THE IMPACT OF INVENTORY MANAGEMENT ON THE PERFORMANCE OF SMALL AND MEDIUM SIZE ENTERPRISES

ABSTRACT

The main purpose of management of inventory is basically to try and balance the conflicting economics of not wanting to hold too much inventories or stocks. However, most managers ignore the saving potential that arise from proper management of inventories, trying to treat inventories as a necessary evil and not as an asset that require to be managed. As such, some firms do not or ignore to control their inventory holding, this usually leads to under stocking and causing the firm to stop or slow its production.

This finally results to firm’s ineffectiveness. This study sought to examine effect of inventory management on performance of small and medium size enterprises in Buea. The study employed a descriptive research design. The Population of the study involved thirty SMSe thus the study carried out a census of thirty  firms in Buea Cameroon . The study used secondary data, which was collected using a data collection sheet from thirty firms.

The study concluded that inventory management significantly influence the performance of small and medium size enterprises in Buea Cameroon. The study recommended that the management of small and medium size enterprises should adopt effective inventory management practices like just in time and material requirement planning. This is because such inventory management practices would improve their performance in their business.

CHAPTER ONE: INTRODUCTION

1.1 Background of the Study 

Stock or Inventory constitutes a substantial proportion of the current asset group. It represents investments made for obtaining a return (Duru, Oleka&Okpe, 2014). Inadequate inventory has an adverse potential effect on the smooth running of the business, while excess inventory involve extra cost, which can reduces the firm’s profits (Panigrahi, 2013). Excessive stock is not desirable for longer periods because high inventory levels increase carrying cost and as inventory is increased, the profitability decreases (Priyank&Hemant, 2015). Hence, a suitable inventory control strategy will help in ensuring that the firms always keep an optimal amount of assets. Freeing frozen amounts in the form of stocks or inventories increases the firm’s efficiency in the use of its resource (Ziukov, 2015). As such, a well-functioning inventory system has a great effect on total firm’s performance as well as that of the firm’s managers (Akindipe, 2014).

Inventories are part of current assets, which are convertible to other forms of working capital (cash and other receivables) in less than one year (Milicevic, Davidovic&Stefanovic, 2010). The theory of inventory management involves making decisions that are in line with basic trade off among firm’s objectives, costs and other constraint (Mathuva, 2013). The economic order quantity theory, suggests that firms should maintain the quantity of inventory which provides the lowest total holding cost and acquiring cost (Milicevic, Davidovic&Stefanovic, 2010). Thus, inventory management is vital to for an effective and efficient firm. It is also important since it helps the firm in determination of the optimal amount of materials and goods a firm can hold at any given time (Kumar &Bahl, 2014).

Profit of an organization can easily be maximized with the help of an effective inventory management system in places. Profit maximization is all about cost minimization and revenue maximization. An effective inventory management improves the firm’s total performance through matching inventory management practices and a competitive advantages especially now that most organizations operates in a more competitive industries or sectors all over the world (Mahidin et al., 2015). The main goal and objective of inventory management system is to keep at the necessary required inventory at any time so that production runs smoothly without interruption whatsoever (Panigrahi, 2013). Inventory is the second largest assets as shown in the statement of financial position in small and medium size enterprises. It’s only exceeded by equipment and the physical facilities (Eneje, Nweze, &Udeh, 2012) 

1.2 Research Problem 

The main goal of management of inventory management is all about balancing the conflicting economics of not wanting to hold less stock or too much stock at any point in time (Kumar &Bahl, 2014). Return maximization on investment of inventories present a considerable proportion of firm’s working capital which is a key function of the firm’s financial manager (Mathuva, 2013). However, most managers ignore the saving potential that arise from proper management of inventories, trying to treat inventories as a necessary evil and not as an asset that require to be managed. As such, some firms do not or ignore to control their inventory holding, this usually leads to under stocking and causing the firm to stop or slow its production. This finally results to firm’s ineffectiveness (Anichebe&Agu, 2013). According to Schreibfeder (2006) many organizations usually fail to examine its investment in inventory. They most focus on maximization of returns. 

In Cameroon , more and more institutions including small and medium size enterprises are increasingly adopting inventory management systems with the aim of achieving competitive advantage and enhancing their performance (Swaleh&Were, 2014). However, the main challenge today among firms in Cameroon is about the need to enhance of efficiency and improving on effectiveness at the same time. Cameroonian firms are known to have a poor inventory management techniques which has negatively affected the firm’s ability to service and satisfy their customers (Thogori&Gathenya, 2014). Thus, the need to study effect of inventory management on performance of small and medium size enterprises in Buea Cameroon.

In addition, several studies have been carried out on inventory management across the world and in Cameroon too. A study by Folinas&Shen (2014) on effect of inventory turnover and inventory days on performance of the firms in United Kingdom’s agricultural machinery industry. The study revealed that inventory days are vital to financial performance of organizations, however to varying degrees. Additionally, Eneje, Nweze, and Udeh (2012) studied the effect of raw materials inventory management on profitability of brewery companies in Nigeria. The study established that efficient management of the raw material inventory significantly affects the profitability of the brewery firms in Nigeria. 

In Kenya, Thogori&Gathenya (2014) examined the role of inventory management on the customer satisfaction and established that most firms in Kenya have poor management of inventory systems, which negatively affects the firm’s ability to satisfy their customers. Sitienei and Memba (2015) also explored the effects of inventory management on the profitability of the Cement manufacturing firms. The study established a negative relation between inventory turnover, conversion period of inventory and storage cost with firm’s profitability. However, most of the inventory management research globally and in Cameroon focus on inventory management of large scale and mostly manufacturing entities thus ignoring small and medium size enterprise. In addition, most of the studies focus on inventory management and profitability leaving out operating cash flows. Thus, the question: What are the effects of inventory management on firm profitability and operating cash flows on small and medium size enterprises?

1.3 Research question

These question outlined here are proposed by hypothesis. These questioned will be vividly analyze in this work. The questions include the following;

1. Thus inventory affect productivity of firms?

2. Thus inventory management affects the profitability of firm?

3. Is inventory management correlated with operating cash flow?

1.4 Research Objective

• To examine effects of inventory management on the performance of small and medium size enterprises in Buea Cameroon.
• To increase firm effectiveness. The effectiveness of the firm is increased when the company’s holding and ordering cost is being minimized. The point were the ordering costs and holding costs are equal is called the economic order quantity.