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0 Preamble Small scale businesses are mostly involved in transacting with already finished products which are ready for selling. In transacting with these types of merchandise, the business should always have enough stock to enable an effective and reliable supply of the products to their customers. Lack of enough stock in place may lead to loss of customers to the competition and hence a loss in the proceeds of the business. To avoid loss of customers due to stock-outs, a system should be put in place to control the stock level of goods and ensure an adequate supply of goods and ensure and adequate supply and minimize the costs involved in providing enough and reliable stock of goods to the customers. This is the overall objective of inventory management. A-One Electronics is a small scale business that deals with selling of electronic products. It transacts in selling solar panels, batteries, radios, television sets and assorted solar electrical. The purpose of this study is to determine the role played by inventory control systems in achieving effective inventory management in small scale businesses. 1.1 Background of the study Organizations are nowadays taking a great look at inventory being the asset that provides a sustained competitive advantage in the business environment. Changes in business environment have led to increased importance of managing inventory. The changes that have brought great concern in the business environment includes an increase in globalization, changing demographic patterns, diversified cultures, changes in the economic variables, changes in sociology and the influx of technology in the global scene. In this case, a store and purchasing department that lacks strategic integration fails to provide the highly needed
competitive advantage for the survival in the dynamically changing business environment. Thus the role played by inventory management in small scale businesses is of great importance. Internationally, most small scale businesses have adopted various techniques of enabling sustained supply of their products even to the remote most parts of the globe. This has led to a wide sourcing of products internationally (Gordon et al., 1982). Manufacturers of products have played a great role of providing their goods to all parts of every continent. Through this international break, complex networks of international alliances have been developed. These have spread the advantage of expertise and offering of particular products for participants in the small scale business. Internationalization has therefore provided a number of services such as lowering of psychological barriers, increased awareness of opportunities other markets and an increased international small scale business expertise, (Mue 2007). Regionally, the impact of a single global market has taken face with the ever changing business environment. Many businesses have been established across the different nations. In east Africa for instance, every country depends on each other for supply and demand of the different products needed. Most businesses have branches established in the different countries. This enables the provision of goods and services to each part of the countries. In Kenya, many businesses are located in the major town centers which have a considerable population size to provide demand for products. The population of the country has increased considerably from that of previous decades and it is anticipated to clock 40 million from last year s national census. This provides an affluent market for merchandise and a likely growth in small scale businesses. The economy of the country is in an upward growth from a decreased economic activity during the past post-election violence that rocked most of the major towns of the country. Small scale business development has greatly benefitted from the fact that in recent year, the government has made considerable headway in terms of making the business environment in Kenya more attractive to investors. Many small scale businesses have been established in all major towns. Nairobi having the bulk of small businesses is seen as the most lucrative location for opening of small scale stores. Nevertheless, opportunities in Nairobi s
central business district seem to have become exhausted with supermarkets and small scale business stores. Recent trends have shown that some of the larger businesses are beginning to open stores in sub-urban districts which have longer term potential (Mue, 2007). With a secured flow of income from small scale businesses, focus has been shifted from the bulk of stock in place, to determining what level of stock should be kept and avoid the high losses in the businesses due to stock shortages. The stock shortage is the difference between the amount of merchandise that is believed to exist in the store as stock according to records and the amount of stock that the physical inventory actually reflects to be in stock. Therefore it is important for small scale businesses to control losses due to stock shortages and theft. 1.2 Statement of the problem In an effort to embrace inventory management, many firms are providing information and strategy planning with a clear understanding of the facts of the business. Informed decision can be undertaken in order to improve inventory control system. One of the biggest challenges, that most small scale business face is developing effective inventory control system, which matches their organizational goals for maximum profitability of the business. i. Green and MischaDick (2001) focused on inventory level as a strategy for maximizing profit and they found that just like any investment in business; inventory needs to serve the purpose of maximizing profit. ii. Green and MischaDick (2002) also focused on inventory value using six-sigma, which considered the value addition or utilization of existing equipment considered outdated to produce high quality product efficiently. They found out that old equipment are viewed as not worth understanding and improving for operations, however, replacement cost can be staggering. iii. Khor and Thomas (2007) focused on the raw materials procurement and ordering methods. The study was based on the accuracy of the investigation on the methods to improve procurement and inventory control.
Small scale businesses experience high losses due to stock shortages and theft, this is as result of mistakes that have been made in keeping track of inventory, which means that the discrepancy is due to recording error or actual theft of merchandize. Some bookkeeping errors are bound to happen because people make mistakes. Far more serious, though is theft by employees or by customers stock damage is greatest during the holiday season and during special sales when customers are rushed and handle merchandize carelessly. These losses may also be due to increased competition which has led to reduction in market share, lack of enough capital for expansion and reliable suppliers. 1.3 Research questions This study will address the following questions: 1. To what extent has the adoption of inventory management led to success of small scale business 2. How do we lower holding costs and carrying costs of stock 3. What challenges face adoption of effective inventory management controls 1.4 Significance of the study The study is intended to help understand the effectiveness and role of inventory management and its effect on the operation of the business. This study therefore aims at evaluating the effectiveness and the success of inventory controls. This study is therefore so significant because management, suppliers of the products/materials, the public at large are going to benefit. In this case the manager will be enlightened on alternative ways of inventory control and problems associated with inventory management and application of inventory control systems. The suppliers will be able to ascertain the amount of material or product that a certain
organization will demand or need at a particular period of time, thus they are able to plan for their production level. The study will also help the society in such a way that they will know how to manage their asset especially the inventory they have. In the business situation customers will be assured of continuous flow of goods and services thus their needs will be satisfied, as the organization serves as a purchasing agent for the community. 1.5 Assumptions of the study Assumptions A major accounting issue arises when identical units of merchandise are acquired at different unit costs during a period. In such cases, when an item is sold, it is necessary to determine its unit cost using a cost flow assumption so that proper accounting entry can be recorded. There are 3 common inventory cost flow assumptions used in business, each identified with an inventory costing method: a. Cost flow is in the order in which the costs were incurred. b. Cost flow is in the reverse order in which the costs were incurred. c. Cost flow is an average of the costs. 1.6 Delimitation and scope of study The study will look at the role played by inventory management control systems in small scale businesses, and the case study will be on A-ONE ELECTRONICS; an electronics dealing shop located in Nairobi city along Luthuli Avenue and with branches in Athi-river town and Machakos town.
