MAKERERE UNIVERSITY

COLLEGE OF EDUCATION AND EXTERNAL STUDIESSCHOOL OF DISTANCE AND LIFELONG LEARNING

DEPARTMENT OF OPEN AND DISTANCE LEARNING

INVENTORY MANAGEMENT AND FINANCIAL PERFORMANCE MANUFACTURING INDUSTRIES:A CASE OF UGANDA CLAYS LIMITED

ACAYE PHILIP KILAMA

06/U/9333/EXT

A RESEARCH REPORT SUBMITTED TO COLLEGE OF EDUCATION AND

EXTERNAL STUDIES, SCHOOL OF DISTANCE AND LIFELONG

LEARNING, DEPARTMENT OF OPEN AND DISATANCE

LEARNING IN PARTIAL FULFILLMENT OF THE

REQUIREMENTS FOR THE AWARD OF

THE DEGREE OF BACHELOR OF

COMMERCE OF MAKERERE

UNIVERSITY

MAY, 2011

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DECLARATIONI, Acaye Philip Kilama declare that this work is original and has never been submitted to any

other institution for award of any degree where the work of others has been used, reference has

been made there of.

Signed…………………………………… Date:………………………

ACAYE PHILIP KILAMA

06/U/9333/EXT

(CANDIDATE)

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APPROVALI thereby certify that I supervised the candidate and his report is ready for examination

Signed by……………………………….. Date……………………….

MR BYARUGABA PONTIUS

(SUPERVISOR)

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DEDICATIONTo my dear parents Mr. Kilama Wilson Olal(deceased), my mother Mrs. Kilama Mary Adong,

my brother Aliker Walter Kilama, my wife Akello Solina, my children; Joel and Jude, my sisters;

Jenniffer, Agnes, Susan, Betty and Irene; and all relatives and friends who bore my absence

while I was at the university. I also appreciate the great support they gave me while at the

university and home preparing and working on this report.

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ACKNOWLEDGEMENTI wish to thank in a special way, the Almighty Father for availing me the grace and opportunity

to study up to this level, for the encouragement, gift of life and the strength to carry out this

research as it is absolutely difficult and time consuming.

My thanks go to the Management and the entire Staff of Uganda Clays Limited for the assistance

they rendered to me including sparing a lot of their time answering my questionnaire.

My appreciation and acknowledgement goes to my family for all the support and encouragement

they rendered to me while at Makerere University.

I, also, in a special way, thank my supervisor Mr. Byarugaba Pontius for his professional

supervision and encouragement.

I am grateful to Bongomin Moris, Okwir Denis and Kikwiyakare Walter for the professional

advice and editing of this research report.

My special thanks also go to the management and staff of Makerere University for giving me the

opportunity to carryout this research study and allocating me to Mr. Byarugaba Pontius for

supervision.

I am greatly indebted to management and staff of Gulu District Local Government for allowing

me to go for further studies and my fellow students for their patience.

Lastly, my appreciation goes to my course mates, and friends for all their moral and academic

support rendered.

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LISTS OF ABBREVIATIONSUCL Uganda Clays Limited

ACCA Association of Chartered Certified Accountant

EOQ Economic Order Quantity

JIT Just In Time

DPS Dividends Per Share

EPS Earning Per Share

PBT Profit Before Tax

ROE Return on Equity

ROA Return on Assets

UIA Uganda Investment Authority

SPSS Statistical Package for Social Sceinces

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TABLE OF CONTENTSDECLARATION..............................................................................................................................iAPPROVAL....................................................................................................................................iiDEDICATION...............................................................................................................................iiiACKNOWLEDGEMENT..............................................................................................................ivLISTS OF ABBREVIATIONS.......................................................................................................vTABLE OF CONTENTS...............................................................................................................viABSTRACT....................................................................................................................................x

CHAPTER ONE............................................................................................................................11.0 INTRODUCTION...................................................................................................................11.2 Statement of the Problem...........................................................................................................41.3 Purpose of the Study..................................................................................................................51.4 Objectives of the Study..............................................................................................................51.5 Research Questions....................................................................................................................51.6 Scope of the Study.....................................................................................................................61.6.1 Geographical Scope................................................................................................................61.6.2 Subject Scope..........................................................................................................................61.6.3 Time Scope.............................................................................................................................61.7 Justification/Significance of the Study......................................................................................6

CHAPTER TWO...........................................................................................................................72.0 LITERATURE REVIEW.......................................................................................................72.1 Introduction................................................................................................................................72.2 Types of Inventory.....................................................................................................................72.3. Inventory Models......................................................................................................................82.3.1 Order Cycle Methods of Inventory.........................................................................................82.3.2. Pareto (80/20) Distribution...................................................................................................82.3.3. Economic Order Quantity......................................................................................................82.4 Balancing Inventory and Costs..................................................................................................92.4.1 Holding Costs.........................................................................................................................92.4.2. Stock out Costs.....................................................................................................................102.4.3 Set-Up Costs.........................................................................................................................102.4.4. Purchasing Cost...................................................................................................................11

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2.4.4.2 Other lot-sizing techniques................................................................................................142.5. Inventory Management...........................................................................................................152.5.1. Two bin systems...................................................................................................................162.5.2 ABC analysis.........................................................................................................................172.5.4 Theory of constraints (TOC).................................................................................................182.5.5 Materials Requirements Planning (MRP) system.................................................................182.6 Why Firms Hold Inventory......................................................................................................192.7 Determination of Inventory Level...........................................................................................192.8 Financial performance of an organization...............................................................................212.9 Performance Indicators............................................................................................................232.10 Relationship between inventory management and financial performance............................24

CHAPTER THREE.....................................................................................................................273.0 RESEARCH METHODOLOGY.........................................................................................273.1 Overview..................................................................................................................................273.2 Research Design......................................................................................................................273.3 The Study Population..............................................................................................................273.4 Sample Area.............................................................................................................................283.5 Sampling procedures/Techniques............................................................................................283.6 Sources of Data and Collection Methods................................................................................283.7 Procedures of Collection Data.................................................................................................283.8 Data Collection Instruments....................................................................................................283.8.1 Interviews.............................................................................................................................293.8.2 Questionnaires......................................................................................................................293.8.3 Documentary Reviews..........................................................................................................293.9 Data Analysis...........................................................................................................................293.10 Limitation of the study...........................................................................................................29

CHAPTER FOUR.......................................................................................................................30DATA PRESENTATION, ANALYSIS AND INTERPRETATION OF THE FINDINGS..304.0 Introduction..............................................................................................................................304.1 Background Information on Respondents...............................................................................304.1.1 Findings on the sample sex...................................................................................................304.1.2 Findings on the qualifications of respondents......................................................................31

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4.1.3 Findings on Age of Respondents..........................................................................................31Table..............................................................................................................................................314.1.4: Findings on how long the respondents have worked for the company..............................324.2 Inventory Management System Employed by Uganda Clays Limited...................................334.2.1 Response on the inventory management system employed by Uganda Clays Limited.......334.2.2 Response on maintenance of stock levels.............................................................................334.2.3 Response on maintenance of inventory levels for each item................................................344.2.4 Responses on proper records of inventory............................................................................344.2.5 Responses on existence of stock taking................................................................................354.2.6 Responses on whether stock taking figures agree with the record figures...........................354.2.7 Responses on how often stocktaking is carried out..............................................................364.3 Findings on the Profitability Levels of the Industry................................................................364.3.1 Responses on the trend of profitability.................................................................................364.4 Findings on the Relationship between Inventory Management and Profitability...................374.4.1 Responses on the level of inventory management system in Uganda Clays Limited..........374.4.2 Responses on the level of profitability in Uganda Clays Limited........................................374.4.3 Responses on whether inventory management significantly affected the financial performance of Uganda Clays Limited..........................................................................................384.4.4 Correlation between inventory management and financial performance (profitability)......38

