ACAYE PHILIP KILAMA
MAKERERE UNIVERSITY
COLLEGE OF EDUCATION AND EXTERNAL STUDIES
SCHOOL 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
i
ii
DECLARATION
I, 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)
APPROVAL
I thereby certify that I supervised the candidate and his report
is ready for examination
Signed by……………………………….. Date……………………….
MR BYARUGABA PONTIUS
(SUPERVISOR)
DEDICATION
To 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.
ACKNOWLEDGEMENT
I 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.
LISTS OF ABBREVIATIONS
UCLUganda Clays Limited
ACCAAssociation of Chartered Certified Accountant
EOQEconomic Order Quantity
JITJust In Time
DPSDividends Per Share
EPSEarning Per Share
PBTProfit Before Tax
ROEReturn on Equity
ROAReturn on Assets
UIAUganda Investment Authority
SPSSStatistical Package for Social Sceinces
TABLE OF CONTENTS
DECLARATIONi
APPROVALii
DEDICATIONiii
ACKNOWLEDGEMENTiv
LISTS OF ABBREVIATIONSv
TABLE OF CONTENTSvi
ABSTRACTx
CHAPTER ONE1
1.0 INTRODUCTION1
1.2 Statement of the Problem4
1.3 Purpose of the Study5
1.4 Objectives of the Study5
1.5 Research Questions5
1.6 Scope of the Study6
1.6.1 Geographical Scope6
1.6.2 Subject Scope6
1.6.3 Time Scope6
1.7 Justification/Significance of the Study6
CHAPTER TWO7
2.0 LITERATURE REVIEW7
2.1 Introduction7
2.2 Types of Inventory7
2.3. Inventory Models8
2.3.1 Order Cycle Methods of Inventory8
2.3.2. Pareto (80/20) Distribution8
2.3.3. Economic Order Quantity8
2.4 Balancing Inventory and Costs9
2.4.1 Holding Costs9
2.4.2. Stock out Costs10
2.4.3 Set-Up Costs10
2.4.4. Purchasing Cost11
2.4.4.2 Other lot-sizing techniques14
2.5. Inventory Management15
2.5.1. Two bin systems16
2.5.2 ABC analysis17
2.5.4 Theory of constraints (TOC)18
2.5.5 Materials Requirements Planning (MRP) system.18
2.6 Why Firms Hold Inventory19
2.7 Determination of Inventory Level19
2.8 Financial performance of an organization21
2.9 Performance Indicators23
2.10 Relationship between inventory management and financial
performance24
CHAPTER THREE27
3.0 RESEARCH METHODOLOGY27
3.1 Overview27
3.2 Research Design27
3.3 The Study Population27
3.4 Sample Area28
3.5 Sampling procedures/Techniques28
3.6 Sources of Data and Collection Methods28
3.7 Procedures of Collection Data28
3.8 Data Collection Instruments28
3.8.1 Interviews29
3.8.2 Questionnaires29
3.8.3 Documentary Reviews29
3.9 Data Analysis29
3.10 Limitation of the study.29
CHAPTER FOUR30
DATA PRESENTATION, ANALYSIS AND INTERPRETATION OF THE
FINDINGS30
4.0 Introduction30
4.1 Background Information on Respondents30
4.1.1 Findings on the sample sex30
4.1.2 Findings on the qualifications of respondents31
4.1.3 Findings on Age of Respondents31
Table31
4.1.4: Findings on how long the respondents have worked for the
company32
4.2 Inventory Management System Employed by Uganda Clays
Limited33
4.2.1 Response on the inventory management system employed by
Uganda Clays Limited33
4.2.2 Response on maintenance of stock levels33
4.2.3 Response on maintenance of inventory levels for each
item34
4.2.4 Responses on proper records of inventory34
4.2.5 Responses on existence of stock taking35
4.2.6 Responses on whether stock taking figures agree with the
record figures35
4.2.7 Responses on how often stocktaking is carried out36
4.3 Findings on the Profitability Levels of the Industry36
4.3.1 Responses on the trend of profitability36
4.4 Findings on the Relationship between Inventory Management
and Profitability37
4.4.1 Responses on the level of inventory management system in
Uganda Clays Limited37
4.4.2 Responses on the level of profitability in Uganda Clays
Limited37
4.4.3 Responses on whether inventory management significantly
affected the financial performance of Uganda Clays Limited38
4.4.4 Correlation between inventory management and financial
performance (profitability)38
CHAPTER FIVE40
SUMMARY, CONCLUSION AND RECOMMENDATIONS40
5.0 Introduction40
5.1 Summary of Findings40
5.1.1 Summary of the Findings on Inventory Management System in
Uganda Clays Limited40
5.1.3 The Summary of Findings on the Relationship between
Inventory Management System and Financial Performance
(Profitability)41
5.2 Conclusion41
5.3 Recommendations42
References44
Appendices46
Appendix A: Questionnaire46
Appendix B: Letter of Introduction51
List of tables
Table 1: Major Shareholders in Uganda Clays Limited3
Table 2: Showing Trend of Profits In Uganda Clays Limited(in
‘000 Shs)4
Table 3: Inventory in metric tones5
Table 4: Income Statement22
Table 7: Sex of respondents30
Table 8: Qualification of respondents31