1.7 Definition of key terms 1.7.1 Inventory Inventories are the assets that are held; for sale in the ordinary course of business or in the process of production for such sale or in the form of materials or supplies to be consumed in the production process or rendering of services (Kagiri 2006). 1.7.2 Inventory management Inventory management encompasses the planning, organizing and control of activities that focus on the flow of inventory into or from the organization (Charles etc 1997).
CHAPTER TWO 2.0 LITERATURE REVIEW 2.1 Introduction This chapter explains the theoretical and empirical evidence about inventory management. In theory, features of effective inventory management systems are explained, how the use of computers affects the organizations use of inventory management systems, the need for controls and how to much demand with supply. In practice the chapter tries to look at previous studies done on the inventory management. It also establishes the knowledge gap. Successful inventory management involves balancing the costs of inventory with the benefits of inventory. Many small business owners fail to appreciate fully the true costs of carrying inventory, which include not only direct costs of storage, insurance and taxes, but also the cost of money tied up in inventory. 2.2 Review of Theories Inventory control is not a Science, more nearly it is a set of methods for figuring out how much stock to order, when and how to receive it (Tibur, 2008). It is one of the roles that management has to play by putting a system of keeping track of items in inventory. A powerful inventory management system is the base of the every good retail software package. An inventory management system lets you know what our important needs, with inventory management systems are, you can get minors to majors report on what you have in stock, on order transit. Retailer s software with an inventory management system eliminates the guesswork from running your retail business. The system can be set up to automatically notify you when its time to order more inventories such as when stock falls below a prearranged level. By always having your hottest items in stock, you will be sure to not sell due to out-of- stock items. Many retail software packages will even generate purchase orders, further streamlining inventory management. In addition to increasing your sales, retail software with an inventory management system drastically reduce
your operating costs by reducing the time spent manually counting inventory and creating purchases. It will also track which items are selling and which are not. By identifying your less moving items you can adjust their position, pricing or other issues earlier. You can also see which items are often purchased in pairs and can group them consequently in the store. Keeping inventory cost low is vital to competitive benefits. 2.2.1 Features of inventory management system In inventory management, different theories have been developed to support the different methods of inventory management. These methods have been based on various features that can be adopted in inventory management. These features include; i. ii. iii. iv. v. Get Your (Ware) House in Order Replenishment, Order Point and the Line Point Lead time The Economic Order Quantity Balancing, inventory and costs
Get Your (Ware) House in Order
This is where proprietor(s) of the business should ask themselves why they are in business. This helps them to focus on the aims and goals of their business hence are able to predetermine profits and anticipate losses when times are harsh. Under getting the (ware) house in order, a theory on inventory management was developed called the triangle of cooperation. The Triangle of Cooperation
The triangle of cooperation, developed by Jon Schreibfeder(2008), illustrates that most companies want to achieve the goal of effective inventory management: Effective Inventory Management allows a company to meet or exceed customers' expectations of product availability with the amount of each item that will maximize net profits or minimize costs. But whose responsibility is it to accomplish this goal? Often it is left to one person or department but it has found that effective inventory management takes support and acceptance of responsibility by sales, purchasing/replenishment, and warehouse personnel. He (Jon Schreibfeder) referred to this as the "triangle of cooperation":
Without the active participation of each of the triangle's sides, achieving effective inventory management is impossible. Here is a brief outline of specific responsibilities for salespeople, purchasing or replenishment, and warehouse people necessary to achieve this goal. Salespeople Determine what products should be stocked in each branch or warehouse; salespeople should be in almost constant communications with customers. They are probably in the best position to determine what must be in inventory to meet customers' expectations. It means that the customers' impression towards inventory is that it should meet their needs than the stock of your competitors.
Help develop the forecast of future sales of each product. The salespeople are also in the best position to observe customers' changing needs over time. They should help
determine why there was a large discrepancy between a forecast and what was actually sold in a specific week or month. For example, why did a customer buy an unusually large quantity of an item? Will this be a new ongoing requirement or was it a one-time only sale? Studying unusual sales activity can provide salespeople with valuable information for increasing future sales!
Help keep inventory records accurate. Salespeople are usually very empathetic with their customers. They often will go to great lengths to meet a customer's needs. However, they must follow the established rules for properly recording all material disbursements. For example, salespeople should not take material out of a warehouse without properly recording it in your computer system.
Purchasing or Replenishment People Make sure that inventory is available to meet the sales or usage forecast. While accomplishing this primary and most important goal, buyers must replenish stock in such a way as to minimize the "total cost" of each piece. If you minimize your total cost of inventory, you will maximize your profits! Decisions involved in minimizing the total cost of inventory include:
Decide the best source of supply for each product in each stocking location. Do you buy it? If so, from what vendor? Are replenishment quantities transferred from a central warehouse or distribution center? Do you assemble a product from component parts in this warehouse?