CHAPTER FIVE.........................................................................................................................40SUMMARY, CONCLUSION AND RECOMMENDATIONS..............................................405.0 Introduction..............................................................................................................................405.1 Summary of Findings..............................................................................................................405.1.1 Summary of the Findings on Inventory Management System in Uganda Clays Limited....405.1.3 The Summary of Findings on the Relationship between Inventory Management System and Financial Performance (Profitability)............................................................................................415.2 Conclusion...............................................................................................................................415.3 Recommendations....................................................................................................................42References......................................................................................................................................44Appendices....................................................................................................................................46Appendix A: Questionnaire...........................................................................................................46Appendix B: Letter of Introduction...............................................................................................51

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List of tables

Table 1: Major Shareholders in Uganda Clays Limited..................................................................3

Table 2: Showing Trend of Profits In Uganda Clays Limited(in ‘000 Shs)....................................4

Table 3: Inventory in metric tones...................................................................................................5

Table 4: Income Statement............................................................................................................22

Table 7: Sex of respondents...........................................................................................................30

Table 8: Qualification of respondents............................................................................................31

4.1.3 Findings on Age of RespondentsTable 9: Age of respondents.............................................31

Table 10: Period of service in the company..................................................................................32

Table 11: Responses on Inventory management systems..............................................................33

Table 12: Response on whether stock levels are maintained........................................................33

Table 13::Stock maintenance for each item...................................................................................34

Table 14: Proper records of inventory...........................................................................................34

Table 15: Existence of stock taking...............................................................................................35

Table 16: Agreement between stock taking figures and record figures........................................35

Table 17: Frequency of stock taking.............................................................................................36

Table 18: Profitability trend...........................................................................................................36

Table 19: Profit Margin of Uganda Clays Limited (2002-2006 in ‘000 Shs)...............................37

Table 20: Quality of Inventory management system and profitability..........................................37

Table 21: Profitability in UCL.......................................................................................................37

Table 22: Effects of inventory management on performance of UCL..........................................38

Table 23: Correlation table showing the significance of the relationship between inventory

management and financial performance........................................................................................38

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ABSTRACTThe research study was aimed at establishing the effects of inventory management in

manufacturing industries, a case study of Uganda Clays Limited. The study was meant ; to

evaluate the inventory management system in Uganda Clays limited, to establish the profitability

level in Uganda Clays Limited, and to establish the relationship between inventory management

and financial performance of Uganda Clays Limited.

The researcher used random sampling. Staff within Uganda Clays Limited constituted the study

population. Thirty respondents were sampled. Primary data was collected by use of

questionnaires. Secondary data was from existing literature and data was analyzed using

percentage scores and frequencies, the correlation analysis of the relationship between inventory

management and financial performance was done using SPSS and Pearson’s Correlation

coefficient was used.

The findings revealed that the relationship between inventory management and the level of

financial performance has been fairly good, and on a raising trend. However, inventory is the key

current asset with a substantial portion in the form of work in progress and spares and

consumables, which are not as liquid as cash and receivables. The company is working on

increasing its liquidity levels by streamlining its processes to ensure better and effective

inventory management.

The researcher recommends that, proper records of inventory of each item must be maintained

and ensure that rate of inventory turn over increased. There is need for interdepartmental

coordination between Marketing and Production to avoid having much inventory at year end.

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CHAPTER ONE

1.0 INTRODUCTIONIn the late 1980s, most manufacturing industries relied on Agricultural products for raw materials

and machinery, and as a result the problems plaguing the agricultural sector hampered both

production and marketing in manufacturing. Processing industries for cotton, coffee, sugar and

food crops were dominant , but Uganda also produced textiles, tobacco, beverages, wood and

paper products, construction materials and chemicals.

In the late 1980’s, the government began to return some nationalized manufacturing firms to the

private sector in order to encourage private investment and increase on the effective and efficient

performance of these firms. The primary aim was to promote self sufficiency in consumer goods

and strengthen linkages between agriculture and industry. By 1989, the government estimated

manufacturing output to be only about one third of the post independent peak levels achieved in

1970 and 1971.

Only eleven out of eighty two manufacturing establishments surveyed by the Ministry Of

Planning and Economic Development were operating at more than 35% capacity. Overall,

industrial output increased between January 1986 and June 1989 and the contribution from

manufacturing increased from only 5% to more than 11% during the same period.

The manufacturing sector in Uganda comprises of Agricultural, manufacturing plants, food

processing, construction materials which include; steel products, clay works and others.

The companies involved in the manufacturing sector include but not limited to; East African

Steel Corporation, the two cement producing plants at Tororo and Hima, Uganda Clays limited

which is the subject of this research.

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1.1 Background of the study

Inventories are materials and supplies that a business or institution carries or holds either for sale

or to provide inputs or supplies to the production process (Arnold 1998).

Inventories exist in three different types; finished goods, work in progress and raw material that

are used to facilitate business operations.

When too much of inventory is kept, it raises the operation costs through storage cost, damages

and so on. On the other hand, losses are likely to occur if too little inventory is kept due to an

interruption in operations. Therefore, a good operations manager is one who will easily strike a

balance of how much inventory of each type should be kept in order to gain a greater efficiency

in production or operations. This therefore makes inventory management inevitable as it takes a

large portion of the operation manager’s job.

Performance of an organization relates to how well or badly an organization is doing in relation

to the given or selected variables. The variables could be sales turnover, environmental factors,

inventory management system, government policies like taxes and others.

Uganda Clays Limited was established in 1950 as a private limited company. The company’s

ownership has changed hands overtime

In 1969, Westomat Construction and Engineering Corporation (WCEC) took over the company

due to its performance. Having failed to maintain a certain standard, they in turn sold 75% of the

company to National Housing and Construction Corporation (NHCC) in 1977.

In 1999 NHCC was 100% owned by the Government of Uganda (GoU). It is this 75% stake in

the company which government divested at the end of 1999. WCEC had sold their stake to

White Tower Corporation in 1996, and remained the principal share holders until they sold their

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stake to Kenya Clays Products Limited in August 2002. Kenya Clays divested their holding in

2006 to various institutional investors trading under Barclays Bank Uganda Nominee accounts.

All the above changes in ownership were as a result of its continuous decline in performance.

As of June 2009, the ten (10) major shareholders in the company are as listed in the table below;

Table 1: Major Shareholders in Uganda Clays LimitedRank Name of Owner %age Ownership

1st National Social Security Fund 32.52

2nd National Insurance Corporation 18.86

3rd Uganda Communication Employees Pension Fund 4.16

4th Central Bank of Kenya 2.66

5th Kenya Power and Lighting Company 2.25

6th Bank of Uganda 2.09

7th Stanbic Bank Uganda Pension Fund 1.81

8th Kenya Airways Staff Provident Fund 1.67

9th Uganda Development Bank 1.13

10th 2311 Other Shareholders 32.85

TOTAL 100

The company has operated for over 55 years and is the country’s leading manufacturer of quality

baked clay building products. Using Italian made heavy clay processing machinery; the company

manufactures a variety of building materials from clay excavated using surface mining

techniques.

These materials form part of the inventory which include; roofing tiles, bricks, interlocking and

corner blocks, portioning blocks, decorative gilles, ventilators, floor tiles, pipes and cable covers.

Of the company’s products, roofing tiles and bricks account for the largest portion of the

inventory. Thus the nature of its business has made it face a lot of competition in the wake of the

influx of other companies that deal in either the same kind of business or products that can be

substituted for clay products.

