INVENTORY MANAGEMENT PRACTICES AND LOGISTICS PERFORMANCE IN OIL AND GAS FIRMS

INVENTORY MANAGEMENT PRACTICES AND LOGISTICS PERFORMANCE OF OIL AND GAS FIRMS

Inventory management aims at efficient purchasing, storage and use of the materials. Inventory management practices play a major role in the operations of many businesses including oil and gas companies in Rivers State.

Therefore, there is a need to study the effects of inventory management on logistics performance in oil and gas firms.

CHAPTER ONE

1.1 Background of the Study

Today oil and gas firms in Rivers State of Nigeria are operating in a turbulent and changing economic environment. Thus, they need to use new strategies to overcome the new threats in terms of competition and new economic realities on their customer base and assault on its bottom line. Thus, to remain competitive by investing in inventory function, it thus becomes imperative to manage inventories effectively and efficiently to avoid unnecessary holding costs and ensure a high level of return, especially in a dwindling oil and gas economy.

Inventory is the stock of raw materials, work in progress, finished goods and supplies held by a business organization to facilitate operations in the production process (Munyao, Omulo, Mwithiga and Chepkulei, 2015). Inventories can either be assets as well as items held in the ordinary course of business or they can be goods that will be consumed or used in the production of goods to be sold (Eroglu, Brent, and Waller, 2006). Inventory management aims at efficient purchasing, storage and use of the materials. Inventory management practices play a major role in the operations of many businesses including oil and gas companies in Rivers State.

In recent years, several oil and gas firms in Rivers State have faced and are still facing numerous challenges especially in inventory management and material control, thus affecting the logistics performance of these firms. There have been cases of materials overstocking which eventually get outdated and turns to dead stock, understocking, lack of stock-taking and chronic delays in deliveries of materials which have further adversely affected the smooth operation and profit of the firms.

According to the United Nations (2018), organizations have dramatically changed their views of stock in recent years. Historically, they saw stock as a benefit, with high stocks ensuring maximum service and even giving a measure of wealth. This thinking encouraged firms in the oil and gas sector and others to maximize their stocks and this is still the reason countries keep reserves of gold and why individuals keep food in the freezer. But in the 20^th century, it became clear that these stocks had costs that could be surprisingly high. Then organizations began to view stocks not as unreserved benefits but as resources that need careful control and thus the need to devise ways of minimizing overall costs. More recently, firms have gone further in reducing stocks, and they try to work with very low levels.

On the cost side, most obvious are the costs of holding inventory, which include the capital costs (interest or opportunity) and the physical cost (storage, insurance, and spoilage). In recent years, several systems have been developed in the field of operations management to deal with excess inventory problem. Management–oriented systems include the Just-In-Time (JIT), the materials Requirements Planning systems (MRP). There is also the Economic order quantity {EOQ} model. According to this model, some costs (ordering costs) decline with inventory holdings, while others (holding costs) rise and that the total inventory-associated cost curve has a minimum point. This is the point where total inventory costs are minimized. The economic order quantity is the level of inventory that minimizes the total of the inventory holding cost and ordering cost.

ABC analysis, the purpose of this approach to inventory control is to try to identify the selective vital few of the items which constitute the greatest bulk of the total inventory, and give them special/critical attention, while the rest {trivial many} are only normal attention. Thus, the firm will be spending its resources on what is important in terms of costs.

In the same vein, the optimum inventory level lies between inadequate inventories and excessive inventories. Therefore, it is important to note that a good inventory practice is the one that engenders competitiveness as a strategy and this defines the set of customer needs that it seeks to satisfy through its products and services. Competitive strategy targets for oil and gas firms one or more customer segments and aims to provide products and services that will satisfy these customer’s needs.

This delivery performance represents the on-time and fulfillment of customer needs of time, place, quantity, quality, and cost. It also explains how the firm uses the inventory to meet up production targets and ensure smooth operations.

Inventory management, therefore, involves ensuring a constant supply of stock to avoid stock out and have uninterrupted spares and efficient customer service, maintaining sufficient stock, controlling investment in inventories by keeping at an optimum level of production while minimizing carrying costs and delivery time. The objective of good inventory management is to ensure a sufficient level of stock which maintains an acceptable level of available demand while minimizing the related holding, administrative and stockout costs. Several types of research have been undertaken within the sphere of inventory management, these include purchasing, classification, inspection, codification, storekeeping and stock-taking which includes stock control. As shown in the works of Miller (2010); oil and gas firms in Rivers State of Nigeria are facing competition in the current market place.

1.2 Statement of the Research Problem

Inventory constitutes the most significant part of current cost and assets in any organization and because of the relative largeness of Inventories maintained by most organizations, a considerable sum of organizations fund is being committed to them and this has become a recurrent challenge to management. To run an uninterrupted production line, organizations keep large inventories.

Consequently, they run the risk of stocking up more than is required thus leading to excessive inventories. This is the situation the oil and gas firms in Rivers State, Nigeria find themselves in as most time they hold excessive inventories that tie up their working capital and boost up carrying costs. This affects negatively their performance and cost of operation (Rajeev, 2010).  On the other hand, insufficient inventories hamper the production process and mitigate turnover volumes and bottom- lines.