Determine the economic order quantity for each product. The economic order quantity (i.e., "EOQ") balances the cost of the material with the carrying cost of inventory and the cost of issuing and receiving replenishment orders (Jon Schreibfeder, 2008).
Warehouse Personnel Warehouse people make up the third side of the triangle of cooperation and responsibility. They must:
Organize stock in the warehouse to minimize the cost of filling orders.. It makes sense to store material to maximize the efficiency of the order fulfillment process.
Keeping inventory records accurate. If the quantity in the computer system does not agree with what is in the warehouse, salespeople won't know what is available for sale, and buyers will not replenish inventory at the right time. This task probably will involve conducting full physical inventories or cycle counting certain products each day.
Ensure that all material movement (both receipts and disbursements) are properly recorded. This will ensure that quantities in your warehouse remain accurate. After all, you can have an accurate forecast and bring material in such a way to minimize your total cost. But if it isn't properly recorded in your computer system, you will probably experience problems such as:
Bringing in unnecessary stock because previous stock receipts weren't correctly posted and you actually have more inventory than your system reports.
Unexpected stock outs due to unrecorded material disbursements, substitutes, damaged parts, and other "sloppy" procedures.
Protect inventory from breakage, spoilage, misplacement, and theft. Inventory is valuable, and all employees must realize that their paychecks result from the sale of inventory. If inventory is "lost," it must be paid for out of the company's profits. This means that fewer profit dollars are available to pay employees. (Jon Schreibfeder,2008)
Achieving effective inventory management is probably one of the most effective undertakings to increase your company's profitability. But it cannot be accomplished by just one person or department. It takes cooperation and commitment from everyone in sales, purchasing, and the warehouse. You must implement and maintain the "triangle of cooperation and responsibility." Protect the company against theft Make sure that the only people in your warehouse belong in your warehouse. Pilferage is a larger problem than most distributors realize. Establishing an approved stock list for each warehouse Order only the amount of non-stock or special order items that your customer has committed to buy. Before adding an item to
inventory, try to get a purchase commitment from your customer. If this is not possible, inform the salesperson who requests the tem that he or she is personally responsible for half the carrying cost of any part of the initial shipment that isn t sold within nine months (Jon Schreibfeder, 2008). Assign and use bin locations Assign primary and surplus bin locations for every stocked item. All picking and receiving documents should list the primary bin location (in either characters or a bar code). With correct bin locations on documents, order picking is probably the least complicated job in your warehouse. Assign inexperienced people to this task and your most experienced warehouse workers to receiving inventory and stock management. Recording all material leaving the warehouse There should be appropriate paperwork for every type of stock withdrawal. Under no circumstances should material leave the warehouse without being entered in the computer. Eliminate "no charge/no paperwork" material swaps. Product samples should be charged to a salesperson s account until they are either returned to stock or charged to the customer. Process paperwork in a timely manner All printed picking documents should be filled by the end of the day. Stock receipts should be put away and entered in the computer system within 24 hours of arrival. Set appropriate objectives for the buyers Buyers should be judged and rewarded based on the customer service level, inventory turns, and return on investment for the product lines for which they are responsible. Ensure that stock balances are accurate and will remain accurate Implement a comprehensive cycle counting program. A good cycle counting program can replace your traditional year-end physical inventory ii. Replenishment, the Order Point and the Line Point
Replenishment of inventory is normally based on safety stock quantities, order points, line points, and standard order quantities:
Safety Stock Quantity: This is the level of inventory maintained in stock to protect stock outs resulting from unexpected customer demand or vendor shipment delays. Order Point: The Safety Stock Quantity plus predicted demand during the anticipated lead time gives the point at which inventory should be replenished. Line Point: The Order Point plus predicted demand during the supplier review or order cycle the normal length of time between typical replenishment orders with the supplier. Standard Order Quantity: This is the minimum quantity that can be ordered once (Horngren, et al, 1997). Replenishment orders are typically placed with a supplier when the Replenishment Position (On Hand - Committed on Current Outgoing Orders + On Current Incoming Replenishment Orders) of an item is between its Order Point and Line Point Stock receipts for the replenishment orders. This will normally be received when the replenishment position is somewhere between a point equal to the Line Point Line point Demand during order Quantity cycle Demand during Order point anticipated lead time Safety Stock Safety Stock Order issued
Figure 1(b) Estimation of ideal inventory investment Line point Demand during order Quantity cycle Demand during Order point anticipated lead time Safety Stock Safety Stock Received Stock
Anticipated Lead Time Demand and the Safety Stock quantity:
For example, if a product is ordered when its replenishment position is just below the line point, shipment would be received when the available stock quantity equals the Line Point minus Anticipated Lead Time Demand. But if the product is not ordered until the replenishment position equals the Order Point, the receipt would probably arrive when the available inventory equals the Safety Stock. Therefore it can be estimated that the average quantity on hand at the time of stock receipt will be the average of the Line Point - Anticipated Lead Time Usage and the Safety Stock quantity.
