THE EFFECT OF INVENTORY MANAGEMENT ON THE PERFORMANCE OF SMALL AND MEDIUM SIZE ENTERPRISES IN BUEA MUNICIPALITY
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The study was the effect of inventory management on the performance of small and medium size enterprises in Buea Municipality. The objectives of the study were to examine the effect of net transaction on the performance of small and medium size enterprises in Buea. The objectives of the study were to examine the effect of economic order quantity on the performance of small and medium size enterprises in Buea .
The objectives of the study were to examine the effect of just in time on the performance of small and medium size enterprises in Buea .The study had three hypothesis that is net transaction significantly affect the performance of SMEs in Buea, economic order quantity significantly affect the performance of SMEs in Buea, just in time significantly affect the performance of SMEs in Buea. A sample of 40 questionnaires was taken and the primary method was use to carry out the study all the questionnaires were close ended.
The descriptive and regression analysis wereused to analysis the study and from the results it was shown that inventory management significantly affect the performance of SMEs in Buea. This study of inventory management on the performance was conducted on a few small and medium size enterprises in the municipality of Buea. The study used primary data that was collected entirely using a questionnaire.
Future studies ought to be conducted to cover many small and medium size enterprises and other sectors like the effect of inventory management on large scale enterprises’ performance. Future studies should also be conducted using both primary and secondary data. There is also need to carry out further studies by review of empirical studies.
1.1 Background of the Study
Small and medium size enterprises have been identified as one of the driving forces of modern economies, mainly due to their contributions to job creation and innovation in both developed and developing countries. SMEs constitute more than 95% of all firms, contribute approximately 50% of GDP and contribute to 60 to 70%of total employment (European commission 2014). In reality performance constitute one of the factors that occupy a very important role in developing as well as developed countries in the world.
Performance requires a comprehensive vision of interdependence between internal and external parameters, quantitative and qualitative technical and human, physical and financial management Alazard&Separi, (2001). Overall performance is the aggregate of economic performance, social performance and environmental performance Reynaud, (2003).
Performance is a broad concept in corporate discussions that refers to the extent to which a firm meets its objectives, goals, targets or the level to which it gears itself towards the organizational vision. Financial performance is concerned efficiency in asset utilizations to generate revenue. The concept of financial performance is the objective to ensure firms overall financial health going status Penman & Penman, (2007).
The Performance of SMEs in Cameroon is determined by several internal and external factors such as capital structure, motivation, the size of the enterprise and inventory control. Capital structure is the combination of debt and capital that a company uses to finance its business Damodaran, (2001).
Scholars have also argued a case in support of financial performance. The ratios have been classified for which profitability plays a vital role. According to Sahel et al (2003), financial institutions behave more cautiously when providing loans to SMEs which are of high interest rates, high collateral and loan guarantees thus a major problem to SMEs in Buea municipality. According to Tomlin (2008), economists argue that the resources smaller companies direct towards tax compliance are resources that could otherwise be used for investment facilities which thus hinder performance.
Inventory constitutes a very significant portion of the current assets of Small and Medium Scale Enterprises because most Small and Medium Scale Enterprises’ assets are in inventory form and their turnover represents the primary source of revenue and subsequent earnings to Small and Medium Scale Enterprises Prempeh(2016). Considering the level of investment required for inventory in Small and Medium Scale Enterprises it is essential to manage inventory efficiently and effectively in order to avoid idle or shortage resources and also ensure production continuity. Inefficient management of inventory can lead to under-utilisation of capacity and loss of profit.
The under-utilisation of capacity can intensify the unemployment problem in any economy. Well and efficient control of inventories can contribute to the effective operation of the firm and hence the firms overall profit Dubelaar, (2000). In many developing economies, small and medium scales enterprises employ substantial number of the work force. Therefore, efficient management of inventory in small and medium scale enterprises is very important for meaningful economic growth and or development of any country.
In Cameroon, just like many developing economies, SMEs occupy a central place in the economy and play a major role in stimulating growth and development. Abor&Adjasi (2007) articulated that SMEs contribute about 85 per cent of businesses in the country. Small enterprises have been identified as the catalyst for the economic growth of the country as they are a primary source of income and employment Mensah, (2012). In a developing economy like Cameroon, the share of business activity represented by the SE sector has increased considerably over the last decade of the 21st Century Abor&Adjasi and play an important role in achieving the Sustainable Development Goals Appah, (2015).
