Project. Chapter 1and 2

8/9/2019 Project. Chapter 1and 2

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CHAPTER ONE

INTRODUCTION

1.0 Preamble

Small scale businesses are mostly involved in transacting with already finished products which

are ready for selling. In transacting with these types of merchandise, the business should always

have enough stock to enable an effective and reliable supply of the products to their

customers. Lack of enough stock in place may lead to loss of customers to the competition and

hence a loss in the proceeds of the business. To avoid loss of customers due to stock-outs, a

system should be put in place to control the stock level of goods and ensure an adequate

supply of goods and ensure and adequate supply and minimize the costs involved in providing

enough and reliable stock of goods to the customers. This is the overall objective of inventory

management.

A-One Electronics is a small scale business that deals with selling of electronic products. It

transacts in selling solar panels, batteries, radios, television sets and assorted solar electrical.

The purpose of this study is to determine the role played by inventory control systems in

achieving effective inventory management in small scale businesses.

1.1 Background of the study

Organizations are nowadays taking a great look at inventory being the asset that provides a

sustained competitive advantage in the business environment. Changes in business

environment have led to increased importance of managing inventory. The changes that have

brought great concern in the business environment includes an increase in globalization,

changing demographic patterns, diversified cultures, changes in the economic variables,

changes in sociology and the influx of technology in the global scene. In this case, a store and

purchasing department that lacks strategic integration fails to provide the highly needed


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competitive advantage for the survival in the dynamically changing business environment. Thus

the role played by inventory management in small scale businesses is of great importance.

Internationally, most small scale businesses have adopted various techniques of enabling

sustained supply of their products even to the remote most parts of the globe. This has led to a

wide sourcing of products internationally (Gordon et al., 1982).

Manufacturers of products have played a great role of providing their goods to all parts of

every continent. Through this international break, complex networks of international alliances

have been developed. These have spread the advantage of expertise and offering of particular

products for participants in the small scale business. Internationalization has therefore

provided a number of services such as lowering of psychological barriers, increased awareness

of opportunities other markets and an increased international small scale business expertise,

(Mue 2007).

Regionally, the impact of a single global market has taken face with the ever changing business

environment. Many businesses have been established across the different nations. In east

Africa for instance, every country depends on each other for supply and demand of the

different products needed. Most businesses have branches established in the different

countries. This enables the provision of goods and services to each part of the countries.

In Kenya, many businesses are located in the major town centers which have a considerable

population size to provide demand for products. The population of the country has increased

considerably from that of previous decades and it is anticipated to clock 40 million from last

years national census. This provides an affluent market for merchandise and a likely growth in

small scale businesses. The economy of the country is in an upward growth from a decreased

economic activity during the past post-election violence that rocked most of the major towns of

the country. Small scale business development has greatly benefitted from the fact that in

recent year, the government has made considerable headway in terms of making the business

environment in Kenya more attractive to investors. Many small scale businesses have been

established in all major towns. Nairobi having the bulk of small businesses is seen as the most

lucrative location for opening of small scale stores. Nevertheless, opportunities in Nairobis


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central business district seem to have become exhausted with supermarkets and small scale

business stores. Recent trends have shown that some of the larger businesses are beginning to

open stores in sub-urban districts which have longer term potential (Mue, 2007).

With a secured flow of income from small scale businesses, focus has been shifted from the

bulk of stock in place, to determining what level of stock should be kept and avoid the high

losses in the businesses due to stock shortages. The stock shortage is the difference between

the amount of merchandise that is believed to exist in the store as stock according to records

and the amount of stock that the physical inventory actually reflects to be in stock. Therefore it

is important for small scale businesses to control losses due to stock shortages and theft.

1.2 Statement of the problem

In an effort to embrace inventory management, many firms are providing information and

strategy planning with a clear understanding of the facts of the business. Informed decision can

be undertaken in order to improve inventory control system.

One of the biggest challenges, that most small scale business face is developing effective

inventory control system, which matches their organizational goals for maximum profitability of

the business.

i. Green and MischaDick (2001) focused on inventory level as a strategy for maximizingprofit and they found that just like any investment in business; inventory needs to serve

the purpose of maximizing profit.

ii. Green and MischaDick (2002) also focused on inventory value using six-sigma, whichconsidered the value addition or utilization of existing equipment considered outdated

to produce high quality product efficiently. They found out that old equipment are

viewed as not worth understanding and improving for operations, however,

replacement cost can be staggering.

iii. Khor and Thomas (2007) focused on the raw materials procurement and orderingmethods. The study was based on the accuracy of the investigation on the methods to

improve procurement and inventory control.


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Small scale businesses experience high losses due to stock shortages and theft, this is as result

of mistakes that have been made in keeping track of inventory, which means that the

discrepancy is due to recording error or actual theft of merchandize. Some bookkeeping errors

are bound to happen because people make mistakes. Far more serious, though is theft by

employees or by customers stock damage is greatest during the holiday season and during

special sales when customers are rushed and handle merchandize carelessly. These losses may

also be due to increased competition which has led to reduction in market share, lack of

enough capital for expansion and reliable suppliers.

1.3 Research questions

This study will address the following questions:

1. To what extent has the adoption of inventory management led to success of small scalebusiness

2. How do we lower holding costs and carrying costs of stock3. What challenges face adoption of effective inventory management controls

1.4 Significance of the study

The study is intended to help understand the effectiveness and role of inventory management

and its effect on the operation of the business. This study therefore aims at evaluating the

effectiveness and the success of inventory controls. This study is therefore so significant

because management, suppliers of the products/materials, the public at large are going to

benefit.

