The impact of inventory management system on the performance of small and medium size enterprises in Buea

ABSTRACT

          This research work titled “The Impact of Inventory Management System on the Performance of SME’s in Buea”, is aimed at examining the impact of inventory management system on the performance of SME’s in Buea. The data was gotten through primary source by using questionnaires. The study also used quantitative method of data analyzes. Regression techniques were used in the process of determining the impact of inventory management on the performance of SME’s in Buea. After performing the analysis, we discovered that inventory management has an impact on the economic, operational and financial performance of SME’s in Buea. From the result, SME’s in Buea should improve on the way it manages its inventory in order to boost its performance both economically, operationally and financially.

CHAPTER ONE

INTRODUCTION

1.1  Background of the Study

According to Kotler (2000), inventory management refers to all the activities involved in developing and managing the inventory levels of raw materials, semi-finished materials (work-in- progress) and finished good so that adequate supplies are available and the costs of over or under stocks are low.  Rosenblatt (1977) says: “The cost of maintaining inventory is included in the final price paid by the consumer. Good in inventory represents a cost to their owner. The manufacturer has the expense of materials and labour. The wholesaler also has funds tied up”. Therefore, the basic goal of the researchers is to maintain a level of inventory that will provide optimum stock at lowest cost.

Morris (1995) stressed that inventory management in its broadest perspective is to keep the most economical amount of one kind of asset in order to facilitate an increase in the total value of all assets of the organization – human and material resources. Keth et al. (1994) in their text also stated that the major objective of inventory management and control is to inform managers how much of a good to re-order, when to re-order the good, how frequently orders should be placed and what the appropriate safety stock is, for minimizing stock outs. Thus, the overall goal of inventory is to have what is needed, and to minimize the number of times one is out of stock. Drury (1996) defined inventory as a stock of goods that is maintained by a business in anticipation of some future demand. This definition was also supported by Schroeder (2000) who stressed that inventory management has an impact on all business functions, particularly operations, marketing, accounting, and finance. He established that there are three motives for holding inventories, which are transaction, precautionary and speculative motives. The transaction motive occurs when there is a need to hold stock to meet production and sales requirements.

A firm might also decide to hold additional amounts of stock to cover the possibility that it may have under estimated its future production demand is uncertain. The speculative motive for holding inventory might entice a firm to purchase a larger quantity of materials than normal in anticipation of making abnormal profits. Advance purchase of raw materials in inflationary times is one form of speculative behavior.

Enterprises has to acquire, allocate and control the factors of production that are necessary to the achievement of its objectives. Inventory management as one of the key activities of business logistics, has always been a major preoccupation of an organization ‘s survival and growth. According to Chase et al (2004), inventory is the stock of any item or resource used in an organization. Solomon and Pringle (1977), defines inventory as a physical resource that a firm holds in stock with the intent of selling it or transforming it into a more valuable state.  An inventory system is the set of policies and control that monitor levels of inventory and determine what levels should be maintained, when stock should be replenished and how large orders should be. The SME’s in Buea is the centre of this study to see if their success can be attributed to the kind of inventory system they embark on.  The aim of inventory management is to hold inventories at the lowest possible cost, given the objectives to ensure uninterrupted supplies for ongoing operations. When making decisions on inventory, management has to find a compromise between the different cost components, such as the cost of supplying inventory, inventory – holding costs and costs resulting from insufficient inventories (Hugo, et al, 2002). There are various categories of inventories kept in an organization but the most common are six and include: cycle stock, in-transit inventories, safety or buffer stock, speculation stock, seasonal stock and dead stock (Stock and Lambert (2001). Cycle stock is the inventory that results from the replenishment process and required in order to meet demand under conditions of certainty that is when the firm can predict demand and replenishment times / lead times almost perfectly.  In-transit inventories are items that are en- route from one location to another. They are considered part of cycle stock even though they are not available for sale.

Safety or buffer is stock held in excess of cycle because of uncertainty in demand or lead time. The notion is that a portion of average inventory should be devoted to cover short – range variations in demand and lead time. Speculation stock is inventory held for reasons other than satisfying current demand. For example, materials may be purchased in volumes larger than necessary in order to receive quantity discounts, because of a forecasted price increase or materials shortage, or to protect against the possibility of a strike. In JMS such inventories may be Stored since it is involved in production of drugs, procurement, storage and sale. This can be done in case of anticipation of an increase in the dollar exchange rate since it continuously fluctuating (Stock et al, 2001).

Seasonal stock is a form of speculative stock that involves the accumulation of inventory before a season begins in order to maintain a stable production and supply.  Dead stock is inventory that no one wants, at least immediately. The question is why any organization would incur the costs associated with holding these items rather than simply disposing of them. One reason might be that management expects demand to resume at some point in the future. Alternatively, it may cost more to get rid of an item that it does to keep it. But the most compelling reason for maintaining these goods is customer service. Perhaps an important buyer has an occasional need for some of these items, so management keeps them on hand as a good will gesture. According to Opio (2011), there are some instances in company where they find themselves with dead stock yet they have an elaborate inventory management system.

Bloomberg et al (2002), state that   there a number of reasons that make organizations hold stock. These include economies of scale, balancing supply and demand; specialization, protection from uncertainties and buffer key interfaces that creates time and place utility. Key interfaces include: supplier and purchasing, purchasing and production, production and marketing, marketing and distribution, distribution and intermediary and intermediary and customer. Having inventory at these interfaces helps ensure that demand is met and stock outs are minimized.

1.2   Statement of the Problem

 Organization are more concerned with stock control because a lot of funds are invested in stock and stock forms are an important and major item of a firm’s investment, despite the fact that most organizations carry out inventory control through stock taking, surprise checks and other methods, there is always a variance between the actual result and the records kept by these organizations, thus exposing them to stock related costs that affect performance and service delivery. Traditional views of inventory management tend to focus on inventory at the item level and to be reactive in nature, often seeking to optimize inventory performance at a single location at the expense of the overall system (Closs, 1989). Despite this growth in value and importance of more rigorous inventory techniques, many organizations continue to rely on simple, item based approaches (Thonemann, Brown, & Hausman, 2002). Under these traditional approaches to inventory management, inventory levels for an item are determined by simple formulas that balance inventory holding, ordering, and stock out costs (Thonemann et al., 2002). Such approaches are considered simpler due to a lack of sophistication and because decisions on the individual inventory item levels are often made without considering other items.  They go on to identify the use of simplistic inventory stocking policies as one of the common pitfalls of supply chain management. The lack of and evident need for “real world” evidence related to the use of a system approach to inventory management, especially as a means for addressing inventory control in SME’s in Buea, served as the motivation for this study.

      The main research question is: What is the effect of inventory management on the performance of SME’s in Buea? In order to better answer this question the following specific questions need to be answered;

1. What is the role played by the inventory management on the economic performance of SME’s in Buea?

2. What is the extent to which this inventory management practices on operational performance of SME’s in Buea?

• What is the effect of inventory management on the financial performance of SME’s in Buea?

1.3  objective of the study

The main objective of this study is to examine the effect of inventory management on the performance of SME’s in Buea.

This study will be based on the following specific objectives which will enable us to achieve our main objective;

• To analyze the ct of inventory management on the economic performance of SME’s in Buea.
• To examine the impact of inventory management on the operational performance of SME’sin Buea.
• Determine the extent to which this inventory management the profit of small medium size enterprises in Buea

MANAGEMENT PROJECT TOPICS WITH MATERIALS

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