The stock receipt of products with recurring usage will normally be equal to the specified Standard Order Quantity (SOQ) of the product. The average quantity of this SOQ on hand during the time it takes to consume the entire SOQ will be equal to half the SOQ:
Therefore the ideal average on hand quantity of an item with recurring usage should be equal to the average quantity on hand at the time of stock receipt plus half the SOQ:
[(Line Point - Anticipated Lead Time Usage) + Safety Stock]/2 + SOQ/2
Ideal average on hand quantity of each item with recurring usage can be multiplied with its average cost and compare it with the current inventory value of the product to determine whether there is currently over stocking or under stocking. iii. Lead time and just in time inventory management
Lead time is the time that elapses between the placing of an order (either a purchase order or a production order issued to the shop or the factory floor) and actually receiving the goods ordered (Daniel et al, 1999) If a supplier (an external firm or an internal department or plant) cannot supply the required goods on demand, then the client firm must keep an inventory of the needed goods. The longer the lead time, the larger the quantity of goods the firm must carry in inventory.
A just-in-time (JIT) is a philosophy that advocates the lowest possible levels of inventory. JIT espouses that firms need only keep inventory in the right quantity at the right time with the right quality. The ideal lot size for JIT is one, even though one hears the term "zero inventories" used. Small scale business can maintain extremely low levels of inventory. However, a firm may have a lead time of up to three months. That means that a firm that uses goods produced through a process of three months must place orders at least three months in advance of their need. In order to keep their operations running in the meantime, an on-hand inventory of three months requirement would be necessary. iv. Economic order quantity
It is the level of inventory that minimizes the total inventory holding costs and ordering costs. It is one of the oldest classical production scheduling models. The framework used to determine this order quantity is also known as the Wilson EOQ Model or the Wilson Formula. The model was developed by F. W. Harris in 1913. The required parameters in determining the EOQ are the total demand for the year, the purchase cost for each item, the fixed cost to place the order and the storage cost for each item per year. The number of times an order is placed will also affect the total cost; however, this number can be determined from the other parameters (Schwartz, 2009). Assumptions of the EOQ model 1. The ordering cost is constant. 2. The rate of demand is constant 3. The lead time is fixed 4. The purchase price of the item is constant i.e. no discount is available 5. The replenishment is made instantaneously; the whole batch is delivered at once.
EOQ is the quantity to order, so that ordering cost + carrying cost finds its minimum. (A common misunderstanding is that formula tries to find when these are equal.) Variables
y y y y y y
Q = order quantity Q * = optimal order quantity D = annual demand quantity of the product P = purchase cost per unit C = fixed cost per order (not per unit, in addition to unit cost) H = annual holding cost per unit (also known as carrying cost or storage cost) (warehouse space, refrigeration, insurance, etc. usually not related to the unit cost)
At EOQ Ordering Cost And Carrying Cost Are Same..... The Total Cost function The single-item EOQ formula finds the minimum point of the following cost function: Total Cost = purchase cost + ordering cost + holding cost - Purchase cost: This is the variable cost of goods: purchase unit price × annual demand quantity. This is P×D - Ordering cost: This is the cost of placing orders: each order has a fixed cost C, and we need to order D/Q times per year. This is C × D/Q - Holding cost: the average quantity in stock (between fully replenished and empty) is Q/2, so this cost is H × Q/2
To determine the minimum point of the total cost curve, set its derivative equal to zero:
. The result of this derivation is:
. Solving for Q gives Q* (the optimal order quantity):
Note that interestingly, Q* is independent of P, it is a function of only C, D, H. v. Balancing inventory and costs
There are three types of costs that together constitute total inventory costs: holding costs, setup costs, and purchasing costs. Holding costs Holding costs, also called carrying costs, are the costs that result from maintaining the inventory. Inventory in excess of current demand frequently means that its holder must provide a place for its storage when not in use. This could range from a small storage area near the production line to a huge warehouse or distribution center. A storage facility requires
personnel to move the inventory when needed and to keep track of what is stored. If the inventory is heavy or bulky, forklifts may be necessary to move it around. Storage facilities also require heating, cooling, lighting, and water. The firm must pay taxes on the inventory, and opportunity costs occur from the lost use of the funds that were spent on the inventory. Also, obsolescence, pilferage (theft), and shrinkage are problems. All of these things add cost to holding or carrying inventory. If the firm can determine the cost of holding one unit of inventory for one year (H) it can determine its annual holding cost by multiplying the cost of holding one unit by the average inventory held for a one-year period. Average inventory can be computed by dividing the amount of goods that are ordered every time an order is placed (Q) by two. Thus, average inventory is expressed as Q/2. Annual holding cost, then, can be expressed as H(Q/2). Set-up costs Set-up costs are the costs incurred from getting a machine ready to produce the desired good. In a manufacturing setting this would require the use of a skilled technician (a cost) who disassembles the tooling that is currently in use on the machine. The disassembled tooling is then taken to a tool room or tool shop for maintenance or possible repair (another cost). The technician then takes the currently needed tooling from the tool room (where it has been maintained; another cost) and brings it to the machine in question. There the technician has to assemble the tooling on the machine in the manner required for the good to be produced (this is known as a "set-up"). Then the technician has to calibrate the machine and probably will run a number of parts, that will have to be scrapped (a cost), in order to get the machine correctly calibrated and running. All the while the machine has been idle and not producing any parts (opportunity cost). As one can see, there is considerable cost involved in set-up. If the firm purchases the part or raw material, then an order cost, rather than a set-up cost, is incurred. Ordering costs include the purchasing agent's salary and travel/entertainment budget,
administrative and secretarial support, office space, copiers and office supplies, forms and documents, long-distance telephone bills, and computer systems and support. Also, some firms include the cost of shipping the purchased goods in the order cost. If the firm can determine the cost of one set-up (S) or one order, it can determine its annual setup/order cost by multiplying the cost of one set-up by the number of set-ups made or orders placed annually. Suppose a firm has an annual demand (D) of 1,000 units. If the firm orders 100 units (Q) every time it places and order, the firm will obviously place 10 orders per year (D/Q). Hence, annual set-up/order cost can be expressed as S(D/Q). Purchasing cost Purchasing cost is simply the cost of the purchased item itself. If the firm purchases a part that goes into its finished product, the firm can determine its annual purchasing cost by multiplying the cost of one purchased unit (P) by the number of finished products demanded in a year (D). Hence, purchasing cost is expressed as PD. Total = Holding cost + Set-up/Order cost + Purchasing cost or Total = H(Q/2) + S(D/Q) + PD 2.2.2 Need for inventory control records A comprehensive inventory control record system is relevant in order that:a) Goods sold can be recorded and balances in both physical and monetary terms calculated. b) Checks can be implemented on regular or random basis to minimize losses due to pilferage or damage in stores. c) Goods can be recorded on a receipt in relation to both quantity and price, by use of highly effective integrated computer system besides the manual system. d) Replacement of stock can be ordered when re-order level is reached.