In this case the manager will be enlightened on alternative ways of inventory control and

problems associated with inventory management and application of inventory control systems.

The suppliers will be able to ascertain the amount of material or product that a certain


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organization will demand or need at a particular period of time, thus they are able to plan for

their production level.

The study will also help the society in such a way that they will know how to manage their asset

especially the inventory they have. In the business situation customers will be assured of

continuous flow of goods and services thus their needs will be satisfied, as the organization

serves as a purchasing agent for the community.

1.5 Assumptions of the study

Assumptions

A major accounting issue arises when identical units of merchandise are acquired at different

unit costs during a period. In such cases, when an item is sold, it is necessary to determine its

unit cost using a cost flow assumption so that proper accounting entry can be recorded.

There are 3 common inventory cost flow assumptions used in business, each identified with an

inventory costing method:

a. Cost flow is in the order in which the costs were incurred.b. Cost flow is in the reverse order in which the costs were incurred.c. Cost flow is an average of the costs.

1.6 Delimitation and scope of study

The study will look at the role played by inventory management control systems in small scale

businesses, and the case study will be on A-ONE ELECTRONICS; an electronics dealing shop

located in Nairobi city along Luthuli Avenue and with branches in Athi-river town and Machakos

town.


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1.7 Definition of key terms

1.7.1 Inventory

Inventories are the assets that are held; for sale in the ordinary course of business or in the

process of production for such sale or in the form of materials or supplies to be consumed in

the production process or rendering of services (Kagiri 2006).

1.7.2 Inventory management

Inventory management encompasses the planning, organizing and control of activities that

focus on the flow of inventory into or from the organization (Charles etc 1997).


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CHAPTER TWO

2.0 LITERATURE REVIEW

2.1 Introduction

This chapter explains the theoretical and empirical evidence about inventory management. In

theory, features of effective inventory management systems are explained, how the use of

computers affects the organizations use of inventory management systems, the need for

controls and how to much demand with supply. In practice the chapter tries to look at previous

studies done on the inventory management. It also establishes the knowledge gap.

Successful inventory management involves balancing the costs of inventory with the benefits of

inventory. Many small business owners fail to appreciate fully the true costs of carrying

inventory, which include not only direct costs of storage, insurance and taxes, but also the cost

of money tied up in inventory.

2.2 Review of Theories

Inventory control is not a Science, more nearly it is a set of methods for figuring out how much

stock to order, when and how to receive it (Tibur, 2008). It is one of the roles that management

has to play by putting a system of keeping track of items in inventory.

A powerful inventory management system is the base of the every good retail software

package. An inventory management system lets you know what our important needs, with

inventory management systems are, you can get minors to majors report on what you have in

stock, on order transit. Retailers software with an inventory management system eliminates

the guesswork from running your retail business.

The system can be set up to automatically notify you when its time to order more inventories

such as when stock falls below a prearranged level. By always having your hottest items in

stock, you will be sure to not sell due to out-of- stock items. Many retail software packages will

even generate purchase orders, further streamlining inventory management. In addition to

increasing your sales, retail software with an inventory management system drastically reduce


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your operating costs by reducing the time spent manually counting inventory and creating

purchases.

It will also track which items are selling and which are not. By identifying your less moving items

you can adjust their position, pricing or other issues earlier. You can also see which items are

often purchased in pairs and can group them consequently in the store. Keeping inventory cost

low is vital to competitive benefits.

2.2.1 Features of inventory management system

In inventory management, different theories have been developed to support the different

methods of inventory management. These methods have been based on various features that

can be adopted in inventory management. These features include;

i. Get Your (Ware) House in Orderii. Replenishment, Order Point and the Line Pointiii. Lead timeiv. The Economic Order Quantityv. Balancing, inventory and costs

i. Get Your (Ware) House in OrderThis is where proprietor(s) of the business should ask themselves why they are in business. This

helps them to focus on the aims and goals of their business hence are able to predetermine

profits and anticipate losses when times are harsh. Under getting the (ware) house in order, a

theory on inventory management was developed called the triangle of cooperation.

The Triangle of Cooperation


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The triangle of cooperation, developed by Jon Schreibfeder(2008), illustrates that most

companies want to achieve the goal of effective inventory management:

Effective Inventory Management allows a company to meet or exceed customers' expectations

of product availability with the amount of each item that will maximize net profits or minimize

costs. But whose responsibility is it to accomplish this goal? Often it is left to one person or

department but it has found that effective inventory management takes support and

acceptance of responsibility by sales, purchasing/replenishment, and warehouse personnel. He

(Jon Schreibfeder) referred to this as the "triangle of cooperation":

Without the active participation of each of the triangle's sides, achieving effective inventory

management is impossible. Here is a brief outline of specific responsibilities for salespeople,

purchasing or replenishment, and warehouse people necessary to achieve this goal.

Salespeople

y Determine what products should be stocked in each branch or warehouse; salespeopleshould be in almost constant communications with customers. They are probably in the

best position to determine what must be in inventory to meet customers' expectations.