4.1.3 Findings on Age of RespondentsTable 9: Age of
respondents31
Table 10: Period of service in the company32
Table 11: Responses on Inventory management systems.33
Table 12: Response on whether stock levels are maintained.33
Table 13::Stock maintenance for each item34
Table 14: Proper records of inventory34
Table 15: Existence of stock taking35
Table 16: Agreement between stock taking figures and record
figures35
Table 17: Frequency of stock taking36
Table 18: Profitability trend36
Table 19: Profit Margin of Uganda Clays Limited (2002-2006 in
‘000 Shs)37
Table 20: Quality of Inventory management system and
profitability37
Table 21: Profitability in UCL37
Table 22: Effects of inventory management on performance of
UCL38
Table 23: Correlation table showing the significance of the
relationship between inventory management and financial
performance38
ABSTRACT
The 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.
CHAPTER ONE
1.0 INTRODUCTION
In 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.
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 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 Limited
Rank
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.
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 Problem
In 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 tones
2006
2005
2004
2003
2002
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 Study
The 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 Questions
The 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 Study
The coverage of this research included the following;
1.6.1 Geographical Scope
The study was conducted in Uganda clays Limited
1.6.2 Subject Scope
The study was limited to Inventory management and financial
performance of Uganda Clays Limited
1.6.3 Time Scope
The 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 Study
1.7.1 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.
CHAPTER TWO2.0 LITERATURE REVIEW2.1 INTRODUCTION
This 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 Inventory
According 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.
2.3. Inventory Models
These 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 Inventory
Under 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) Distribution
This 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 Quantity
This 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.
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 Costs
As 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
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 Costs
These 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.
.
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 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
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: 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.
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
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 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 systems
This 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)
2.5.2 ABC analysis
Under 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.
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.
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 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.
(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)
Table 4: Income Statement
Year ended 31 December
2006 2005 2004 2003 2002
Ushs.’000 Ushs. ‘000 Ushs. ‘000Ushs. ‘000Ushs.’000
Sales 9,984,104 7,915,007 7,594,8866,310,6255,039,075
Cost of sales (2,528,914) (5,525,020) (4,597,607) (3,542,063)
(2,864,560)
Gross profit 4,459,0843,317,4003,570,267 2,768,5622,174,515
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 1,985,9521,664,2411,721,409909,712
1,108,610
Finance cost (217,762) (334,605) (180,261) (28,353)(16,119)
PBT 1,768,190 1,329,636 1,541,148881,359 1,092,491
Income tax exp. (461,034)(376,809) (583,558)
(413,171)(462,593)
Net profit 1,307,156952,827957,590 468,188629,898
DPS(Ushs.) 40 80 1,000 500 1,000
EPS (Ushs.) 261 191 192 94 126
Source:Uganda Clays Limited Auditor’s Report 2008
2.9 Performance Indicators
UCL’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 45 5
Liquidity
Current ratio0.95 0.68 0.84 1.34 1.02
Quick ratio0.48 0.30 0.43 0.71 0.66
Solvency
Interest coverage ratio56 24 105 9
Debt service coverage ratio 2 1 1 1 1
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
performance
The 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 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).