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Despite the changes in management nothing has been done to address inventory management

problem and declining profitability.

Table 2: Showing Trend of Profits In Uganda Clays Limited(in ‘000 Shs)YEAR 2007 2006 2005 2004

Revenues 4,901,318 8,984,104 7,915,007 7,594,886

Costs 2,528,914 5,525,020 4,597,607 4,024,619

Gross Profit 2,372,404 3,459,084 3,317,400 3,570,267

Source: Uganda Clays Ltd Management report, 2008

1.2 Statement of the ProblemIn modern businesses, it is inevitable for organization to function without inventories that is why

many firms recognize the need to have a developed and comprehensive inventory management

system in order to minimize inventory cost and maximize profitability.

The inability to manage inventory in a proper way has led Uganda clays limited to face a

problem of declining profitability in their operations and this has led to fluctuations in profits

(Management report, 2008) Uganda Clays limited. If the problem of poor inventory management

is not solved, profitability levels will continue declining and the company may run out of

business given the fact that there is an increasing number of similar industries producing same

products and those producing substitute products.

Table 3: Inventory in metric tones2006 2005 2004 2003 2002

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Year Opening 100,000 200,000 200,000 100,000 100,000

Produce 250,000 100,000 100,000 200,000 100,000

Demand 500,000 200,000 100,000 100,000 100,000

Year-end inventory 300,000 100,000 200,000 200,000 100,000

Source, primary data 2008

1.3 Purpose of the Study The purpose of the study was to establish the relationship between inventory management and

financial performance of Uganda Clays Limited.

1.4 Objectives of the StudyThe objectives of study were;

1.4.1 To evaluate the inventory management system in Uganda Clays limited

1.4.2 To establish the profitability level in Uganda Clays Limited

1.4.3 Establish the relationship between inventory management and financial performance of

Uganda Clays Limited

1.5 Research QuestionsThe study was meant to answer the following research questions;;

1.5.1 What is the inventory management system of Uganda Clays Limited?

1.5.2 What is the profitability level in Uganda Clays Limited?

1.5.3 Is there any relationship between inventory management system and the financial

performance of Uganda Clays Limited?

1.6 Scope of the StudyThe coverage of this research included the following;

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1.6.1 Geographical Scope The study was conducted in Uganda clays Limited

1.6.2 Subject ScopeThe study was limited to Inventory management and financial performance of Uganda Clays

Limited

1.6.3 Time ScopeThe study covered data on Uganda Clays Limited inventory management processes and its

effects on financial performance for a period of four years(2007-2010).

1.7 Justification/Significance of the Study1.7.1 The study is to ascertain the effect of inventory management on the financial performance

of the business, a case of Uganda Clays Limited.

1.7.2 The study will benefit researchers especially those who have an interest of broadening their

knowledge in inventory management and performance

1.7.3 It is a pre-requisite for partial fulfillment for the award of a degree of Bachelor of

Commerce of Makerere University.

1.7.4 The research will benefit Uganda Clays Limited by providing a basis upon which action

could be taken to improve their efficiency in inventory management and financial performance

1.7.5 Benefit to other clay industries which will get baseline information about the effect of

defective inventory management and its net effect on profitability levels.

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CHAPTER TWO

2.0 LITERATURE REVIEW

2.1 INTRODUCTIONThis chapter analyzed the relevant literature on inventory management as studied by other

scholars and it has been discussed in relation to the research objectives.

Inventory is defined as any resources used to satisfy a current future need(Render and Stair

1985). Inventory can also be defined as items available for sale in the ordinary course of

business, which a company has in its possession and holds legal title to(Larry, Flattery and

O’cconor 1984).

Inventory exists in three forms; raw materials, work in progress and finished goods.

This chapter deals with why firms hold inventory, inventory management definition and

objectives, techniques to be used in inventory management, inventory models and systems and

the costs to be associated with inventory management, inventory centre methods

2.2 Types of InventoryAccording to Meheshwan and Gupta (1994), Inventory is goods held for eventual sale by a firm

while Pandey (1995) says that inventory is the stock of the product a company is manufacturing

for sale and the components that make up a product.

Pandey (1995) goes a head to say that raw materials are the basic inputs that are converted into

finished goods through the manufacturing process.

Work in progress is semi-finished products. They are the products that have been partially

finished (Pandey, 1995)

Finished goods inventory refers to those units that are complete and ready for sale. It provides a

link between production and consumption of goods.

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2.3. Inventory ModelsThese are models that enable the organizations set order quantities (Drury, 1992). They are also

aimed at minimizing Inventory costs. These models include; economic order quantity, order

cycle method, Pareto (80/20) distribution models.

2.3.1 Order Cycle Methods of InventoryUnder this particular method, inventory on hand is reviewed periodically (say every 12 months).

For these items that are of low cost, a technique called 90-60-30 days can be used so that when

inventory falls to 60 days, supply of fresh order is placed from 30 days supply so as to boast

stocks to 90 days supply (ACCA,1996).

2.3.2. Pareto (80/20) DistributionThis is an approach to stores management that emphasizes that more expensive items be

controlled closely. It is based on the understanding that 80% of the stocks are accounted for by

only 10% of the stores items (ACCA,1996).

2.3.3. Economic Order QuantityThis is the quantity at which carrying costs and ordering costs are minimum and equal (Lucey,

1994). According to Kakuru (1998), this is also the most commonly used approach to inventory

management. In production planning, the major issue is usually how much production to

schedule. The amount to order called order quantity usually causes problems to firms.

Therefore, the Economic Order Quantity helps firms to determine the optimum level of inventory

held at one time (Pandey,1995). When the level of inventory (Optimum) does not lead to sales

disruptions, this is an indicator that the firm is performing efficiently as customers are promptly

served and there exists no excess inventory in stock for the firm to incur inventory holding costs.

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However, the Economic Order Quantity (EOQ) model has got its disadvantages, as its

applicability in developing countries is not certain.

There is a constant change in demand for products due to factors like prices, quantity, and

income. This makes demand not to be known with certainty.

Ordering and carrying costs are never constant. The fact is that they keep on changing all the

time.

There are other factors that affect the efficiency of the purchasing department and supplies lead

time keep on changing.

2.4 Balancing Inventory and CostsAs stated earlier, inventory management is an attempt to maintain an adequate supply of goods

while minimizing inventory costs. We saw a variety of reasons companies hold inventory and

these reasons dictate what is deemed to be an adequate supply of inventory.

There are three types of costs that together constitute total inventory costs: holding costs, stock

out costs, set-up costs, and purchasing costs.

2.4.1 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 and where it 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

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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)

2.4.2. Stock out CostsThese are costs associated with having inadequate or no stock. Stock out costs are an essential

factor in inventory control and are difficult to estimate. If a firm runs out of stock, this leads to a

loss in the short- term and damage of its good will in the long run. The inadequate inventory

level will basically mean stock outs and this could ultimately lead to the closure of the firm as

profits are lost continuously (Render and Stairn,1994). The avoidance of stock out costs is the

basic reason stocks are held in the first place (Lucey,1996) because inventories constitute a large

part of a firm’s current assets, proper management of inventories has to be emphasized.

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2.4.3 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

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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 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 ).

2.4.4. 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

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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.

Now total inventory cost can be expressed as:

Total = Holding cost + Set-up/Order cost + Purchasing cost

or

Total = H (Q /2) + S (D / Q) + PD

If holding costs and set-up costs were plotted as lines on a graph, the point at which they

intersect (that is, the point at which they are equal) would indicate the lowest total inventory cost.