It means that the customers' impression towards inventory is that it should meet their

needs than the stock of your competitors.

y Help develop the forecast of future sales of each product. The salespeople are also inthe best position to observe customers' changing needs over time. They should help


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determine why there was a large discrepancy between a forecast and what was actually

sold in a specific week or month. For example, why did a customer buy an unusually

large quantity of an item? Will this be a new ongoing requirement or was it a one-time

only sale? Studying unusual sales activity can provide salespeople with valuable

information for increasing future sales!

y Help keep inventory records accurate. Salespeople are usually very empathetic withtheir customers. They often will go to great lengths to meet a customer's needs.

However, they must follow the established rules for properly recording all material

disbursements. For example, salespeople should not take material out of a warehouse

without properly recording it in your computer system.

Purchasing or ReplenishmentPeople

Make sure that inventory is available to meet the sales or usage forecast. While accomplishing

this primary and most important goal, buyers must replenish stock in such a way as to minimize

the "total cost" of each piece. If you minimize your total cost of inventory, you will maximize

your profits! Decisions involved in minimizing the total cost of inventory include:

y Decide the best source of supply for each product in each stocking location. Do you buyit? If so, from what vendor? Are replenishment quantities transferred from a central

warehouse or distribution center? Do you assemble a product from component parts in

this warehouse?

y Determine the economic order quantity for each product. The economic order quantity(i.e., "EOQ") balances the cost of the material with the carrying cost of inventory and

the cost of issuing and receiving replenishment orders (Jon Schreibfeder, 2008).

Warehouse Personnel

Warehouse people make up the third side of the triangle of cooperation and responsibility.

They must:


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y Organize stock in the warehouse to minimize the cost of filling orders.. It makes sense tostore material to maximize the efficiency of the order fulfillment process.

y Keeping inventory records accurate. If the quantity in the computer system does notagree with what is in the warehouse, salespeople won't know what is available for sale,

and buyers will not replenish inventory at the right time. This task probably will involve

conducting full physical inventories or cycle counting certain products each day.

y Ensure that all material movement (both receipts and disbursements) are properlyrecorded. This will ensure that quantities in your warehouse remain accurate. After all,

you can have an accurate forecast and bring material in such a way to minimize your

total cost. But if it isn't properly recorded in your computer system, you will probably

experience problems such as:

o Bringing in unnecessary stock because previous stock receipts weren't correctlyposted and you actually have more inventory than your system reports.

o Unexpected stock outs due to unrecorded material disbursements, substitutes,damaged parts, and other "sloppy" procedures.

y Protect inventory from breakage, spoilage, misplacement, and theft. Inventory isvaluable, and all employees must realize that their paychecks result from the sale of

inventory. If inventory is "lost," it must be paid for out of the company's profits. Thismeans that fewer profit dollars are available to pay employees. (Jon Schreibfeder,2008)

Achieving effective inventory management is probably one of the most effective undertakings

to increase your company's profitability. But it cannot be accomplished by just one person or

department. It takes cooperation and commitment from everyone in sales, purchasing, and the

warehouse. You must implement and maintain the "triangle of cooperation and responsibility."

Protect the company against theft Make sure that the only people in your warehouse belong

in your warehouse. Pilferage is a larger problem than most distributors realize.

Establishing an approved stock list for each warehouse Order only the amount of non-stock or

special order items that your customer has committed to buy. Before adding an item to


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inventory, try to get a purchase commitment from your customer. If this is not possible, inform

the salesperson who requests the tem that he or she is personally responsible for half the

carrying cost of any part of the initial shipment that isnt sold within nine months (Jon

Schreibfeder, 2008).

Assign and use bin locations Assign primary and surplus bin locations for every stocked item.

All picking and receiving documents should list the primary bin location (in either characters or

a bar code). With correct bin locations on documents, order picking is probably the least

complicated job in your warehouse. Assign inexperienced people to this task and your most

experienced warehouse workers to receiving inventory and stock management.

Recording all material leaving the warehouse There should be appropriate paperwork for

every type of stock withdrawal. Under no circumstances should material leave the warehouse

without being entered in the computer. Eliminate "no charge/no paperwork" material swaps.

Product samples should be charged to a salespersons account until they are either returned to

stock or charged to the customer.

Process paperwork in a timely manner All printed picking documents should be filled by the

end of the day. Stock receipts should be put away and entered in the computer system within

24 hours of arrival.

Set appropriate objectives for the buyers Buyers should be judged and rewarded based on the

customer service level, inventory turns, and return on investment for the product lines for

which they are responsible. Ensure that stock balances are accurate and will remain accurate

Implement a comprehensive cycle counting program. A good cycle counting program can

replace your traditional year-end physical inventory

ii. Replenishment, the Order Point and the Line PointReplenishment of inventory is normally based on safety stock quantities, order points, line

points, and standard order quantities:


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Safety Stock Quantity: This is the level of inventory maintained in stock to protect stock outs

resulting from unexpected customer demand or vendor shipment delays.

Order Point: The Safety Stock Quantity plus predicted demand during the anticipated lead

time gives the point at which inventory should be replenished.

Line Point: The Order Point plus predicted demand during the supplier review or order cycle

the normal length of time between typical replenishment orders with the supplier.

Standard Order Quantity: This is the minimum quantity that can be ordered once (Horngren,

et al, 1997).