Accordingly, this potential waste can be turned into a good source of savings for any organization with the adoption of a good and efficient inventory management system. It is expected that oil firms are meant to hold optimal inventory to meet with performance through the right inventory practices. However, this is not true. The inadequate or absent of inventory practices such as Economic Order Quantity (EOQ), MRP, JIT, and ABC analysis may have caused this low logistics performance.

Many inventory systems are based on arbitrary rules. Inventory management is a fundamental pillar in an organization and should be taken seriously. Some of the goods and services required may not be readily available in-country, thus, global sourcing may be applied. Due to this, robust inventory management is required to be in place to ensure timely delivery and quality standards are observed.

Though, studies have shown how inventory control could lead to a firm’s delivery performance. It is our thinking too that these measures of inventory control could also cause delay performance. Thus, for oil and gas firms to entrench its competitiveness, it needs to embrace the changing competitive trends in the market by improving inventory management practice. Several studies done on inventory management practices have rarely considered logistics as a basic component of inventory and this is the gap that this study is filling. Based on the foregoing, therefore, this study sought to investigate the inventory management practices and logistics performance in oil and gas firms in Rivers state in Nigeria.

1.3 Aim and Objectives of the Study

This study aims to examine the inventory management practices and logistics performance of oil and gas firms in Rivers State. Specifically, the aim was achieved through the following objectives:

1. Examine the socio-economic characteristics of the respondents
2. Examine the awareness of respondents about different types of inventory control practices
3. Investigate the usage of inventory control practices techniques applied by oil and gas firms in Rivers State, Nigeria
4. Determine the contribution of inventory control practices to the performance of the logistics department
5. Determine the level of effectiveness of inventory control practices
6. Examine the impacts of inventory control practices on logistics performance

1.4 Research Questions

1. What are the socio-economic characteristics of the respondents?
2. Which inventory control practices are applied in the oil and gas firms in Rivers State, Nigeria?
3. What is the awareness of respondents about different types of inventory control practices in the study area?
4. Which of the inventory control practices is applied by oil and gas firms in Rivers State, Nigeria?
5. How would the inventory control practices in oil and gas be rated in terms of their contributions to the performance of the logistics department?
6. What is the level of effectiveness of inventory control practices used by the oil and gas firms in Rivers State?
7. What are the impacts of inventory control practices on logistics performance?

1.5 Research Hypotheses

Based on the problem statement and the objectives of the study, the following hypotheses are formulated for this research.

Ho: There is no significant relationship between the usage of different inventory control practices and logistics performance in the oil and gas firms in Rivers State, Nigeria.

1.6 Significance of the Study

The findings from this study are expected to educate the reader about the benefits of inventory management and logistics performance as the literature is awash with inventory control techniques. This study will be a good reference to inventory managers and workers in the oil and gas sector. This study will be useful to the academic/scholars of the subject matter because it will be a good source of literature for future researchers and the general public.

1.7 Scope of the Study

This study x-rays inventory management practices and logistics performance in oil and gas firms in Rivers State. This research touches on all existing system of inventory practices in oil and gas firms in Rivers State while attempts were made to touch on all areas in the study, detailed study would not be conducted on some aspects of inventory management practices due to some clear constraints. This includes among others, the cost of conducting a holistic study is enormous. In addition to all the above, this study takes a cursory look at the level and priority placed/accorded inventory management in production/service-based oil and gas organizations.

1.8 Limitations of the Study

This study was carried out in Port Harcourt Rivers State. This poses a scope constraint.  This research effort has been made to conduct a detailed study on inventory management and logistics performance. However, it is limited in measuring as variable/construct is used. One of the constraints is the existence of so many inventory practices available. Nevertheless, the time and attitude of workers to freely release information for the work were noticeable constraints.

1.9 Definition of Terms

• Economic Order Quantity (EOQ) Model

The economic order quantity known as the Wilson EOQ model is a model that defines the optimal quantity to order that minimizes total variable costs required to order and hold inventory (Aro-Gordon and Gupte, 2016). EOQ refers to the optimal ordering quantity for an item of stock that aids in the minimization of costs. This inventory management technique assumes that the demand for the item is known with certainty, the lead time is known and fixed, the receipt of the order occurs in a single instant, quantity discounts are not calculated as part of the model and shortages of inventory or stock out do not occur. Economic order quantity graphs illustrate the relationship amongst the ordering costs holding total costs and economic order quantity (Swami, Pareek, Singh and Yadav, 2015,).

• Just-In-Time: {JIT}

This is an inventory management method whose goal is to maintain just enough material in just the right place at just the right time to make first the right amount of the product (Toptal, Ozlu, and Konur, 2014), this was pioneered by the Japanese manufacturing firms where inventory is acquired only when required in business for production process and this aimed at improving the return on investment of the business by reducing in-process inventory and its associated costs (Ullah and Kang, 2014). In this system, the supplier has the responsibility of delivering the components and part to the production line “just in Time” to be assembled. Other names for just in time system is Zero stock inventory and production (Moric Milovanovic, Sisek & Kolakovic, 2012).

