Chapter 1

The Problem and Its Setting

Introduction

The primary purpose of a business is maximization of profit. There are

external and internal factors as to why firms are losing their expected profit.

External factors connote the idea of the factors that is beyond the control of the

firm such as competition, government policies, and economic status of

consumers. On the other hand, internal factors are those that are within the

control of the firm such as financial difficulties, poor management of the firm,

stock-out of products and unavailability of services offered. This study which

focuses on inventory management of grocery stores seeks to find solutions on

the problems regarding inventory shrinkage.

Republic Act No. 9501 updated the definition of Micro, Small and Medium

Enterprises (MSMEs) by increasing the threshold. Micro enterprises are those

with assets, before financing, of P3 million (before P1.5 million) or less and

employ not more than nine workers. Small enterprises are those with assets,

before financing, of above P3 (before 1.5 million) to P15 million and employ 10 to

99 workers. Medium enterprises have assets, before financing, of above P15

million to P100 million and employ 100 to 199 workers.

Inventory management is a crucial function; it is not separate but rather a

requisite to profitability and to the whole organization of the firm. The

fundamental function for carrying inventories is to meet customer demands for a

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product. But in fact, it is physically impossible and economically impractical for

each stock item to arrive exactly where it is needed and exactly when it is

needed. Therefore, a reasonable level of inventory is normally maintained that

will meet anticipated or expected customer or user demand. Since demand is

usually not known with certainty, additional amounts of inventory are often kept

on hand to meet unexpected variations in excess of expected demand (Evans, et

al., 1990; Liang, 1997 and Yamoah, 2012). With good inventory management, a

business will possibly be able to have an inventory at the right quantity, at the

right place, at the right time and at the right cost. Ignoring the importance of

inventory management will lead to the shutdown of the firm (Mpwanya, 2005;

Kontus, 2014; Relph and Milner, 2015).

Many Organizations face great challenges in managing inventories. Poor

inventory management may result in under-stocking, overstocking as well as high

inventory total cost (Yamoah, 2012). Successful inventory management requires

sophisticated methods to cope with the continuously changing environment.

Literature is rich with papers about independent demand inventory modelling.

However, the practical implementation of inventory models lags behind the

development of inventory modelling (Silver, 1981). This hinders the practical

application of inventory models because an understanding of the fundamental

structure of complex models is the first step necessary to provide a workable

solution of the problem being considered. Moreover, the mathematical

techniques and other methods are only aids to management decision making.

They cannot replace the judgment of human experts. A manager may have
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several inventory models available to him, but if he is not sure which is the best

one for the situation, obviously, he may not be able to solve the problem

effectively (Kobbacy and Liang, 1999).

Grocery store holds a lot of different inventories which requires different

treatment individually as to their category. Holding inventory is a matter of

comparing the cost of keeping it to its actual demand. According to Trauzettel

(2014), when consumers enter to the store and did not found what they were

looking for, they will definitely leave the store and look for alternative store which

offers what they need. It is just like “money already but suddenly turns into

stone”. The Out-of-Stock (OOS) of inventory is the common problem of a firm

nowadays. In the study of Tan and Karatbati (2012), developing a product

substitution in the store may lessen losing expected sales. We agreed to the

claims of Cairns, et. al. (2016) that because of the intense competition of

supermarkets in Singapore, they managed well the on-shelf availability (OSA) to

prevent the occurrence of out-of-stock (OOS) and over stock (OS) of inventory.

There is no such business that has never encountered problems. But

there are few who can solve the problem with great efficiency and effectiveness.

One of the problems that merchandising companies like grocery stores face is

managing its inventories. According to Kobbacy and Liang (1999), to overcome

the drawbacks of the existing systems used and in order to achieve an efficient

knowledge-based inventory system one should answer the following fundamental

questions: First, does the system require responses from the user to questions in

order to select a suitable model? Second, how are the parameters used to
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choose suitable models estimated? Third, which inventory models should be

included in the knowledge base? Finally, how should the system communicate

with the user and access other management information systems? The

responses to these questions cannot be made unless a detailed study is made of

inventory modelling, quantitative forecasting, existing knowledge-based inventory

systems, and the tools available to develop it.

Statement of the Problem

This study assessed the Inventory Management of Micro, Small, and

Medium (MSM) Grocery Stores in Daet, Camarines Norte.

Specifically, this study answered the following questions:

1. What is the status of the enterprise in terms of:

1.1 age of the business,

1.2 size of the business,

1.3 capitalization,

1.4 Total inventory management personnel, and

1.5 Total employee?

2. What are the existing Inventory Management Practices used by

Grocery Stores?

3. Is there significant difference on the rank orders of the perceptions on

the procedures and practices in inventory management of MSM

grocery stores among the three groups of respondents?

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4. What are the problems faced by the Inventory Management of Grocery

Stores?

5. What are the strategies that can be recommended to lessen (if not

eliminated) the problems in inventory management?

Assumptions

The study is grounded on the following assumptions:

1. The respondents are reliable sources of information on behalf of the

enterprises.

2. The respondents are transparent with the inventory management

practices of the enterprises.

3. There are strategies that could be suggested to lessen the problems in

inventory management of grocery stores.