Replenishment orders are typically placed with a supplier when the Replenishment Position (On

Hand - Committed on Current Outgoing Orders + On Current Incoming Replenishment Orders)

of an item is between its Order Point and Line Point Stock receipts for the replenishment

orders. This will normally be received when the replenishment position is somewhere between

a point equal to the Line Point -

Line point

QuantityDemand during order

cycleOrder issued

Order point

Demand during

anticipated lead time

Safety Stock Safety Stock

Figure 1(b) Estimation of ideal inventory investment

Anticipated Lead Time Demand and the Safety Stock quantity:

Line point

QuantityDemand during order

cycle

Stock

Received

Order pointDemand during

anticipated lead time

Safety Stock Safety Stock


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For example, if a product is ordered when its replenishment position is just below the line

point, shipment would be received when the available stock quantity equals the Line Point

minus Anticipated Lead Time Demand. But if the product is not ordered until the replenishment

position equals the Order Point, the receipt would probably arrive when the available inventory

equals the Safety Stock. Therefore it can be estimated that the average quantity on hand at

the time of stock receipt will be the average of the Line Point - Anticipated Lead Time Usage

and the Safety Stock quantity.

The stock receipt of products with recurring usage will normally be equal to the specified

Standard Order Quantity (SOQ) of the product. The average quantity of this SOQ on hand

during the time it takes to consume the entire SOQ will be equal to half the SOQ:

Therefore the ideal average on hand quantity of an item with recurring usage should be equal

to the average quantity on hand at the time of stock receipt plus half the SOQ:

[(Line Point - Anticipated Lead Time Usage) + Safety Stock]/2 + SOQ/2

Ideal average on hand quantity of each item with recurring usage can be multiplied with itsaverage cost and compare it with the current inventory value of the product to determine

whether there is currently over stocking or under stocking.

iii. Lead time and just in time inventory managementLead time is the time that elapses between the placing of an order (either a purchase order or a

production order issued to the shop or the factory floor) and actually receiving the goods

ordered (Daniel et al, 1999)

If a supplier (an external firm or an internal department or plant) cannot supply the required

goods on demand, then the client firm must keep an inventory of the needed goods. The longer

the lead time, the larger the quantity of goods the firm must carry in inventory.


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A just-in-time (JIT) is a philosophy that advocates the lowest possible levels of inventory. JIT

espouses that firms need only keep inventory in the right quantity at the right time with the

right quality. The ideal lot size for JIT is one, even though one hears the term "zero inventories"

used.

Small scale business can maintain extremely low levels of inventory. However, a firm may have

a lead time of up to three months. That means that a firm that uses goods produced through a

process of three months must place orders at least three months in advance of their need. In

order to keep their operations running in the meantime, an on-hand inventory of three months

requirement would be necessary.

iv. Economic order quantityIt is the level of inventory that minimizes the total inventory holding costs and ordering costs. It

is one of the oldest classical production scheduling models. The framework used to determine

this order quantity is also known as the Wilson EOQ Model or the Wilson Formula. The model

was developed by F. W. Harris in 1913.

The required parameters in determining the EOQ are the total demand for the year, the

purchase cost for each item, the fixed cost to place the order and the storage cost for each item

per year. The number of times an order is placed will also affect the total cost; however, this

number can be determined from the other parameters (Schwartz, 2009).

Assumptions of the EOQ model

1. The ordering cost is constant.2. The rate of demand is constant3. The lead time is fixed4. The purchase price of the item is constant i.e. no discount is available5. The replenishment is made instantaneously; the whole batch is delivered at once.


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EOQ is the quantity to order, so that ordering cost + carrying cost finds its minimum. (A

common misunderstanding is that formula tries to find when these are equal.)

Variables

y Q = order quantityy Q* = optimal order quantityy D = annual demand quantity of the producty P = purchase cost per unity C= fixed cost per order (notper unit, in addition to unit cost)y H = annual holding cost per unit (also known as carrying cost or storage cost)

(warehouse space, refrigeration, insurance, etc. usually not related to the unit cost)

At EOQ Ordering Cost And Carrying Cost Are Same.....

The Total Cost function

The single-item EOQ formula finds the minimum point of the following cost function:

Total Cost = purchase cost + ordering cost + holding cost

- Purchase cost: This is the variable cost of goods: purchase unit price annual demand

quantity. This is PD

- Ordering cost: This is the cost of placing orders: each order has a fixed cost C, and we need to

order D/Q times per year. This is C D/Q

- Holding cost: the average quantity in stock (between fully replenished and empty) is Q/2, so

this cost is H Q/2

.


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To determine the minimum point of the total cost curve, set its derivative equal to zero:

.

The result of this derivation is:

.

Solving for Q gives Q* (the optimal order quantity):

Therefore: .

Note that interestingly, Q* is independent of P, it is a function of only C, D, H.

v. Balancing inventory and costsThere are three types of costs that together constitute total inventory costs: holding costs, set-

up costs, and purchasing costs.

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


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personnel to move the inventory when needed and to keep track of what 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).

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 the 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,


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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).

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.

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

or

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

2.2.2 Need for inventory control records

A comprehensive inventory control record system is relevant in order that:-

a) Goods sold can be recorded and balances in both physical and monetary termscalculated.

b) Checks can be implemented on regular or random basis to minimize losses due topilferage or damage in stores.

c) Goods can be recorded on a receipt in relation to both quantity and price, by use ofhighly effective integrated computer system besides the manual system.

d) Replacement of stock can be ordered when re-order level is reached.


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e) Records can be examined in order to highlight slow moving inventory which maydeteriorate or become obsolete.

f) Inventory can be charged to the appropriate department code when issued from store.g) Returns to store can be properly recorded/ accounted for.h) Rightful quality and quantity duly signed for and recorded in Goods Received Note

(GRN).

i) Stock taking procedure at a given time is done efficiently.j) The valuation of stock for balance sheet and profit measurement purposes can be

accurately implemented (Kagiri, 2006).