e) Records can be examined in order to highlight slow moving inventory which may deteriorate or become obsolete. f) Inventory can be charged to the appropriate department code when issued from store. g) Returns to store can be properly recorded/ accounted for. h) Rightful quality and quantity duly signed for and recorded in Goods Received Note (GRN). i) Stock taking procedure at a given time is done efficiently. j) The valuation of stock for balance sheet and profit measurement purposes can be accurately implemented (Kagiri, 2006). 2.3 Empirical studies 2.3.1 Strategy for resolving maximum profit for inventory minimization Green and MischaDick (2001) found out that just like any investment in business; inventory needs to serve the purpose of maximizing profit. However, in many cases inventory has turned into a major cash flow constraint thus making it necessary to optimize inventory using analytical and statistical methods in an integrated approach. One of the biggest challenges in optimizing inventory is the fact that it is merely an output of many inter-organizational processes, all too often organization attempt to lower inventory using non-analytical approaches which lower service levels. The study was conducted through a case study of a major US corporation, where Green and MischaDick identified two-step approach of significant value; optimizing inventory levels while viewing the existing order fulfillment process as a given constraint and changing the fundamental order fulfillment process across the entire system. The first step was used to make quick and successful cash availability. The second step was used to generate breakthrough business results and provide a robust order fulfillment process that was to perform at lower inventory levels while providing extraordinary service levels.
The real world constraint is taken into account prior to deciding on the appropriate changes. Simulations are conducted to verify the appropriateness of the analytical models using actual process data. Cash flow problem is identified, further analysis reveals that inventory levels are high and turns are below most major competition. This study has not focused on the systems necessary for inventory management; they have only taken into consideration inventory level as a strategy for maximizing profit. 2.3.2 Inventory value using six- sigma Green and MischaDick (2002) found out that old equipment are viewed as not worth understanding and improving for the operations, however, replacement cost can be staggering. Certainty purchasing new equipment is necessary at times. However, frequently it is possible to produce good product with existing equipment. Properly characterizing existing equipment using statistical methods can yield significant improvements. The research was carried out through a case study to a major US manufacturer, made the decision to stop providing critical components. The supplier made the decision because the equipment was the 30-40 years old, yields had traditionally run at 60% and the margins were low, a baseline of the extrusion process was performed and a vast list of potential factors was identified during process mapping. It was also determined through measurement system studies that the measurement systems were not capable of measuring the parts. The measurement systems were improved and several screening designed experiments were conducted. Results showed a few key factors to be important. Follow-up optimization experiments were run. The process was producing 100% yield within 3 months on existing numbers. The next step was to produce parts that had not been previously produced. The first parts off of the new die met the desired specification, although slightly off target. This study has only considered the value addition or utilization of existing equipment considered outdated to produce high quality product efficiently, therefore it did not consider the systems necessary for inventory management
2.3.3 The study of inventory management of raw materials for a pharmaceutical company Khor and Thomas (2007) focused on the raw materials procurement and ordering methods. The study is based on the accuracy of the investigation on the methods to improve procurement and inventory control. The study used a case study of TCG a multinational pharmaceutical company, they used a twofactor classification method to rank the thirty eight types of raw materials in the warehouse in terms of their importance based on their past procurement cost and the amount of warehouse space they occupied. They proposed a just-in-time approach for the nine most important items by having timely orders that much closely to the production schedule. A continuous review model was used for the next eleven items of low importance and periodic review model was used for the remaining eighteen items, which are of the least importance. They provided recommendation on how to improve inventory control based on observation of the current practices. They found out that it might be possible to reduce the amount of space occupied by raw materials from the current average of 1076 pallet by 72%. The study focused on the inventory management of raw materials and ordering methods. It is also based on the accuracy of demand forecast for finished products and investigates the methods to improve procurement and inventory control using two-factor classification method i.e. continuous and periodic review. However, it does not say how these control systems are applied in various organizations. The researcher will concentrate on the inventory management system practice by retail firms which represent the general inventory oriented organization. 2.4 Knowledge Gap While earlier researches, on the area of inventory management have focused on the strategy for maximizing profit by maintaining the necessary inventory level. They have also focused on the utilization of existing equipment considered outdated to produce high quality product efficiently and therefore it did not consider the systems necessary for inventory management. These earlier studies have also focused on inventory management of raw materials and
ordering method which is based on the accuracy of demand forecast for finished products and has also investigated on the methods for improving procurement and inventory control using 2factor classification method i.e. continuous and periodic review. The implementation of RFID tagging in the inventory management of retailing store in order to control cost has also been considered. Therefore the past researches have focused on the systems necessary for inventory management; there have not been any considerations as to the extent of application in various organizations. This study having the limited scope of major retail store in Nairobi will be able to capture the data appropriate for effective adoption of inventory management in the most inventory oriented firms in the country; as a result any conclusion reached can hold to other industries which are represented by the firms in practice.