The long-term goal is for SEs to maximize their contribution to the country’s economic and social development of production, income distribution, employment and the closer integration of women and people in rural areas within the national economy. Given their significance to a nation’s economic growth and the role that they play in the fight against poverty, an understanding of the problems which negatively affect these businesses particular small cosmetics enterprises in Douala which are the focus of this paper is a vital first step in managing inventory and avoiding their massive failure.
The concept of inventory management has been visualized differently by different authors, academicians and researchers. According to Kolter(2007). Inventory management refers to the activities involved in developing and managing the inventory levels of raw materials, work in progress and finished goods so that adequate supply are available and the costs of over or under stocks are low Pandey (2005). Considering the level of investment required for inventory in Small and Medium Scale Enterprises it is essential to manage inventory efficiently and effectively in order to avoid idle or shortage resources and also ensure production continuity. Inefficient management of inventory can lead to under-utilisation of capacity and loss of profit. The under-utilisation of capacity can intensify the unemployment problem in any economy.
The efficient management of inventory in small and medium scale enterprises is very important for meaningful economic growth and or development of any country. According to Otuya&Akporien (2017). Large number of SMEs performs poorly due to incompetent management in recent years SMEs have encountered a lot of challenges in inventory management thus affecting the financial sector.
The inventory investment for a small business takes up a big percentage of the total budget, yet inventory control is one of the most neglected management areas in small firms. Many small firms have an excessive amount of cash tied up to accumulation of inventory sitting for a long period because of the slack inventory management or inability to control the inventory efficiently. An effective and efficient management inventory flow across the value chain is one of the key factors for success of large and small enterprises.
The challenge in managing inventory is to balance the tradeoff between the supplies of inventory with demand. Ideally a company wants to have enough inventories to satisfy the demands of its customers no lost sales due to inventory stock-outs. On the other hand, the company does not want to have too much inventory staying on hand because of the cost of carrying inventory. Inventory decisions are high risk and high impact for the supply chain management of an organization.
According to Dimitrios (2008), inventory management practices have come to be recognized as a vital problem area needing top priority. Now even small and medium size businesses can find affordable inventory management software to meet their needs. Inventories are vital to the successful functioning of manufacturing and retailing organizations. They may consist of raw materials, work in progress, spare parts/consumables and finished goods.
It is not necessary that an organization has all these inventory classes. But whatever may be the inventory items, they need efficient management as, generally a substantial share of its funds is invested in them. Different departments within the same organization adopt different attitude towards inventory. This is mainly because the particular functions performed by a department influence the department’s motivation. For example, the sales department might desire large stock in reserve to meet virtually every demand that comes. The production department similarly would ask for tasks of materials so that the production system runs uninterrupted.
On the other hand, the finance department would always argue for a minimum investment in stocks so that the funds could be used elsewhere for other better purposes Vobra(2008). Inventory represents an important decision variable at all stages of product manufacturing, distribution and sales, in addition to being a major portion of total current assets of many organizations represents as much as 40% of total capital of industrial organizations Moore, Lee & Taylor, (2003). It may represent 33% of a company’s assets and as much as 90% of working capital Sawaya&Graque, (2006). Since inventory constitutes a major segment of total investment, it is essential that good inventory management be practiced to ensure organizational growth and profitability.
Inventories make up an important part of a manufacturing firm’s production process as they facilitate continued production. The manner in which inventories are managed affects the performance of an organization because it contributes to the cost of production which later affects profitability in the small and medium scale enterprises. In order to manage inventories efficiently, effectively and obtain maximum performance in small and medium scale enterprises, the small and medium scale enterprises must normally have an inventory management system or practice which monitors or controls the flow of inventories so as to ensure that there is neither oversupply nor undersupply in the in small and medium scale enterprises.
Inventory includes; inventory of raw materials, inventory of semi-finished products, inventory of work in progress and inventory of finish products. Inventory management practices or system include; economic order quantity, net transaction approach, just in time management system and vendor managed inventory system. While performances in SMEs will include; expansion of small and medium scale enterprises, profitability, growth of SMEs and return on capital employed. Therefore, this study intends to examine the relationship between inventory management and the performance in small and medium scale enterprises.