2.3 Empirical studies

2.3.1 Strategy for resolving maximum profit for inventory minimization

Green and MischaDick (2001) found out that just like any investment in business; inventory

needs to serve the purpose of maximizing profit. However, in many cases inventory has turned

into a major cash flow constraint thus making it necessary to optimize inventory using analytical

and statistical methods in an integrated approach.

One of the biggest challenges in optimizing inventory is the fact that it is merely an output of

many inter-organizational processes, all too often organization attempt to lower inventory

using non-analytical approaches which lower service levels.

The study was conducted through a case study of a major US corporation, where Green and

MischaDick identified two-step approach of significant value; optimizing inventory levels while

viewing the existing order fulfillment process as a given constraint and changing the

fundamental order fulfillment process across the entire system. The first step was used to make

quick and successful cash availability. The second step was used to generate breakthrough

business results and provide a robust order fulfillment process that was to perform at lower

inventory levels while providing extraordinary service levels.


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The real world constraint is taken into account prior to deciding on the appropriate changes.

Simulations are conducted to verify the appropriateness of the analytical models using actual

process data.

Cash flow problem is identified, further analysis reveals that inventory levels are high and turns

are below most major competition.

This study has not focused on the systems necessary for inventory management; they have only

taken into consideration inventory level as a strategy for maximizing profit.

2.3.2 Inventory value using six- sigma

Green and MischaDick (2002) found out that old equipment are viewed as not worth

understanding and improving for the operations, however, replacement cost can be staggering.

Certainty purchasing new equipment is necessary at times. However, frequently it is possible to

produce good product with existing equipment. Properly characterizing existing equipment

using statistical methods can yield significant improvements.

The research was carried out through a case study to a major US manufacturer, made the

decision to stop providing critical components. The supplier made the decision because the

equipment was the 30-40 years old, yields had traditionally run at 60% and the margins were

low, a baseline of the extrusion process was performed and a vast list of potential factors was

identified during process mapping. It was also determined through measurement system

studies that the measurement systems were not capable of measuring the parts. The

measurement systems were improved and several screening designed experiments were

conducted. Results showed a few key factors to be important. Follow-up optimization

experiments were run. The process was producing 100% yield within 3 months on existing

numbers. The next step was to produce parts that had not been previously produced. The first

parts off of the new die met the desired specification, although slightly off target.

This study has only considered the value addition or utilization of existing equipment

considered outdated to produce high quality product efficiently, therefore it did not consider

the systems necessary for inventory management


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2.3.3 The study of inventory management of raw materials for a pharmaceutical company

Khor and Thomas (2007) focused on the raw materials procurement and ordering methods. The

study is based on the accuracy of the investigation on the methods to improve procurement

and inventory control.

The study used a case study of TCG a multinational pharmaceutical company, they used a two-

factor classification method to rank the thirty eight types of raw materials in the warehouse in

terms of their importance based on their past procurement cost and the amount of warehouse

space they occupied.

They proposed a just-in-time approach for the nine most important items by having timely

orders that much closely to the production schedule. A continuous review model was used for

the next eleven items of low importance and periodic review model was used for the remaining

eighteen items, which are of the least importance. They provided recommendation on how to

improve inventory control based on observation of the current practices. They found out that it

might be possible to reduce the amount of space occupied by raw materials from the current

average of 1076 pallet by 72%.

The study focused on the inventory management of raw materials and ordering methods. It is

also based on the accuracy of demand forecast for finished products and investigates the

methods to improve procurement and inventory control using two-factor classification method

i.e. continuous and periodic review. However, it does not say how these control systems are

applied in various organizations. The researcher will concentrate on the inventory management

system practice by retail firms which represent the general inventory oriented organization.

2.4 Knowledge Gap

While earlier researches, on the area of inventory management have focused on the strategy

for maximizing profit by maintaining the necessary inventory level. They have also focused on

the utilization of existing equipment considered outdated to produce high quality product

efficiently and therefore it did not consider the systems necessary for inventory management.

These earlier studies have also focused on inventory management of raw materials and


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ordering method which is based on the accuracy of demand forecast for finished products and

has also investigated on the methods for improving procurement and inventory control using 2-

factor classification method i.e. continuous and periodic review. The implementation of RFID

tagging in the inventory management of retailing store in order to control cost has also been

considered. Therefore the past researches have focused on the systems necessary for inventory

management; there have not been any considerations as to the extent of application in various

organizations. This study having the limited scope of major retail store in Nairobi will be able to

capture the data appropriate for effective adoption of inventory management in the most

inventory oriented firms in the country; as a result any conclusion reached can hold to other

industries which are represented by the firms in practice.


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CHAPTER THREE

3.0 RESEARCH DESIGN AND METHODOLOGY

3.1 Introduction

Underthis section thechapterwill show the methods and techniques that will be used to collect

and analyzedata duringresearch. Theresearch to becarried out is onenhancingeffective

inventory management to a small-scale business. Areas to be touched on includeresearch design,

target population, types ofdata, sources ofdata, tools to be used to collect data and the sampling

design to be used.

3.2 Research design

Theresearch will use a case study. This design shows the analysis ofthe variables relevant to the

subject understudy because it will focus its attention on the individual study andnot the whole

population ofsmall scale businesses.

3.3 Target Population

The study targets theemployees, therecords keepers and thedirectors ofA-One Electronics.