Hypothesis

There is no significant difference on the rank orders of the perceptions on

the procedures and practices in inventory management of MSM grocery stores

among the three groups of respondents.

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Significance of the Study

The researchers believe that this study will provide benefits to the

following:

Grocery Stores. This study will greatly contribute to the management in

improving its sales level and inventory management consistency, efficiency,

accuracy and convenience in providing and giving services. This will provide

them with useful information like the recommended techniques in inventory

control so as to meet their customers’ and organizations’ needs.

Customers. The customers will be benefited in a way that they could save

time in purchasing the goods they needed for it is readily available in the grocery

stores. This study will contribute to the accuracy and convenience in giving

services to customers.

Suppliers. This study will be helpful to the product suppliers in terms of in

every product name, the name of the supplier will be seen. If the time comes that

the products are already lacking in the business, the management will know who

the suppliers are and can contact them immediately.

Prospective Entrepreneurs. This research work will serve as financial

advice to those who are planning to engage in business in some future times.

Department of Trade and Industry. This study will help the agency to have

a clearer view and a sound basis for their future interventions with grocery stores.

BS in Accountancy Students. The study will give the students an insight

about inventory management practices and the importance of it. The techniques

or methods and thinking skills that were found out and developed in this study
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can also be applied to accounting subjects that the researchers are currently

taking especially in management accounting. Also, it may be applied in decision

making for every circumstance they encounter at present and in the future.

Government Agencies. The government with the help of the concerned

agencies can make amendments to existing laws that may affect the inventory

management.

Future Researchers. This study can be a reference to the future

researchers who will undertake studies in the same nature, also as contribution

for other topics or areas related to this study. In addition, this will also help the

future researchers to gather significant information and to learn more about the

problems that most grocery stores encounter in their inventory management.

The Researchers. This study will improve the knowledge of the

researchers about inventory management of merchandising entities. It will also

help them improve their skills in thesis writing. The researchers can also apply

the knowledge they learned as accountancy students.

Scope and Delimitation

The study entitled “Inventory Management of MSM Grocery Stores” was

conducted in Daet, Camarines Norte. Business proprietors of enterprises that are

registered in the Municipality of Daet that qualify under Philippine operational

definition of grocery stores were chosen as respondents of this study including

business owners or managers, and inventory management personnel to come up

with most reliable information needed. Wholesalers and convenience stores were
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excluded in the study. The inventory practices that are included in this study

were the Economic Order Quantity (EOQ) model, reorder point, just-in-time, fixed

order quantity system, fixed reorder cycle system, optional replacement system,

ABC classification system, materials requirements planning (MRP),

manufacturing resource planning (MRP-II), and enterprise resource planning

(ERP).

Definition of Terms

For better understanding of this study, the following terms used by the

researchers were conceptually and operationally defined.

Inventory Management is a formulation and administration of plans and

policies to efficiently and satisfactorily meet production and merchandising

requirements and minimize costs relative to inventories. It is extremely important

to the organization and failure to execute it properly may lead to the closing down

of the firm.

Micro, Small, and Medium Enterprises (MSMEs) is any business

activity or enterprise engaged in industry, agribusiness and/or services, whether

single proprietorship, cooperative, partnership or corporation whose assets,

inclusive of those arising from loans but exclusive of the land on which the

particular business entity’s office, plant and equipment are situated, must have

value falling under the following categories: Micro: not more than P3 million;

Small: above P3 million to P15 million; and Medium: above P15 million to P100

million. They must also have employees falling under the following categories:
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Micro: 1-9 employees; Small: 10-99 employees; and Medium: 100-199

employees.

Grocery Stores are retail shop that primarily sells food; non-perishable

foods that are packaged in bottles, boxes, and cans; some also have bakeries,

and fresh produce. This entity holds a lot of inventory with different category

which requires separate inventory management styles per category.

Inventories are assets which are held for sale in the ordinary course of

business, in the process of production for such sale or in the form of materials or

supplies to be consumed in the production process or in the rendering of

services. Maintaining it is one of the priorities of every entity.

Economic Order Quantity (EOQ) is the quantity to be ordered, which

minimizes the sum of the ordering and carrying costs. It is one of the basic

inventory management models.

Reorder Point is the level of inventory which triggers an action to

replenish the particular inventory stock. It is the minimum amount of an item

which a firm holds stocks, such that, when stock falls to this amount, the item

must be reordered.

Just-in-Time is an inventory planning technique wherein the availability of

inventory is based on actual demand. It only hold minimum amount of

inventories.

Fixed Order Quantity System is an order for a fixed quantity is placed

when the inventory level reaches the reorder point.

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Fixed Reorder Cycle System it is where the orders are made after a

review of inventory levels has been done at regular intervals.

Optional Replacement System it is where the orders are made after a

review of inventory levels has been done at the option of the management.

ABC Classification System it is where the inventories are classified for

selective control: “A” Items are high value items requiring highest possible

control; “B” Items are medium cost items requiring normal control; and “C” Items

are low cost items requiring the simplest possible control.

Materials Requirement Planning (MRP) is a designed to plan and

control raw materials used in production.

Manufacturing Resource Planning (MRP-II) is a closed loop system that

integrates all facets of a business, including inventories, production, sales, and

cash flows.

Enterprise Resource Planning (ERP) integrates the information systems

of the whole enterprise.