3.0 RESEARCH DESIGN AND METHODOLOGY
3.1 Introduction Under this section the chapter will show the methods and techniques that will be used to collect and analyze data during research. The research to be carried out is on enhancing effective inventory management to a small-scale business. Areas to be touched on include research design, target population, types of data, sources of data, tools to be used to collect data and the sampling design to be used.
3.2 Research design The research will use a case study. This design shows the analysis of the variables relevant to the subject under study because it will focus its attention on the individual study and not the whole population of small scale businesses.
3.3 Target Population The study targets the employees, the records keepers and the directors of A-One Electronics. Primary data will be collected through questionnaires which will be the main source of data and secondary data will be used to assist the evaluation of data to be collected in the field. Data collected in the field will be tested and results will help to write a report upon completion of analysis. The table below shows population of the study. Target population Category Employees Records keeper Directors Total Source (Author 2010) Population 24 4 2 30 Population % 80% 13.3% 6.7% 100%
3.4 Sample size and sampling design The sample of the study will consist of employees from six branches which will include; one branch in Nairobi, two branches in Athi River and three branches in Machakos town. A convenience sampling technique is used to select the sample due to proximity of the branches to the researcher. The questionnaires will be issued, one to each of the branches of the selected outlets.
3.5 Data description and collection methods The study will use both primary and secondary data. The primary data will be collected through a structured questionnaire administered on a drop and pick basis. The questionnaire will have two parts A and B which are open-ended questions. The questionnaires are aimed at collecting data on awareness of the concept of inventory management as well as the level of application in the target population. The secondary data will be from published sources such as the journals, books and online available information.
3.6 Data analysis method The data will be checked for accuracy and completeness of recording of the responses, this data will then be coded and checked for coding errors and omissions. The data will be single entered into a Microsoft Excel packages. Once all the data would have been entered, we will verify the Excel for accuracy and completeness of the entry. The data will then be run through the statistical package for social science (SPSS). SPSS helps in summarizing the data by use of descriptive statistics such as tables and percentages and prediction for numerical outcome using linear regression. It will then be presented in form of pie chart, bar graphs and line graphs where possible. Data analysis provides an easy way of interpreting information and hence arriving at more accurate conclusions.
PRESENTATION DISCUSSION AND INTERPRETATION OF FINDINGS Presentation of the findings This chapter presents analysis and findings of the research, from the study population target of 10 respondents, who were the respondents to the questionnaire, constituting 80% response rate. The total number of males is five constituting 62.5% while the females number is 3 constituting 37.5%.
Table 1: Gender of respondents
Frequency Male Female Total Source: Research Data 5 3 8 Percent 62.5 37.5 100
From the findings in the above table there were more males than females as represented by the figure below.
Figure 1: Gender of respondents
Gender of respondents
Source: Research Data
Table 2: Age of respondents
Frequency 20-29 30-39 40-49 Total Source: Research Data 4 3 1 8 Percent 50 37.5 12.5 100
From the above table, the researcher study revealed that the majority of the respondents were 20-29 years old as compared to 30-39 and 40-49 years old. The figure below was used to present this information.
Figure 2: Age of respondents
Age of respondents
20-29 50% 30-39 37%
Table 3: Respondents level of education
Frequency Post graduate Graduate Secondary Total Source: Research Data 1 4 3 8 Percent 12.5 50 37.5 100
Figure 3: Education level of respondents
Education level of respondents
Post graduate 12%
Source: Research Data On the education level of the respondents, the researcher found out that the majority of respondents were graduate compared to post graduate and diploma/college certificate. Period of time working at A-one electronics
Table 4: Period of time working at A-one electronics
Period 1 month- 1 year 1 year- 2 years 2years- 3 years Above 3 years Source: Research Data Frequency 1 1 3 3
From the above table, most of the employees have been at A-one electronics for 3 years and above and also 2year to 3 years. Only a few have worked for 2 years and below. Availability of inventory management systems
Table 5: Availability of inventory management systems and guidelines on inventory management
Frequency Yes Total Source: Research Data According to the above table, the entire respondent said that they have inventory management systems in their organization and also have written guidelines on inventory management. Type of inventory management system 8 8 Percent 100 100
Table 6: Type of inventory management system
Type 1. Classification system 2. Counting system 3. Internal control systems 4. Accounting systems Total Source: Research Data Frequency 0 2 3 3 8 Percentage 0 25 37.5 37.5 100
Figure 4: Graph of the type of inventory management system
Type of inventory management system
40 35 30 25 20 15 10 5 0 Classification system Counting system Internal control systems Accounting systems Type of inventory management system
Source: Research Data Objectives of using inventory management systems
Table 7: Objectives
Frequency Keep track of available inventory Increase sales As an internal control tool Make a requisition for more inventory Total Source: Research Data In the above table, the study sought to investigate the objectives of carrying out inventory management systems. Majority said to keep track of the available inventory as compared to increasing sales, as an internal control tool and making requisition for more inventory. 31 5 1 1 1 8 Percent 62.5 12.5 12.5 12.5 100
Figure 5: Objectives of using inventory management systems
Objectives of using inventory management systems
70 60 50 40 30 20 10 0 Keep track of Increase salesAs an internal Make a available control tool requisition inventory for more inventory Objectives of using inventory management systems
Source: Research Data Responsibility of developing inventory management systems
Table 8: Development responsibility
Frequency Stores and purchasing manager A project team from within Departmental managers Employees themselves Total Source: Research Data In the above table the study sought to investigate from the respondents who developed inventory management system. The majority of respondents said that departmental managers are responsible 2 2 4 0 8 Percent 25 25 50 0 100
while stores and purchasing managers and a project team from within each have equal responsibility, as compared to employees themselves who don`t have any responsibility.