Primary data will becollected through questionnaires which will be the main source ofdata and

secondary data will be used to assist theevaluation ofdata to becollected in thefield. Data

collected in thefield will be tested andresults will help to write a report uponcompletion of

analysis. The table below shows population ofthe study.

Target population

Category Population Population %

Employees 24 80%

Records keeper 4 13.3%

Directors 2 6.7%

Total 30 100%

Source (Author2010)


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3.4 Sample size and sampling design

The sample of the study will consist ofemployees from six branches which will include; one

branch in Nairobi, two branches in Athi Riverand three branches in Machakos town.

A convenience sampling technique is used to select the sampledue to proximity ofthe branches

to theresearcher. The questionnaires will be issued, one to each of the branches of the selected

outlets.

3.5 Data description and collection methods

The study will use both primary and secondary data. The primary data will becollected through

a structured questionnaire administered on a drop and pick basis. The questionnaire will have

two parts A and B which are open-ended questions.

The questionnaires are aimed at collecting data on awareness of the conce pt of inventory

management as well as the level ofapplication in the target population. The secondary data will

befrom published sources such as the journals, books and online available information.

3.6 Data analysis method

Thedata will becheckedforaccuracy andcompleteness ofrecording oftheresponses, this data

will then becoded andcheckedforcodingerrors and omissions. Thedata will be singleentered

into a Microsoft Excel packages. Once all thedata would have beenentered, we will verify the

Excel for accuracy and completeness of the entry. The data will then be run through the

statistical package for social science (SPSS). SPSS helps in summarizing the data by use of

descriptive statistics such as tables and percentages and predictionfornumerical outcome using

linearregression. It will then be presented inform ofpiechart, bargraphs and linegraphs where

possible. Data analysis provides aneasy way of interpreting information and hence arriving at

more accurateconclusions.


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CHAPTER FOUR

PRESENTATION DISCUSSION AND INTERPRETATION OF FINDINGS

Presentation of the findings

This chapter presents analysis and findings of the research, from the study population target of 10

respondents, who were the respondents to the questionnaire, constituting 80% response rate. The total

number of males is five constituting 62.5% while the females number is 3 constituting 37.5%.

Gender

Table 1: Gender of respondents

Frequency Percent

Male 5 62.5

Female 3 37.5

Total 8 100

Source: Research Data

From the findings in the above table there were more males than females as represented by the figure

below.


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Figure 1: Gender of respondents


Age

Table 2: Age of respondents

Frequency Percent

20-29 4 50

30-39 3 37.5

40-49 1 12.5

Total 8 100


Male

62%

Female

38%

Gender of respondents


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From the above table, the researcher study revealed that the majority of the respondents were20-29

years old as compared to 30-39 and 40-49 years old. The figure below was used to present this

information.

Figure 2: Age of respondents

Education level

Table 3: Respondents level of education

Frequency Percent

Post graduate 1 12.5

Graduate 4 50

Secondary 3 37.5

Total 8 100


20-2950%

30-39

37%

40-49

13%

Age of respondents


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Figure 3: Education level of respondents


On the education level of the respondents, the researcher found out that the majority of respondents

were graduate compared to post graduate and diploma/college certificate.

Period of time working at A-one electronics

Table 4: Period of time working at A-one electronics

Period Frequency

1 month- 1 year 1

1 year- 2 years 1

2years- 3 years 3

Above 3 years 3


Post graduate

12%

Graduate

50%

Secondary

38%

Education level of respondents


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30

From the above table, most of the employees have been at A-one electronics for3 years and above and

also 2year to 3 years. Only a few have worked for 2 years and below.

Availability of inventory management systems

Table 5: Availability of inventory management systems and guidelines on inventory

management

Frequency Percent

Yes 8 100

Total 8 100


According to the above table, the entire respondent said that they have inventory management systems

in their organization and also have written guidelines on inventory management.

Type of inventory management system

Table 6: Type of inventory management system

Type Frequency Percentage

1. Classification system 0 02. Counting system 2 253. Internal control systems 3 37.54. Accounting systems 3 37.5

Total 8 100



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Figure 4: Graph of the type of inventory management system


Objectives of using inventory management systems

Table 7: Objectives

Frequency Percent

Keep track of available inventory 5 62.5

Increase sales 1 12.5

As an internal control tool 1 12.5

Make a requisition for more inventory 1 12.5

Total 8 100


In the above table, the study sought to investigate the objectives of carrying out inventory management

systems. Majority said to keep track of the available inventory as compared to increasing sales, as an

internal control tool and making requisition for more inventory.

0

5

10

15

20

25

30

35

40

Classificationsystem

Countingsystem

Internalcontrol

systems

Accountingsystems

Type of inventory management system

Type of inventory management

system


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Figure 5: Objectives of using inventory management systems


Responsibility of developing inventory management systems

Table 8: Development responsibility

Frequency Percent

Stores and purchasing manager 2 25

A project team from within 2 25

Departmental managers 4 50

Employees themselves 0 0

Total 8 100


In the above table the study sought to investigate from the respondents who developed inventory

management system. The majority of respondents said that departmental managers are responsible

0

10

20

30

40

50

60

70

Keep track of

availableinventory

Increase salesAs an internal

control tool

Make a

requisitionfor more

inventory

Objectives of using inventory management

systems

Objectives of using inventory

management systems


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while stores and purchasing managers and a project team from within each have equal responsibility, as

compared to employees themselves who don`t have any responsibility.

