.
        For the purpose of this study, it is necessary to distinguish between inventory records and control and correct stores cards whose balances and physical counts are in agreement. There may be efficient requisition purchasing receiving and material handling. But despite all these thing and diligent employees the inventory control will be inadequate, clerical efficiency therefore is not in arrangement only major duty as inspection can attain inventory control. The major inventory problem is to maximize profitability by balancing inventory investment against what is required to sustain operation.
        The problem of inventory investment policy to non-profit organization like hospitals armed forces e.tc. and profitability can take the form of minimizing cost in these organization inventory control and record will not be needed and or applied unless there is a sound inventory policy. The big question asked by a number of businessmen and executive faced with the dilemma and frustration of attempting to maintain stable production operation, provide customers with adequate service and keep investment in stocks and equipment at reasonable levels.
        Why are we always out of stock? How often should we re-order or how should we adjust production when sales are uncertain? What capacity level should we set for operation? What do we plan as production and procurement for seasonal sales?  The idea of inventory involves the difficult of determining how big inventory should be. To some people, inventory should be just big enough but what is ‘BIG ENOUGH’. The problem is made more difficult because each individual within the management group tend to answer his questions from his or her own point of view. He or she fails to recognize cost outside his frame work and thinks of inventory in isolation from other operations.
        It is unfortunate that business executive are more to view inventories with dislike as an opportunity unnecessary drain on resources, something that one has been able to eliminate, but hardly a “productive” asset like a new machine or tool. They fail to realize that inventories are so productive in earnings as other types of capital investment. They serve as lubrication and spicing for production distribution system keeping it from burning out  or breaking down under external shocks. All organization to survive in this complex system, it must operate efficiently and inventory policy and management will hold to achieved this by resulting in relatively high utilization “ratio” how to write absolute and deteriorated inventories and few instances of work stoppage or cost of sales due to stock out. All these contribute to high profit margin high total assets utilization, high rate of return on investment and a strong stock price.