Therefore, if we want to minimize total inventory cost, every time we place an order, we should

order the quantity (Q) that corresponds to the point where the two values are equal. If we set the

two costs equal and solve for Q we get:

H (Q/2)=S(D/Q)

Q = 2 DS / H

The quantity Q is known as the Economic Order Quantity (EOQ). In order to minimize total

inventory cost, the firm will order Q every time it places an order. For example, a firm with an

annual demand of 12,000 units (at a purchase price of Shs 25 each), annual holding cost of Shs

10 per unit and an order cost of Shs 150 per order (with orders placed once a month) could save

Shs 800 annually by utilizing the EOQ. First, we determine the total costs without using the EOQ

method:

Q = Shs 10(1000/2) + Shs 150(12,000/1000) + Shs 25(12,000) = Shs 306,800

Then we calculate EOQ:

EOQ = 2(12,000)(Shs 150)/Shs 10= 600

And we calculate total costs at the EOQ of 600:

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Q = Shs 10(600/2) + Shs 150(12,000/600) + Shs 25(12,000) = Shs 306,000

Finally, we subtract the total cost of Q from Q to determine the savings:

Shs 306,800 − 306,000 = Shs 800

Notice that if you remove purchasing cost from the equation, the savings is still Shs 800. We

might assume this means that purchasing cost is not relevant to our order decision and can be

eliminated from the equation. It must be noted that this is true only as long as no quantity

discount exists. If a quantity discount is available, the firm must determine whether the savings

of the quantity discount are sufficient to offset the loss of the savings resulting from the use of

the EOQ.

2.4.4.1 Assumptions of Economic Order Quantity(EOQ)

There are a number of assumptions that must be made with the use of the EOQ. These include

situations like when;

Only one product is involved.

Deterministic demand (demand is known with certainty).

Constant demand (demand is stable through-out the year).

No quantity discounts

Constant costs (no price increases or inflation).

While these assumptions would seem to make EOQ irrelevant for use in a realistic situation, it is

relevant for items that have independent demand. This means that the demand for the item is not

derived from the demand for something else (usually a parent item for which the unit in question

is a component). For example, the demand for steering wheels would be derived from the

demand for automobiles (dependent demand) but the demand for purses is not derived from

anything else; purses have independent demand.

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2.4.4.2 Other lot-sizing techniques There are a number of other lot-sizing techniques available in addition to EOQ. These include

the fixed-order quantity, fixed-order-interval model, the single-period model, and part-period

balancing.

Fixed-order quantity model

EOQ is an example of the fixed-order-quantity model since the same quantity is ordered every

time an order is placed. A firm might also use a fixed-order quantity when it is captive to

packaging situations. If you were to walk into an office supply store and ask to buy 22 paper

clips, chances are you would walk out with 100 paper clips. You were captive to the packaging

requirements of paper clips, i.e., they come 100 to a box and you cannot purchase a partial box.

It works the same way for other purchasing situations. A supplier may package their goods in

certain quantities so that their customers must buy that quantity or a multiple of that quantity.

Fixed-order-interval model

The fixed-order-interval model is used when orders have to be placed at fixed time intervals such

as weekly, biweekly, or monthly. The lot size is dependent upon how much inventory is needed

from the time of order until the next order must be placed (order cycle). This system requires

periodic checks of inventory levels and is used by many retail firms such as drug stores and

small grocery stores.

Single-period mode.

The single-period model is used in ordering perishables, such as food and flowers, and items

with a limited life, such as newspapers. Unsold or unused goods are not typically carried over

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from one period to another and there may even be some disposal costs involved. This model tries

to balance the cost of lost customer goodwill and opportunity cost that is incurred from not

having enough inventories, with the cost of having excess inventory left at the end of a period.

Part-period balancing

Part-period balancing attempts to select the number of periods covered by the inventory order

that will make total carrying costs as close as possible to the set-up/order cost.

When a proper lot size has been determined, utilizing one of the above techniques, the reorder

point, or point at which an order should be placed, can be determined by the rate of demand and

the lead time. If safety stock is necessary it would be added to the reorder point quantity.

Reorder point =Expected demand during lead time + Safety stock

Thus, an inventory item with a demand of 100 per month, a two-month lead time and a desired

safety stock of two weeks would have reorder point of 250. In other words, an order would be

placed whenever the inventory level for that good reached 250 units.

Reorder point = 100/month × 2 months + 2 weeks' safety stock = 250

2.5. Inventory Management Inventory management refers to the process of managing the stocks of finished products, semi-

finished products and raw materials by a firm. Inventory management, if done properly, can

bring down costs and increase the revenue of a firm.

How much one should invest in inventory management? The answer to this question depends on

the volume and value of inventory as a percentage of the total assets of a firm. The importance of

inventory management varies according to industries. For example, an automobile dealer has

15

very high inventories, sometimes as high as 50 per cent of the total assets, whereas in the hotel

industry it may be as low as 2 to 5 per cent.

The process of inventory management is a continuous one and there are various kinds of

solutions available. It is advisable to employ specialized staff for inventory management.

The inventory management process begins as soon as one has started production and ordered raw

materials, semi-finished products or any other thing from a supplier. If you are a retailer, then

this process begins as soon you have placed your first order with the wholesaler.

Once orders have been placed, there is generally a short period of time available to a firm to put

an inventory management plan in place before the supplies are delivered. Inventory management

helps a firm to decide in advance where these supplies should be stored. If a firm is getting

supplies of small-sized goods, it may not be much of a problem to store them, but in the case of

large goods, one has to be careful so that the warehousing space is optimally utilized.

From invoices to purchase orders, there is lot of paperwork and documentation involved in

inventory management. Several software programs are available in market, which help in

inventory management.

Inventory management systems are used to determine when to place orders and in what

quantities, these management systems have an objective of minimizing investment in inventory

without necessarily impairing production (Gitman ,1997)

2.5.1. Two bin systemsThis where every stored item is put in its own bin and if the first bin is emptied, an order is

placed for re-supply meaning that where the second bin will be containing sufficient quantities to

last until fresh delivery is made (ACCA, 1996)

16

2.5.2 ABC analysisUnder this system, items of inventory are classified to identify which items should receive the

most effort in controlling. ABC analysis measures the significance of each item in terms of

value. Items with the highest value are classified as “A” items and have the highest control; “B”

items represent relatively low value of the business and one under simple management. They

represent 15% of the value of the business and 50% of stock. C items represent relatively low

value and simple control (Pandey, 1995). Under the ABC analysis, there is more concentration

on important items and less control on less important items (Pandey 1995)

Before the ABC analysis is implemented, the following steps will be involved;

Clarify the items of inventory, determining the expected use in units and price per unit.

Determine the total value of each item by multiplying the expected units by its unit price

Rank items according to value giving first rank to those with highest value.

Compute the ratios (percentage) of numbers of units of each item to the total units of all items

and the ratio of total value of each item to total value of items.

Combine items on the basis of their relative value to form three categories AB and C (Pandey,

1997).

2.5.3. Just-In -Time system

This is a new approach in inventory control that was developed by the Japanese. The aim of just

in time is to have particular items of inventory, particularly raw materials delivered hours before

they are required. There is no need of holding stock and their needs to be close liaison between

the supplier and the producer.

According to Lucey(1994), Just In Time aims at producing the required items of high quality at

the exact time they are required.

17

Eugene and Brigham (1997), also emphasizes that inventory is costly to the firms there is always

pressure to reduce inventory holding in a firm.

2.5.4 Theory of constraints (TOC) Theory of constraints (TOC) is a philosophy which emphasizes that all management actions

should center on the firm's constraints. While it agrees with JIT that inventory should be at the

lowest level possible in most instances, it advocates that there be some buffer inventory around

any capacity constraint (e.g., the slowest machine) and before finished goods.