Figure 6: Responsibility of developing inventory management systems
Responsibility of developing inventory management systems
60 50 40 30 20 10 0 Stores and purchasing manager A project Departmental Employees team from managers themselves within Responsibility of developing inventory management systems
Source: Research Data Responsibility of carrying out inventory management systems
Table 9: Responsibility of carrying out
Frequency Supervisor Peers Group supervisor Branch manager Total Source: Research Data 5 0 2 1 8 Percent 62.5 0 25 12.5 100
According to the findings in the above table, the majority of the respondent said that supervisors are responsible for carrying out inventory management system compared to the others. How clear and formalized the inventory planning process is
Table 10: Clarity and formalization of inventory planning process
Frequency Yes No Total Source: Research Data 6 2 8 Percentage 75 25 100
Figure 7: Clarity and formalization of inventory planning process How clear and formalized is inventory planning process
Source: Research Data From the above table, majority of the respondents say the stock planning process is clear and formalized compared to whom think that the stock planning process is unclear and not formalized.
Stock keeping and storage facilities From the findings the businesses have a store keeper and they do have inventory storage facilities.
Table 11: Stock keeping and storage facilities
Frequency Is there a store keeper Does the business have storage facilities 8 8 Percentage 50 50
Figure 8: Stock keeping and storage facilities Stock keeping and storage facilities
Does the business have storage facilities 50%
Is there a store keeper 50%
Source: Research Data
Transport and payment of inventory
Table 12: Transport and payment of inventory
How is stock transported to business premises? By pickups Payment for transport When Goods are delivered Source: Research Data The data indicated that the firm s stock is transported by use of pick-ups and that payment is done when the goods are received. Inventory storage 100% Percentage 100%
Table 13: Inventory storage
frequency Stored within the shops Stored in a warehouse Stored in owners residence Total Source: Research Data From the data collected, most of the branches had a warehouse for storing stock compared to storing stock within the shop outlets and in the owner`s residence. 2 5 1 8 percentage 25 62.5 12.5 100
Figure 9: Inventory storage
Stored in owners residence 13% Stored within the shops 25%
Stored in a warehouse 62%
Source: Research Data
Challenges experienced in the adoption of inventory management systems
Table 14: Challenges experienced
Very Strongly Agree Factors Do the systems you use in your company conflict with each other? Do your suppliers supply goods on time? Do customers shop lift stock/inventory from the shelves? Loss of inventory through theft by employees Does it take time to reconcile the systems that you use? Are there damages of inventory/stock by employees and customers? Source: Research Data The above table shows the findings on the challenges experienced in the adoption of inventory management systems. From the findings, the researcher found out that in the majority of the organization, the system used conflict with each other, suppliers supply goods on time, customers do shoplift stock in the shelves, there is less theft by employees, it takes time to reconcile the system and there are minimum damages of inventory by both employees and customers as shown above. 12.5 25 12.5 62.5 0 50 25 25 0 0 0 12.5 25 25 37.5 0 25 50 12.5 12.5 0 0 12.5 25 37.5 75 37.5 0 12.5 0 % Strongly Agree % Agree % Disagree % Strongly Disagree %
Improvement of inventory management system
Table 15: Actions to be taken to improve
Very Important Factors Have strong security controls to avoid shop lifters and theft by customers and employees The managers and team members should co-operate 37.5 62.5 0 % 75 Not Important Important % 25 % 0
The lead time for stock should be short to avoid stock out and damages Dealing with inventory/stock problems quickly as they occur
Use of computers at the sales and purchasing points and stock taking Handling inventory/stock with care by all concerned
Source: Research Data
The above table shows the action to be taken in order to improve inventory management systems. From the findings, respondents suggestions to improve the management systems were that majority of the organization strong security controls to avoid shop lifting and theft by both customers and employees, it is important for both manager and team member should corporate, lead time for stock should be short to avoid stock out and damages, dealing with problems as they occur, use of computers at the sale and purchasing point and handling inventory with care by all concerned as shown above.
Discussion of the findings From the analysis and data collected the following discussion was made. Guided by the objectives in the summary, the study shows that the respondents of the different branches of A-one electronics had some reasonable awareness of the practice of inventory management. 62.5 percent of the respondents were males and 37.5 percent were females. Of the total population majority of the respondents were aged between 20 and 29 years. 50 percent of the respondent had a graduate degree as the rest had post graduate and secondary certificate. The six branches that were took part in the survey were drawn from different geographical areas. These were from Nairobi, AthiRiver and Machakos. The study found out that the inventory management practices were practiced in all the firms surveyed. The reasons for using the inventory management system were varied but included to keep track of available inventory, increase sales, internal control tool and making a requisition for more inventories. The stores and purchasing manager, departmental managers and project team from within were responsible for development of inventory management system in the organizations. The supervisor, group supervisor and branch managers were responsible for carrying out inventory systems. In terms of meeting the challenges in adopting an effective inventory management system, the factor that was most met was dealing with problems as they arise. The challenge that was most experienced by the organization in the adoption of inventory management system was shoplifting of inventory by customers. Most of the branches should use computer at the point of sale and purchasing as well as handle inventory with care by all concerned. The study also revealed that in the majority of the branches, the inventory planning process was clear and formalized, objectives and tasks were clearly stated, inventory problems dealt with as they arise, performance by employees improved with inventory management, the cash and carry method of buying led to the improved inventory management, the customer services improved with adoption of inventory management, both managers and team leaders provided constructive feedback as required, had improved security systems, they used bar coding, both customers and employees handled stock with care.