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.
CHAPTER THREE
3.0 RESEARCH METHODOLOGY 3.1 Overview
In 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 Design
The 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 Population
The 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 population
Category 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
3.4 Sample Area
This 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/Techniques
Random 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 Methods
Primary 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 Data
The 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 Instruments
Data from the field were collected using the following
instruments
3.8.1 Interviews
These 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 Questionnaires
The 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 Reviews
Samples of files were requested, particularly relating to
inventory management and financial performance including Audited
reports of Uganda Clays Limited.
3.9 Data Analysis
The 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.
CHAPTER FOURDATA PRESENTATION, ANALYSIS AND INTERPRETATION OF
THE FINDINGS
4.0 Introduction
This 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 Respondents
Using 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 sex
Table 7: Sex of respondents
Sex
Frequency(Number)
Percentage (%)
Male
22
73
Female
08
27
Total
30
100
Source primary Data, 2011
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 respondents
Table 8: Qualification of respondents
Qualification
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 respondents
Age 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
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
company
Table 10: Period of service in the company
Period 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
Limited4.2.1 Response on the inventory management system employed
by Uganda Clays Limited
Table 11: Responses on Inventory management systems.
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 levels
Table 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
item
Table 13: Stock maintenance for each item
Responses
Frequency
Percentage (%)
Yes
09
30
No
21
70
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 inventory
Responses
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 taking
Table 15: Existence of stock taking
Response
Frequency
Percentage
Yes
26
87
No
04
13
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 figures
Table 16: Agreement between stock taking figures and record
figures
Response
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 out
Table 17: Frequency of stock taking
Response
Frequency
Percentage (%)
Daily
00
00
Weekly
00
00
Monthly
06
20
Annually
24
80
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 Industry
The 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 profitability
Table 18: Profitability trend
Responses
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
4.4 Findings on the Relationship between Inventory Management
and Profitability4.4.1 Responses on the level of inventory
management system in Uganda Clays Limited
Table 20: Quality of Inventory management system and
profitability
Responses
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 UCL
Responses
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 Limited
Table 22: Effects of inventory management on performance of
UCL
Responses
Frequency
Percentage
Yes
23
77
No
01
3
Not sure
06
20
Total
30
100
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 performance
Inventory Management
Pearson Correlation
1
.803**
Sig. (2-tailed)
.000
N
30
30
Financial 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 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 FIVESUMMARY, CONCLUSION AND RECOMMENDATIONS5.0
Introduction
The 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
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.
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.
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
References
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2. Kakuru E, 2000; Financial management, Makerere University
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3. Lucey T, 1996: Costing DP Publications.
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Irwin Homewood
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publishing house
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imprint
7. David Jobber and Geoff Lancaster, 2000; sales management 5th
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8. Uganda Investment Authority (UIA) magazine 2008
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prentice hall of London
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Appendices Appendix A: Questionnaire
I 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
DegreeDiploma
UACEUCE
Others (Specify)
Age
18- 25 years26-30 years
31- 35 years36- 40 years
41- 45years46- 55 years
4. How long have you served in the organization?
Below 2 years 2 – 4 years
5 – 7 years8 – 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
6. Does your company maintain inventory levels for each item?
(Tick in the box)
YesNoNo
7. Does your company keep inventory records? (Tick in the
box)
YesNo 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
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?
YearsProfit/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
(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
Appendix B: Letter of Introduction