2.5.5 Materials Requirements Planning (MRP) system.This system uses Economic Order Quantity concepts and a computer to compare production

needs with available inventory levels and determine what to order, when to order and what

priorities to assign to ordering materials. The computer basing on production needs, available

inventory and the time it takes a product to pass through various stages of production,

determines when orders should be placed and in what quantities.

Material requirements planning forces the firm to plan accordingly and its objective is to lower

the firm’s investment in inventory without affecting production (Gitman, 1997), while keeping

inventory costs at the minimum, because the escalation of costs of inventory is an indicator of

poor inventory management.

18

2.6 Why Firms Hold Inventory Inventories constitute the most significant part of current assets of large number of firms and

considerable amount of funds is required to be committed to them. The reasons as to why

inventory is held include, Transactions, precautionary and speculative motives (Drury,1992).

The transaction motive; This is aimed at facilitating smooth sales operations. Inventory of

finished goods is held because a firm cannot produce whenever goods are needed.

Precautionary motive; This involves holding inventory to guard against unforeseen or

unpredictable changes in demand and supply forces in the market. Because procurement of

materials may be delayed by such factors as transport, strikes, stocks of raw materials or finished

goods should be maintained to be used in periods of short supply.

Speculative motive; Stocks are held in either excess or shortages to take advantage of price

fluctuation. A firm may over stock raw materials in anticipation of rise of prices of raw

materials.

2.7 Determination of Inventory Level

As seen from above, firms have different reasons as to why they hold inventory. Effective

inventory management is essential in the operation of any business (Bassin, 1990).Hakansson

and Persson (2004) identified three different trends in the development of logistics solutions

within an industry; one trend is concerned with the increased integration of logistics activities

beyond organization boundaries with an aim to reduce cost items such as capital costs for

inventory and handling costs of flows. Inventory as an asset on the balance sheet of companies

has taken on increased importance because many companies are applying the strategy of

reducing their investment in fixed assets like plants, warehouses, equipment and machinery, and

so on, which even highlights the significance of reducing inventory (Coyle et al., 2003). Changes

19

in inventory levels affect Return On Assets (ROA), which is an important financial parameter

both from internal and external perspectives. Reducing inventory usually improves ROA, and

vice versa if inventory goes up without offsetting increases in revenue (Coyle et al 2003).

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, one 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, Badenhorst –Weiss and Van Rooyen 2002).

According to Wild (2002), inventory control is an activity which organizes the availability of

items to the customers. It coordinates the purchasing, manufacturing and distribution functions to

meet the marketing needs. This role includes the supply of current items, new products,

consumables, spare parts, obsolescent items and all other supplies. Inventory management

enables a company to support the customer service, logistic or manufacturing activities in

situations where purchasing or manufacturing of the items is not able to satisfy the demand. Lack

of satisfaction could arise either because of the speed of purchasing or manufacturing is too

protracted, or because quantities cannot be provided without stocks .Clodfelter (2003) adds that a

good inventory control system offers the following benefits:

(a) It maintains a proper relationship between sales and inventory. Without inventory control

procedures in place, the store or department can become overstocked or under stocked.

(b) Inventory control systems provide a business with information needed to take markdowns by

identifying slow-selling merchandise. Discovering such items early in the season will allow a

business to reduce prices or make a change in marketing strategy before consumer demand

completely disappears.

20

(c) Merchandise control systems allow buyers to identify best sellers early enough in the season

so that re-orders can be placed to increase total sales for the store or department.

(d) Merchandise shortages and shrinkages can be identified using inventory control systems.

Excessive shrinkages will indicate that more effective merchandising controls need to be

implemented to reduce employee theft or shoplifting.

2.8 Financial performance of an organization

For organization management to be good, it must be achieving the targets that it sets. Therefore

financial performance is measured to know whether targets have been achieved, measuring

performance also is a useful means of control, and is a useful means if targets are to be attained

(Lockyer, Muhitemann, and Oakland, 1998)

21

Table 4: Income Statement

Year ended 31 December

2006 2005 2004 2003 2002

Ushs.’000 Ushs. ‘000 Ushs. ‘000 Ushs. ‘000 Ushs.’000

Sales 9,984,104 7,915,007 7,594,886 6,310,625 5,039,075

Cost of sales (2,528,914) (5,525,020) (4,597,607) (3,542,063) (2,864,560)

Gross profit 4,459,084 3,317,400 3,570,267 2,768,562 2,174,515

Other operating

Income/expenses 25,804 30,763 23,690 (12,443) 26,473

Distribution costs (265,438) (188,402) (125,019) (139,643) (83,860)

Admin expenses (432,197) (280,984) (396,525) (452,101) (302,828)

Other operating

Exp (1,801,301) (1,214,536) (1,351,004) (1,25,663) (705,690)

Operating profit 1,985,952 1,664,241 1,721,409 909,712 1,108,610

Finance cost (217,762) (334,605) (180,261) (28,353) (16,119)

PBT 1,768,190 1,329,636 1,541,148 881,359 1,092,491

Income tax exp. (461,034) (376,809) (583,558) (413,171) (462,593)

Net profit 1,307,156 952,827 957,590 468,188 629,898

DPS(Ushs.) 40 80 1,000 500 1,000

EPS (Ushs.) 261 191 192 94 126

Source:Uganda Clays Limited Auditor’s Report 2008

22

2.9 Performance IndicatorsUCL’s overall liquidity position has been fairly good, and on a raising trend averaging at 0.96

over the period. However, inventory is the key current asset with substantial portion in the form

of work in progress and spares and consumables, which are not as liquid as cash and receivables.

Subsequently, UCL’s cash and quick ratios average out at approximately 0.52. The company is

working on increasing its liquidity levels by streamlining its processes to ensure better and

effective inventory management. The above statement is evidenced by the table below;

Table 5: Financial Ratio Analysis 2002 2003 2004 2005 2006

Operating performance

Turnover growth rate 35.23% 25.23% 20.35% 4.21% 26.14%

Profitability

Gross profit margin 43.15% 43.87% 47.01% 41.91% 44.66%

Operating profit margin 22.00% 14.42% 22.67% 21.03% 19.89%

Net profit margin 12.50% 7.42% 12.61% 12.04% 13.09%

ROE 11.59% 8.51% 13.72% 12.40% 12.26%

ROA 6.46% 3.77% 7.06% 7.11% 6.82%

Operating efficiency

Inventory turnover 5 4 4 5 5

Liquidity

Current ratio 0.95 0.68 0.84 1.34 1.02

Quick ratio 0.48 0.30 0.43 0.71 0.66

Solvency

Interest coverage ratio 56 24 10 5 9

Debt service coverage ratio 2 1 1 1 1

23

The inventory management system in an organization is measured periodically using standards

performance indicators. These indicators measure the effectiveness of inventory management.

Service level is one of the performance indicators. It is the percentage of items ordered or

requested that is filled from stock by the supplier or warehouse. From public point of view the

higher the service levels, the better, as long as inventory costs do not rise to unsupportable levels

(Balunywa, 1995).

Customer service level is the criterion that is being increasingly used. It is the proportion of

demand-met ex-stock per annum. Service levels to customers are the extent to which either

finished stock can be supplied to them ‘off the shelf’ or the company is able to accept a certain

level of stock outs for defined periods of time (Balunywa,, 1992)

Another performance indicator of inventory management is the average percentage of time out

stock. This takes into account the number of times the organization runs out of stock of identified

items in a year (UIA, 1998). In order to guard against stock out, the firm should keep a buffer

stock.

Determining the safety (buffer) stock level; need to be done cautiously, such that the benefits

and costs arising out of keeping a safety stock is compromised, and does not defeat the overall

objective of an organization.