Interpretation of findings The researcher found out that majority of the organization systems conflict with each other, supplier supplied goods on time, there was theft and shop lifting by customers, it took average time to reconcile the systems, there were little damages of stock by employees and customers and customers were satisfied as a result of ordering the right quantity. The study revealed that in the majority the organization, security should be strong to avoid shop lifting and theft by customers, both managers and team member should cooperate, the lead time for stock should be shorter to avoid stock out and damages. Stock should be stored within the firm and the firm should adopt just in time inventory system to avoid high storage costs. The firm should also deal with inventory problems as they occur, computers should be used at the point of sales and purchasing and stock should be handled with care by all concerned. From the research it was also noted that managers should ensure that employees are educated and understand the importance of efficient stock management.
Chapter 5 5.0 Summary, Conclusions and Recommendations Introduction This study was designed with these questions in mind: y To what extent has the adoption of inventory management led to success of small scale business? y How do we lower holding costs and carrying costs of stock incurred by small scale businesses and maximize their profits? y What challenges face adoption of effective inventory management controls?
Summary Extent of the adoption of inventory management in small scale business: Case A-One electronics The researchers established that small scale businesses mostly used inventory management systems and mostly practiced accounting system and internal control system both by 37.5 percent. Classification system and counting system were least used because of time consumption, a lot of paper work involvement and changes in technology. Determination of lowering holding and carrying costs that small scale businesses should incur to maximize profits: Case A-One electronics The researchers established that the business used storage facilities for storing stock. With these storage facilities the business incurred costs of storing stock and holding costs of stock. The business incurred transport costs relating to stock. This is the cost of carrying stock from the storage facilities to the business premises. The challenges experienced in the adoption of inventory management system: Case A-One Electronics From the research findings, it is established that small scale businesses are facing various challenges. The businesses usually have difficulty in reconciling the systems that they use, the
failure of suppliers to supply goods on time, conflicting systems, theft, shoplifting and damages of stock by employees and customers. Action to be taken; y Have strong security controls to avoid shop lifters and theft by customers and employees y y y y The managers and team members should also co-operate Dealing with inventory/stock problems quickly as they occur Use of computers at the sales and purchasing points and stock taking Handling inventory/stock with care by all concerned.
Conclusions From the findings in chapter four and the summary in this chapter, it can be concluded that majority of the organizations in small scale business practice inventory management system. It can be concluded from results that companies are adopting different types of inventory management ranging from classification system, counting system, internal control system and accounting systems. Stock holding costs and stock carrying costs are incurred in businesses that deal with ready merchandise. This is evidenced by the existence of warehouses and stock transport means. It can also be concluded that small scale businesses are faced with a number of challenges that bar the adoption of effective inventory management systems and which can be resolved by the given remedy actions. The research study reveals also that a number of further actions can be undertaken to achieve an effective inventory management systems. The actions are discussed in the recommendations of the study.
Recommendations In light of the above, the following recommendations are made: y y Inventory management should be incorporated in all functions of an organization Inventory management should be driven by the line managers with the objectives of developing the systems all round y Inventory management should be owned by all the employees for it to benefit the entire organization. y Training the employees on ways of handling and managing inventory as well as new employees on stock management and handling. y y Training the managers on internal control. Laying out formal procedures of inventory management of effective inventory management. y y y y Making sure employees and management are involved in the stock management. Improvement of storage facilities. Setting clear inventory controls as well as account for stock on regular periods. Introduction of effective computer systems.
The study inventory management is a new concept because inventory management is a new practice of management in the store and purchasing management. As seen in the background of this study, it is more practical in the western world than in Kenya and it has yield good results. It therefore needs to be explored further in Kenya and clear practice put in place to ensure proper management of the stock for maximum productivity and success as in the western world. Limitations The business in question A-One electronics did not give full information on inventory systems in place in its organization and also the full role the systems play in enhancement of achieving the overall objective of the business, that is, what level of profitability is achieved, fearing exposing confidential information about the business to competitors who are many and are lined up along the same business centre / street.
Areas for further studies as well as suggestions The research has revealed that there is inadequate use of the day technology. Further research is recommended in the following areas; y y Adoption of technology in the small scale businesses Impact of customer satisfaction on sales.
References for this chapter: a) Charles T. Horngren, George Foster & Srikant M. Datar (1997), Cost accounting, 9th edition, New Delhi: Prentice Hall b) Dominick (2008), How much inventory is too much? [Online] Available:
http://www.nextlevelpurchasing.com c) http://www.effectiveinventory.com/ d) Wren, Daniel A. (1999). "Just-in-Time Inventory." Knowledge Management Magazine, September: 1. e) Lines, Anthony. (1992). "Taking Stock of Stock Control." Malaysian Accountant. (April): 27-28. f) Sucky, Eric. "Inventory Management in Supply Chains: A Bargaining Problem." International Journal of Production Economics 93/94: 253
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