Figure 6: Responsibility of developing inventory management systems


Responsibility of carrying out inventory management systems

Table 9: Responsibility of carrying out

Frequency Percent

Supervisor 5 62.5

Peers 0 0

Group supervisor 2 25

Branch manager 1 12.5

Total 8 100


0

10

20

30

40

50

60

Stores and

purchasing

manager

A project

team from

within

Departmental

managers

Employees

themselves

Responsibility of developing inventory

management systems

Responsibility of developing

inventory management systems


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According to the findings in the above table, the majority of the respondent said that supervisors are

responsible for carrying out inventory management system compared to the others.

How clear and formalized the inventory planning process is

Table 10: Clarity and formalization of inventory planning process

Frequency Percentage

Yes 6 75

No 2 25

Total 8 100


Figure 7: Clarity and formalization of inventory planning process


From the above table, majority of the respondents say the stock planning process is clear and formalized

compared to whom think that the stock planning process is unclear and not formalized.

Yes

75%

No

25%

How clear and formalized is inventory planning process


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Stock keeping and storage facilities

From the findings the businesses have a store keeper and they do have inventory storage facilities.

Table 11: Stock keeping and storage facilities

Frequency Percentage

Is there a store keeper 8 50

Does the business have storage

facilities

8 50

Figure 8: Stock keeping and storage facilities


Is there a store

keeper50%

Does the

business have

storagefacilities

50%

Stock keeping and storage facilities


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Transport and payment of inventory

Table 12: Transport and payment of inventory

How is stock transported to business premises? Percentage

By pickups 100%

Payment for transport

When Goods are delivered 100%


The data indicated that the firms stock is transported by use of pick-ups and that payment is done when

the goods are received.

Inventory storage

Table 13: Inventory storage

frequency percentage

Stored within the shops 2 25

Stored in a warehouse 5 62.5

Stored in owners residence 1 12.5

Total 8 100


From the data collected, most of the branches had a warehouse for storing stock compared to storing

stock within the shop outlets and in the owner`s residence.


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Figure 9: Inventory storage


Stored

within the

shops

25%

Stored in a

warehouse

62%

Stored in owners

residence

13%

Inventory storage


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Challenges experienced in the adoption of inventory management systems

Table 14: Challenges experienced


The above table shows the findings on the challenges experienced in the adoption of inventory

management systems. From the findings, the researcher found out that in the majority of the

organization, the system used conflict with each other, suppliers supply goods on time, customers do

shoplift stock in the shelves, there is less theft by employees, it takes time to reconcile the system andthere are minimum damages of inventory by both employees and customers as shown above.

Very

Strongly

Agree

Strongly

Agree Agree Disagree

Strongly

Disagree

Factors % % % % %

Do the systems you use in your

company conflict with each other? 0 12.5 37.5 37.5 12.5

Do your suppliers supply goods on time? 0 25 75 0 0

Do customers shop lift stock/inventory

from the shelves? 0 25 50 12.5 12.5

Loss of inventory through theft by

employees 0 12.5 25 25 37.5

Does it take time to reconcile the

systems that you use? 50 25 25 0 0

Are there damages of inventory/stock

by employees and customers? 12.5 25 12.5 62.5 0


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Improvement of inventory management system

Table 15: Actions to be taken to improve

Very

Important Important

Not

Important

Factors % % %

Have strong security controls to avoid shop lifters and theft

by customers and employees

75 25 0

The managers and team members should co-operate 37.5 62.5 0

The lead time for stock should be short to avoid stock out

and damages

75 25 0

Dealing with inventory/stock problems quickly as they occur 62.5 37.5 0

Use of computers at the sales and purchasing points and

stock taking

62.5 37.5 0

Handling inventory/stock with care by all concerned 75

25

0


The above table shows the action to be taken in order to improve inventory management systems. From

the findings, respondents suggestions to improve the management systems were that majority of the

organization strong security controls to avoid shop lifting and theft by both customers and employees, it

is important for both manager and team member should corporate, lead time for stock should be short

to avoid stock out and damages, dealing with problems as they occur, use of computers at the sale and

purchasing point and handling inventory with care by all concerned as shown above.


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Discussion of the findings

From the analysis and data collected the following discussion was made. Guided by the objectives in the

summary, the study shows that the respondents of the different branches of A-one electronics had

some reasonable awareness of the practice of inventory management.

62.5 percent of the respondents were males and37.5 percent were females. Of the total population

majority of the respondents were aged between20 and 29 years. 50 percent of the respondent had a

graduate degree as the rest had post graduate and secondary certificate. The six branches that were

took part in the survey were drawn from different geographical areas. These were from Nairobi, Athi-

River and Machakos.

The study found out that the inventory management practices were practiced in all the firms surveyed.

The reasons for using the inventory management system were varied but included to keep track of

available inventory, increase sales, internal control tool and making a requisition for more inventories.

The stores and purchasing manager, departmental managers and project team from within were

responsible for development of inventory management system in the organizations. The supervisor,

group supervisor and branch managers were responsible for carrying out inventory systems.

In terms of meeting the challenges in adopting an effective inventory management system, the factor

that was most met was dealing with problems as they arise. The challenge that was most experienced by

the organization in the adoption of inventory management system was shoplifting of inventory by

customers. Most of the branches should use computer at the point of sale and purchasing as well as

handle inventory with care by all concerned.