2.10 Relationship between inventory management and financial performanceThe relationship between inventory management system and the financial performance of an

organization mainly manifests itself through the material requirements planning which is the

system of planning and scheduling the time- phased material requirements for production

operations (Adam and Ebert 1992) improved customer services and other advantages come at a

24

cost however. They also require a realistic master production schedule to specify when various

end items will be completed. Finally and perhaps most important, they require a certain

discipline, then a commitment by schedules and employees to make the system work.

Material requirement planning provides the following;

Inventory reduction; it determines how many of the components are needed and when, in order

to meet the master schedule. It enables the manager to procure those components, as needed,

thereby avoiding costs of excessive inventory.

Reduction in production and delivery lead times; by coordinating inventory procurement, and

production decisions, material requirements planning helps to avoid delays in production

Realistic commitments; by using material requirements planning production can give marketing

timely information about likely times to prospective customers.

Increased efficiency; Material requirements planning provide close coordination among various

work centers as product progress through them. Material requirements planning is especially

useful in complex operations where new customer order are arriving for a variety of products and

were shop orders for various components are in different stages of completion. These numerous

transaction is accommodated through periodic system. Updating with accurate shop status data;

material requirement planning such as pegging, cycle counting and time remarks helps to

stabilize a dynamic production environment by tracking which components are affected by

change, ensuring that the availability of material coincides with planned requirements and

freezing the short-term production plan so that imminent shop schedules are more predictable

(Adam and Ebert, 1992).

25

Just In Time; Is both a philosophy and set of methods for manufacturing, and emphases waste

reduction, total quality control and devotion to the customers. Just in time is a manufacturing

whose goal is to optimize processes and procedures by continuously pursuing waste reduction

(Adam and Ebert, 1992). Just in time requires not only changes in the way a company handle its

inventory but also change in its culture.

Any step in the manufacturing process product for the customer is wasteful transport, storage,

work in progress inventories, finished goods inventories, excessive paper processing and many

other activities that don’t add value to the product. Wasteful tasks increase costs and reduce

competitiveness. The objectives of just in time is to reduce set up costs to the point that

economic order quantity (EOQ) = 1 unit. If EOQ=1, the immediate benefits are that in progress

inventories are reduced and flexibility to change over production from one product to another is

improved. However reduction in production of sized triggers which of events involving

motivation and focus on just in time and on scrap and quality control.

Just in time purchasing suggests an emphasis on timing, which is true, but it does not suggest the

broad philosophical under pinning of the system. Just in time purchasing calls for close

relationships with few long-term suppliers, geographically close suppliers lose specifications and

contracts, and frequent deliveries of small, exact quantities. Time underlying philosophy of just

in time is continuous pursuit of waste reduction. Using just in time requires extra ordinary

discipline because just in time works but under stable, reliable operating conditions.

26

CHAPTER THREE

3.0 RESEARCH METHODOLOGY

3.1 OverviewIn this chapter, the researcher described how the research was conducted right from proposal

writing, preparation of data collection tools and there purposes, identification of the sample area,

sample respondents, details of the respondents and sampling strategy to be used, and finally the

procedure of collecting data.

3.2 Research DesignThe research design used was cross section research design since the time given was not

sufficient due to the semester system program, in evaluating the relationship between inventory

management and financial performance of Uganda clays Ltd. The information was collected by

use of both quantitative and qualitative approaches using primary data and available literature

concerning the variable.

3.3 The Study PopulationThe sample of thirty respondents was selected. Five were got from the senior staffs of Uganda

clay limited, ten from the line managers and fifteen from the operational (Junior) staff as

indicated in the table below:

Table 6: Sample populationCategory of People Population Sample

Senior Employees 5 5

Line managers 10 10

Operational(Junior) staffs 20 15

TOTAL 35 30

Source: Krejcie and Morgan 1970 Table of Sample size determination

27

3.4 Sample AreaThis included a sample of senior staffs and junior staffs who were chosen from the one hundred

twenty two staffs of Uganda clays Limited.

3.5 Sampling procedures/TechniquesRandom sampling was used to select management and staff because of its advantages; for

instance all the staff selected got an equal chance of being selected, at the convenient and the

limited time available.

3.6 Sources of Data and Collection MethodsPrimary data was collected for purposes of drawing valid conclusions. This data was obtained

using questionnaires and interview guide.

Secondary data was collected for the purpose of drawing valid conclusions. These sources

included reviewing journals, text books and internal records of Uganda Clays Limited.

3.7 Procedures of Collection DataThe researcher took the following steps to collect the required data:

Got permission from Makerere University

Got permission from the Managing Director in-charge of research in Uganda Clays

Limited

Carried out data collection by directly administering the instruments to respective

respondent.

3.8 Data Collection InstrumentsData from the field were collected using the following instruments

28

3.8.1 InterviewsThese were administered to top management including the Finance officers, store keepers, sales

and marketing personnel and other casual employees. The interview guide used was both close

and open ended.

3.8.2 QuestionnairesThe researcher was assisted by the supervisor in preparing the questionnaires. This was used for

collecting data from other sample members in the sample.

3.8.3 Documentary ReviewsSamples of files were requested, particularly relating to inventory management and financial

performance including Audited reports of Uganda Clays Limited.

3.9 Data AnalysisThe data collected were sorted, organized, edited and coded to improve its accuracy and

relevancy; and later presented in frequency tables and percentage frequencies for ease of analysis

and then finally draw inferences on the general population. The frequency tables together with

correlation table for the relationship between he variables of the study were computed using

Statistical Package for Social Sciences( SPSS, Version 15)

3.10 Limitation of the study.I encountered the following problems during the study;

Financial constraints since am self sponsored. This was because the researcher is both a

parent and a student who was also paying school fees for children at school.

Difficulty in accessing the required information

There was also time limitation for carrying out research since the researcher is also a

working class and badly needed at his work place.

29

CHAPTER FOUR

DATA PRESENTATION, ANALYSIS AND INTERPRETATION OF THE FINDINGS

4.0 IntroductionThis chapter presents the findings on effect of inventory management system on the financial

performance of Uganda Clays Limited. The findings were from both primary and secondary

sources. The data collected was edited, coded, tabulated, analyzed and presented according to the

findings of the study.

Specifically, the study objectives involved the following:

i. To evaluate the inventory management system in Uganda Clays limited

ii. To establish the profitability level in Uganda Clays Limited

iii. To establish the relationship between inventory management and financial performance

of Uganda Clays Limited

4.1 Background Information on RespondentsUsing the questionnaires, the researcher was able to get socio-economic information about the

respondents in terms of sex, age and their respective educational levels as follows;

4.1.1 Findings on the sample sexTable 7: Sex of respondentsSex Frequency(Number) Percentage (%)

Male 22 73

Female 08 27

Total 30 100

Source primary Data, 2011

30

According to sample table 7, 73% of the respondents comprised of males while 27% were

female. The findings revealed that the imbalance between male and female employees, implying

that Uganda Clays Limited employs more male than female workers.

4.1.2 Findings on the qualifications of respondentsTable 8: Qualification of respondentsQualification Frequency(f) Percentage (%)

Degree holders 12 40

Diploma 13 43

Completed Secondary level 05 17

Total 30 100

Source primary data, 2011

From the table 8, it was established that 40% of respondents were degree holders, 43% had

diploma while 17% had completed secondary level. The findings revealed that Uganda Clays

Limited employs mostly graduates and Diploma Holders because they are believed to be

hardworking, innovative and creative as compared to the secondary level leavers.