For the just in time method to work successfully the quality of the parts must be very high because defective materials could halt the operations of the assembly line, there must be dependable relationships and smooth co-operation with suppliers, ideally this implies that the supplier should be located near to the company with dependable transportation available (Kolakovic, 2010).

Just in time inventory management system helps in reducing inventory costs by avoiding carriages of excess inventories and mishandling of raw materials. According to Qureshi,  Iftikhar, Bhatti, Shams, and Zaman (2013), just in time purchasing recognizes high costs associated with holding high inventory level and as such it has become important in most organizations to order inventory, just in time of production so as to cut costs of holding inventory like storage, insurance, obsolescence, and deadstock (Singh and Ahuja, 2012).

• Material Requirement planning {MRP}:

This is a technique of working backward from the scheduled quantities and need dates for finished products specified in a master production schedule to determine the requirements for components needed to meet the master production budget schedule (Ullah and Kang, 2014). This inventory management technique determines what components are needed, how many are needed, when they are needed and when they should be ordered so that they are likely to be available when needed (Singh and Ahuja, 2012).

Material requirements planning (MRP) is a production planning, scheduling, and inventory control system used to manage manufacturing processes. Most MRP systems are software-based, but it is possible to conduct MRP by hand as well. Plan manufacturing activities, delivery schedules, and purchasing activities.

An MRP system is intended to simultaneously meet three objectives. Ensure materials are available for production and product are available for delivery to customers. Maintain the lowest possible material and product levels in store. Plan manufacturing activities, delivery schedules, and purchasing activities.

• ABC Technique/practice

ABC analysis is an inventory categorization method that consists of dividing items into three categories, A, B, and C: A being the most valuable item, C being the least valuable ones. This method aims to draw managers’ attention on the critical few (A-items) and not on the trivial many (C-items).

• ABC analysis

is a system for inventory control used throughout materials and distribution management. It is also sometimes referred to as selective inventory control or SIC. ABC analysis can be put -to -use for a wide range of inventory items, such as manufactured products, components, spare parts, finished goods, unfinished goods r sub-assemblies. Whatever sort of items on an inventory it is used for, the approach works by setting all of them into three distinct categories. Therefore, ABC analysis is a system of categorization using three classes, of which each class has a differing management control.

The ‘ABC’ in ABC analysis, as known as ABC Classification, refers to the three classes or categories used in the system. The first, A, is the category for outstandingly important items, or business-critical. The second, B, is the classification for items of average or middling importance.

Finally, category C is the designation for relatively unimportant items. As a basis for a control scheme, each class ought to be handled differently. As you might have guessed, more attention will usually be devoted to category A items, with less to B and still less further to C.

ABC Analysis allows inventory/purchasing managers to segregate and manage the overall inventory/suppliers into three major groups. This allows different inventory/supplier management techniques to be applied to different segments of the inventory/suppliers in- order to increase revenue and decrease costs. In terms of a Pareto Analysis, it separated the critical few from the trivial many.

“A” Category items generally represent approximately 15%-20% of an overall inventory by item but represent 80% of the value of an inventory. By paying attention to close attention in real-time to the optimization of these items in inventory, a great positive impact is possible with minimal increase in inventory management costs.

“B” Category items represent 30%-35% of inventory items by item type and about 15% of the value. These items can generally, be managed through period inventory and should be managed with a formal inventory system.

“C” Category items represent 50% of actual items but only 5% of the inventory value. Most organizations can afford a relatively relaxed inventory process surrounding these items.

• Delivery Performance:

Logistics performance practices involve the speed of delivery, the responsiveness, and flexibility of delivery also influence average sales growth and business profitability {Green et al 2008}

In logistics, flexibility is the ability of logistics management to respond to customer requests, to anticipate change, to adapt and to accommodate special or non-routine requests and to handle unexpected events, from both the viewpoints of the supplier and the customer, ensuring minimal cost and delays (Karia, 2011).

Fugate et al, {2010} defines logistics performance as effectiveness, efficiency, and differentiation in performing logistics activities and added value customer receives from logistics activities.

Logistics encompasses all the information and material flows throughout an organization, it is the process of strategically managing the parts and finished inventory {and related information flow} through the organization and cost-effective fulfillment of orders {Christopher 2010}

• ICT

This is a computer-based information system that supports all aspects of logistics management including the coordination and management of various activities such as; fleet scheduling, inventory replenishment and flow planning {Chang and Lee 2007}

1.10 Organization of the Study

For ease of exposition, the study is structured into five sections, with this section as the introduction, section two reviews the relevant literature focusing on conceptual and theoretical appreciation of inventory management practices. The research methodology adopted for the study is briefly explained in section three. Section four presents the overall results of the study, while section five concludes the study and provides a general scope for further research.

Literature Review on Inventory management and logistics performance

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