The study also revealed that in the majority of the branches, the inventory planning process was clear

and formalized, objectives and tasks were clearly stated, inventory problems dealt with as they arise,

performance by employees improved with inventory management, the cash and carry method of buying

led to the improved inventory management, the customer services improved with adoption of inventory

management, both managers and team leaders provided constructive feedback as required, had

improved security systems, they used bar coding, both customers and employees handled stock with

care.


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Interpretation of findings

The researcher found out that majority of the organization systems conflict with each other, supplier

supplied goods on time, there was theft and shop lifting by customers, it took average time to reconcile

the systems, there were little damages of stock by employees and customers and customers weresatisfied as a result of ordering the right quantity.

The study revealed that in the majority the organization, security should be strong to avoid shop lifting

and theft by customers, both managers and team member should cooperate, the lead time for stock

should be shorter to avoid stock out and damages.

Stock should be stored within the firm and the firm should adopt just in time inventory system to avoid

high storage costs.

The firm should also deal with inventory problems as they occur, computers should be used at the point

of sales and purchasing and stock should be handled with care by all concerned. From the research it

was also noted that managers should ensure that employees are educated and understand the

importance of efficient stock management.


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Chapter 5

5.0 Summary, Conclusions and Recommendations

Introduction

This study was designed with these questions in mind:

y To what extent has the adoption of inventory management led to success of small scalebusiness?

y How do we lower holding costs and carrying costs of stock incurred by small scalebusinesses and maximize their profits?

y What challenges face adoption of effective inventory management controls?Summary

Extent of the adoption of inventory management in small scale business: Case A-One

electronics

The researchers established that small scale businesses mostly used inventory management

systems and mostly practiced accounting system and internal control system both by 37.5

percent. Classification system and counting system were least used because of time

consumption, a lot of paper work involvement and changes in technology.

Determination of lowering holding and carrying costs that small scale businesses should incur

to maximize profits: Case A-One electronics

The researchers established that the business used storage facilities for storing stock. With

these storage facilities the business incurred costs of storing stock and holding costs of stock.

The business incurred transport costs relating to stock. This is the cost of carrying stock from

the storage facilities to the business premises.

The challenges experienced in the adoption of inventory management system: Case A-One

Electronics

From the research findings, it is established that small scale businesses are facing various

challenges. The businesses usually have difficulty in reconciling the systems that they use, the


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failure of suppliers to supply goods on time, conflicting systems, theft, shoplifting and damages

of stock by employees and customers.

Action to be taken;

y Have strong security controls to avoid shop lifters and theft by customers andemployees

y The managers and team members should also co-operatey Dealing with inventory/stock problems quickly as they occury Use of computers at the sales and purchasing points and stock takingy Handling inventory/stock with care by all concerned.

Conclusions

From the findings in chapter four and the summary in this chapter, it can be concluded that

majority of the organizations in small scale business practice inventory management system. It

can be concluded from results that companies are adopting different types of inventory

management ranging from classification system, counting system, internal control system and

accounting systems.

Stock holding costs and stock carrying costs are incurred in businesses that deal with ready

merchandise. This is evidenced by the existence of warehouses and stock transport means.

It can also be concluded that small scale businesses are faced with a number of challenges that

bar the adoption of effective inventory management systems and which can be resolved by the

given remedy actions. The research study reveals also that a number of further actions can be

undertaken to achieve an effective inventory management systems. The actions are discussed

in the recommendations of the study.


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Recommendations

In light of the above, the following recommendations are made:

y Inventory management should be incorporated in all functions of an organizationy Inventory management should be driven by the line managers with the objectives of

developing the systems all round

y Inventory management should be owned by all the employees for it to benefit theentire organization.

y Training the employees on ways of handling and managing inventory as well as newemployees on stock management and handling.

y Training the managers on internal control.y Laying out formal procedures of inventory management of effective inventory

management.

y Making sure employees and management are involved in the stock management.y Improvement of storage facilities.y Setting clear inventory controls as well as account for stock on regular periods.y Introduction of effective computer systems.

The study inventory management is a new concept because inventory management is a new

practice of management in the store and purchasing management. As seen in the background

of this study, it is more practical in the western world than in Kenya and it has yield good

results. It therefore needs to be explored further in Kenya and clear practice put in place to

ensure proper management of the stock for maximum productivity and success as in the

western world.

Limitations

The business in question A-One electronics did not give full information on inventory

systems in place in its organization and also the full role the systems play in enhancement of

achieving the overall objective of the business, that is, what level of profitability is achieved,

fearing exposing confidential information about the business to competitors who are many and

are lined up along the same business centre / street.


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Areas for further studies as well as suggestions

The research has revealed that there is inadequate use of the day technology.

Further research is recommended in the following areas;

y Adoption of technology in the small scale businessesy Impact of customer satisfaction on sales.

References for this chapter:

a) Charles T. Horngren, George Foster & Srikant M. Datar (1997), Cost accounting, 9thedition, New Delhi: Prentice Hall

b) Dominick (2008), How much inventory is too much? [Online] Available:http://www.nextlevelpurchasing.com

c) http://www.effectiveinventory.com/d) Wren, Daniel A. (1999). "Just-in-Time Inventory." Knowledge Management Magazine,

September: 1.

e) Lines, Anthony. (1992). "Taking Stock of Stock Control." Malaysian Accountant. (April):27-28.

f) Sucky, Eric. "Inventory Management in Supply Chains: A Bargaining Problem."International Journal ofProduction Economics 93/94: 253

Documents

Project. Chapter 1and 2