4.1.3 Findings on Age of Respondents Table 9: Age of respondentsAge bracket (years) Frequency Percentage (%)

18-25 03 10

26-30 17 57

31-35 07 23

36-40 01 03

41-45 02 07

46-55 00 00

Total 30 100

Source; Primary Data 2011

31

According to table 9, 57% 0f the respondents were in the range of 26-30 years of age, 23% in the

range of 31-35 years of age, 10% in the age bracket of 18-25 years, 7% in the range of 41-45 and

3% in the age bracket of 36-40 years of age.

From the above, the findings indicate that the majority of those employed belong to the energetic

youth who suit the nature of work being carried out at UCL.

Despite the dominance of the respondents at the age bracket of 26-30, we also have 3

respondents at the age above 35 years implying that they contribute to the sound judgments and

therefore able to articulate facts regarding inventory management and the financial performance.

4.1.4: Findings on how long the respondents have worked for the companyTable 10: Period of service in the companyPeriod of service in years Frequency Percentage (%)

Below 2 02 07

2-4 05 17

5-7 19 63

8-10 03 10

11-13 01 03

Above 13 00 00

Total 30 100

Source; primary data 2011

4.2 Inventory Management System Employed by Uganda Clays Limited

4.2.1 Response on the inventory management system employed by Uganda Clays LimitedTable 11: Responses on Inventory management systems.

32

Response Frequency Percentage

Computerized 24 80

Manual 06 20

Total 30 100

Source; primary data, 2011

From the table 11, 80% of the respondents indicated that the inventory management system was

manual and 20% of the respondents said it was both manual and computerized.

The findings revealed that the inventory management system used by Uganda Clays Limited is

not up to date with modern technology and what a fairly strong system should be.

4.2.2 Response on maintenance of stock levelsTable 12: Response on whether stock levels are maintained.Responses Frequency Percentages

Yes 19 63

No 11 37

Total 30 100

Source: primary data, 2011

From table 12, 63% of the respondents indicated that stock levels were maintained, 37% said that

it was not maintained.

From the above findings, it revealed that management of stock in Uganda Clays Limited was, to

some extent inappropriate.

4.2.3 Response on maintenance of inventory levels for each itemTable 13: Stock maintenance for each itemResponses Frequency Percentage (%)

Yes 09 30

No 21 70

33

Total 30 100

Source; primary data 2011

From the table 13, 30% of the respondents indicated that the company kept records for each item

and 70% said no records were kept for each item.

From the above findings, it reveals that there is no record being kept for each item in isolation.

4.2.4 Responses on proper records of inventory Table 14: Proper records of inventoryResponses Frequency Percentage (%)

Yes 15 50

No 15 50

Total 30 100

Source, primary data 2011

From table 14, 50% of the respondents consented that there was proper records of inventory

being kept and 50% said there was no proper records being Kept. From the above findings, it

reveals that the sampled population was not certain of whether records of inventory are being

maintained.

4.2.5 Responses on existence of stock takingTable 15: Existence of stock takingResponse Frequency Percentage

Yes 26 87

No 04 13

34

Total 30 100

Source; primary data, 2011

From the table 15, 87% of the respondents indicated that stock taking was carried out and 13%

did not oblige.

4.2.6 Responses on whether stock taking figures agree with the record figuresTable 16: Agreement between stock taking figures and record figuresResponse Frequency Percentage

Agree 15 50

Strongly Agree 08 27

Disagree 05 17

Strongly Disagree 02 06

Total 30 100

Source; primary data 2011

From table 16, 50% of the respondents agreed that the stock taking figures tallied/balanced with

record figures, 27% strongly agreed, 17% disagreed while 06% strongly disagreed.

From the above findings, the researcher established that stock taking figures were not compatible

with those of the records, since most of the respondents disagreed with the reconciliation of

records and physical stock.

4.2.7 Responses on how often stocktaking is carried outTable 17: Frequency of stock takingResponse Frequency Percentage (%)

Daily 00 00

Weekly 00 00

Monthly 06 20

Annually 24 80

35

TOTAL 30 100

Source; primary data 2011

Table 17 shows that 20% of the respondents indicated that stock taking was done monthly,

while majority indicated that it was done annually.

4.3 Findings on the Profitability Levels of the IndustryThe researcher administered many questions to establish the level of profitability in Uganda

Clays Limited. The analyses of the responses are as below;

4.3.1 Responses on the trend of profitabilityTable 18: Profitability trendResponses Frequency Percentage

Increasing 09 30

Declining 21 70

Constant 00 00

Total 30 100

Source; primary data, 2011

From table 18, 70% of respondents said the trend of profitability was decreasing, 30% said it was

increasing and nobody indicated that it was constant. The researcher therefore established that

the profitability level of Uganda Clays Limited was decreasing from time to time. The following

data obtained from the past records of the company could support this;

Table 19: Profit Margin of Uganda Clays Limited (2002-2006 in ‘000 Shs)YEAR 2006 2005 2004 2003 2002

Revenues 9,984,104 7,915,007 7,594,886 6,310,625 5,039,075

Costs (5,525,020) (4,597,607) (4,024,619) (3,542,063) (2,864,560)

Gross Profit 4,459,084 3,317,400 3,570,267 2,768,562 2,174,515

Source: Uganda Clays Limited financial report

36

4.4 Findings on the Relationship between Inventory Management and Profitability

4.4.1 Responses on the level of inventory management system in Uganda Clays LimitedTable 20: Quality of Inventory management system and profitabilityResponses Frequencies Percentages

Very Good 10 33

Good 15 50

Poor 05 17

Total 30 100

Source; primary data, 2011

Table 20 shows that the majority (50%) of the respondents believed that the level of inventory

management in Uganda Clays Limited was good, 33% said it was very good whereas 17%

believed it was poor.

4.4.2 Responses on the level of profitability in Uganda Clays Limited Table 21: Profitability in UCLResponses Frequencies Percentages

Very Good 05 17

Good 10 33

Poor 15 50

Total 30 100

Source; primary data, 2011

Table 21 shows that , 50% of the respondents said that the profitability level was poor, 33% said

it was good whereas 17% mentioned very good.

4.4.3 Responses on whether inventory management significantly affected the financial performance of Uganda Clays LimitedTable 22: Effects of inventory management on performance of UCLResponses Frequency Percentage

Yes 23 77

No 01 3

Not sure 06 20

Total 30 100

37

Source; primary data, 2011

The above table shows the observed frequencies on whether inventory management system in

Uganda Clays Limited significantly affected their financial performance.

4.4.4 Correlation between inventory management and financial performance (profitability)Table 23: Correlation table showing the significance of the relationship between inventory management and financial performance

Inventory management Financial

performanceInventory Management

Pearson Correlation 1 .803**

Sig. (2-tailed) .000 N 30 30Financial performance

Pearson Correlation .803** 1

Sig. (2-tailed) .000 N 30 30

** Correlation is significant at the 0.01 level (2-tailed).

The relationship between inventory management and financial performance was statistically

tested. A strong positive relationship (r=.803*, p<0.01) was established. Since .803 is close to 1,

a very high positive relationship, significant at 0.01 level existed between inventory management

and financial performance.

To further establish the significance of the contribution of inventory management to financial

performance, the coefficient of determination (r2) was computed. Since r=0.803, r2=0.644. This

implies that effective inventory management contributed 64% on the levels of financial

performance of Uganda Clays limited while 36% was contributed by other factors. The

implication of the above relationship is that effective proper inventory management procedures

positively influences and financial performance and therefore reminds the management of

38

Uganda Clays Limited of the need to effectively streamline local Inventory management

procedures and strategies so as to boost the levels of financial performance.

CHAPTER FIVE

SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.0 IntroductionThe purpose of this study was to examine the effects of inventory management system on the

financial performance of an organization. In this chapter, the researcher presents a summary of

the findings draws conclusions and makes recommendations in line with the study objectives

39

5.1 Summary of Findings

5.1.1 Summary of the Findings on Inventory Management System in Uganda Clays Limited

The findings of the study revealed that the inventory management system in Uganda Clays

Limited was not effective and not up to date with modern technology. This was reflected in the

fact that Uganda Clays Limited did not follow proper stock management policies such as

maintaining the required stock levels, stock taking, establishing economic re-order quantities,

and etc. Besides, it was established that Uganda Clays Limited uses 80% computerized methods

of stock management and 55% of its staff were qualified and generally had skills in inventory

management.

5.1.2 Summary of Findings on the Profitability Level in Uganda Clays Limited.

From the findings, it was revealed that profitability in Uganda Clays Limited was generally poor

and declining year by year. This was supported by Uganda Clay’s Limited management report,

2009, which indicated an annual average fall in profitability of 23%.

5.1.3 The Summary of Findings on the Relationship between Inventory Management System and Financial Performance (Profitability)

The study established that the Inventory management system was positively related to financial

performance of Uganda Clays Limited. The significance of the relationship implied that

management of Uganda Clays Limited out to place much emphasis in streamlining inventory

management as a means of achieving the desired levels of financial performance.

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5.2 Conclusion

Uganda Clays Limited had successes in areas of: completeness of routine inventory

transportation, working with each customer to develop an inventory delivery schedule that was

acceptable, customers’ inventory levels are being kept to the optimum, customer service levels of

the company inventory distribution organization structure being appreciated by the customers

that management needs to address which were rated as being high

Uganda Clays Limited faced declining levels of profitability. This could have been due to

increase in the number of firms producing similar products, break down of machinery,

administrative weaknesses and improper management of the inventory system leading to

loopholes in serving the customers hence a drop in sales turnover.

The study established a high positive relationship between inventory management and financial

performance. The optimal management of inventories is a primary objective for all the firms

manufacturing make to stock finished goods. As a matter of fact, inventories have important

implications for both the financial and the economic performance of the company; therefore it is

widely acknowledged that an optimal inventory management policy allows companies to achieve

higher productivity levels.

5.3 Recommendations

Management of Uganda Clays Limited should ensure that inventory levels are being kept to the

optimum in addition to re-aligning the inventory management and distribution organization

structure.

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There is need for management of Uganda Clays Limited to strictly observe the inventory

availability policy relating to safety stock, order cycle, and order quantities.

The inventory level of an organization depends on its policy and position in the market; and this

emanates from the marketing, production sales department on which decisions on how much to

produce depend. Therefore, there is need for management of Uganda Clays Limited to ensure

that the activities of these departments be harmonized.

Uganda Clays Limited should engage in strategies that discourage or drive away competitors

through cut-throat competitive strategies by reducing prices lower as compared to its competitors

or market skimming, looking for virgin markets in other regions where such products have not

reached, branding and packaging and providing other services to the consumers of your products

closer to them.

Uganda Clays Limited should strengthen its Research and Development (R&D) Department in

order to work towards modification of their products. This can only be done by investing much

in thus department to ensure innovativeness and creativity

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References

1. Barley peter,1989; Successful stock control by manual system, grower press

2. Kakuru E, 2000; Financial management, Makerere University press, Kampala

3. Lucey T, 1996: Costing DP Publications.

4. Meigs and Meigs,1989: Principles of Auditing 8th edition B Irwin Homewood

5. Pandey I M,1993; Financial management 7th edition Vikas publishing house

6. Colin Drury, 1992; Management and Cost Accounting, ELBs, imprint

43

7. David Jobber and Geoff Lancaster, 2000; sales management 5th edition financial

times/prentice hall of London

8. Uganda Investment Authority (UIA) magazine 2008

9. ACCA Study Text,2007 Kaplan Edition

10. Donnelly Gibson, 1990; Financial and Management Accounting, prentice hall of London

11. Kamal Gupa, 1997 Contemporary Auditing third edition hill publishing house

12. Uganda Clays Limited, Rights Issue, 2008

13. Bassin, R. (2004). Business Logistics / Supply chain management. Planning, organizing

and controlling the supply chain, 5th edition. Pearson –Prentice Hall USA.

14. Clodfelter, R.(2003). Retail buying from basics of fashion. 2nd Edition. USA

15. Coyle, J. J., Bardi, E. J., & Langley Jr, C. J.( 2003) The management of business

logistics. A supply chain perspective. 7th edition. South –Western. Thomson –Learning.

Canada.

16. Hugo, W. M. J., Baden Horst-Weiss,J. A., & Van Rooyen, D. C. (2002). Purchasing and

Supply management. 4th edition. Pretoria: J. L Van Schailk Publishers.

17. Hakansson L J & Persson, L P. (1999). Operations Management. Strategy and Analysis.

5th Edition. Addison –Wesley. USA.

18. Wild, T.(2002).Best Practice in Inventory Management. 2nd edition.Butterworth-

Heinemann.UK.

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Appendices

Appendix A: QuestionnaireI kindly request you to fill in this questionnaire as assistance towards accomplishing my research

project, being one of the prerequisites for the award of a Bachelors degree of Commerce. I

guarantee that the information provided in here shall purposely for academic and shall be treated

with strict confidentiality.

Your assistance will highly be appreciated

PERSONAL DATA

Position held in the organization……………………………………………….

Education level

Degree Diploma

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UACE UCE

Others (Specify)

Age

18- 25 years 26-30 years

31- 35 years 36- 40 years

41- 45years 46- 55 years

4. How long have you served in the organization?

Below 2 years 2 – 4 years

5 – 7 years 8 – 10 years

11 – 13 years Above 13 years

B. INVENTORY MANAGEMENT SYSTEM IN UGANDA CLAYS LIMITED

5. What inventory management system does your firm maintain? (Please tick in the box)

Computerized Manu Manual Both

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6. Does your company maintain inventory levels for each item? (Tick in the box)

Yes No No

7. Does your company keep inventory records? (Tick in the box)

Yes No No

8. Does the company carry out stocktaking?

Yes

No

Others (Specify) ……………………………………………………………………….

9. Do physical stock taking figures agree with those of your records system

Strongly agree Agree

Disagree Strongly disagree

10. How often do you carry out stocktaking?

Daily Weekly

Monthly Annually

When need arises

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C. INFORMATION ON THE PROFITABILITY LEVELS IN UGANDA CLAYS

LIMITED

11. What is the level/trend of profitability in your organization?

(a) Increasing

(b) Declining

(c) Constant

12. To what extent are you satisfied with the level of profitability?

(a) Very good

(b) Good

(c) Poor

13 State the level of profitability in the company?

Years Profit/Loss

…………………………………………………...

…………………………………………………….

…………………………………………………….

D. INFORMATION ON THE RELATIONSHIP BETWEEN INVENTORY

MANAGEMENT AND PERFORMANCE

14. How do you rate the level of inventory management in your company?

(a) Very good

(b) Good

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(c) Poor

15. How do you rate the level of profitability in your company?

(a) Very good

(b) Good

(c) Poor

16. In your view, how do you compare inventory management system with profitability?

Inventory Management

Performance Very good Good Poor

Very good

Good

Poor

17. In your own analysis, have you noticed any impact the inventory management system has

had on the general financial performance of Uganda Clays Limited?

Yes

No

Others (Specify) ……………………………………………………………………….

18. If yes, how do you rate the impact?

Severe

Moderate

No impact

Thank you very much for your responses in this Academic research, God Bless You

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Appendix B: Letter of Introduction

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