Literature Review

Inventory management was first invented by Adam when he named all the animals or Noah when he counted the clean and unclean beasts for the Ark. But for the sake of brevity, we will jump ahead to modern times.

Before the Industrial Revolution, merchants basically had to write down all of the products they sold every day. Then they had to order more products based on their hand-written notes and their gut feelings. This was an incredibly inefficient and inaccurate way of doing business.

Merchants couldn’t really account for stolen goods unless they did time-consuming physical counts on a regular basis. They also had trouble making sure they got the right number of products when orders came in because of sparse recordkeeping. But it was the best they could do.

In 1889 a man named Herman Hollerith invented the first punch card that could be read by machines. By feeding sheets of paper that have little holes in specific places; people could record complex data for a variety of purposes from census taking to clocking in and out of work. This was basically the precursor to computers that can read data in tiny microchips.

Harvard University took Hollerith’s idea in the 1930s and created a punch card system for businesses. Companies could tell which products were being ordered and also record some inventory and sales data based on punch cards customers would fill out for catalog items. Unfortunately, Harvard’s order management system cost too much and was too slow to keep up with rising business challenges.

In the 1960s, a group of retailers (mostly grocery stores, at first) got together and came up with a new method for tracking inventory: the modern barcode. There were several competing types of barcodes before they were standardized with the Universal Product Code (UPC) in 1974. It’s still the most-used barcode in the United States today.

As computers become more efficient and cheaper, UPCs grew in popularity. In the mid-1990s, companies started experimenting with inventory management software that would record data as products were scanned in and out of warehouses. The technology evolved into a comprehensive inventory management solution by the early 2000s. (Rebort Lockard, 2012)

Nowadays, the implementation of inventory management applications has become a valuable tool for organizations looking to more efficiently manage stock. While the capabilities of applications vary, most inventory management applications give organizations a structured method of accounting for all incoming and outgoing inventory within their facilities. Organizations save a significant amount in costs associated with manual inventory counts, administrative errors and reductions in inventory stock-outs.

- Definition of inventory:

Inventory refers to the goods and materials that a business holds for the ultimate purpose of resale (or repair). Inventory management is a science primarily about specifying the shape and percentage of stocked goods. It is required at different locations within a facility or within many locations of a supply network to precede the regular and planned course of production and stock of materials. (Wikipedia).

Many scholars have come up with several definitions of inventory and how to manage the inventory. Therefore, different definitions can be found in different references. Inventory is the stock of any item or resource used in an organization. An inventory system is the set of policies and controls that monitors levels of inventory and determines what levels should be maintained, when stock should be replenished, and how large orders should be, (Chase and Aquilano, 2013). Inventory is a vital asset, necessary for effective operation of any business organization. (Olowolaju, 2013)

Inventory management is defined as the continuing process of planning, organizing and controlling of inventory that aims at minimizing the investment in inventory while balancing supply and demand. (West. 2009).

Inventory Management refers to all the activities involved in developing and managing the inventory levels of raw materials, work-in progress materials and finished goods so that adequate supplies are available and the costs of over or under stocks are low, (Kotler. 2002).

Material and inventory management is a key of the project or firm management which is defined as the process to provide right material at right place at right time in right quantity so as to minimize the cost. Material Management is concerned with planning, identification, procuring, storage, receiving and distribution of material. (Ashwini & Smita, 2013).

Inventory management is the art and science of maintaining stock levels of a given group of items incurring the least cost consistent with other relevant targets and objectives set by management (Jessop,1999). It is important that managers organizations that deals with inventory, to have in mind, the objective of satisfying customer needs and keeping inventory costs at a minimum level.

Morris (1995) stressed that inventory management in its broadest perspective is to keep the most economical amount of one kind of asset in order to facilitate an increase in the total value of all assets of the organization – human and material resources.

Keth et al. (1994) in their text also stated that the major objective of inventory management and control is to inform managers how much of a good to re-order, when to re-order the good, how frequently orders should be placed and what the appropriate safety stock is, for minimizing stock-outs. Thus, the overall goal of inventory is to have what is needed, and to minimize the number of times one is out of stock.

- Types of inventory:

1- Raw materials Inventory: These are raw material, parts and components that enter the firm’s product during the

production process. This includes all items purchased by an organization for processing. (Ile, 2002/ Anichebe & Agu,2013).

Raw materials are component parts of the stock of inventories carried by a manufacturing firm at a given time. Every organization has inventories of some type and the economics and techniques of inventory management are critical for efficient operation, profitability and survival; especially in a highly competitive environment (Kros, Falasca & Nadler, 2006).

2- Work-in-progress Inventory:This is also called goods-in-progress inventory. This is an intermediate stage of raw

material inventory that is yet to be finished by the plant to enter into another stage of processing. These are materials that have been partly processed but are yet uncompleted. (Ile, 2002/ Anichebe & Agu,2013).

These items are not yet completed and are waiting in a queue for further processing or in buffer storage. (Pandey 1999)

3- Finished Goods Inventory:This is the stock of finished goods. These could be stock of goods awaiting shipment or

in the warehouse, the level of finished goods stock is a matter of co-ordination between the production and sales departments of the organization. (Ile, 2002/ Anichebe & Agu, 2013).

Inventories of raw materials and work in progress facilitate production while that of finished products is required for smooth marketing operations (Munene, 1999). The inventories serve as a link between the production and consumption of goods.

- What are the purposes for holding inventory:

Agu and Anichebe (2013) argued according to Banjoko (2004:192), manufacturing organizations carry inventories for a variety of reasons.Inventories perform significant functions in the total production system and since “it is physically impossible and economically impracticable for each stock of item to arrive exactly where and when it is needed”, there is need to keep some amount of inventory at any point in time. Banjoko outlined seven reasons for holding inventories, which include;1. To enhance uninterrupted flow of production2. To meet variations in product demand.3. To allow flexibility in production scheduling4. To decouple successive stages of operations5. To level production activities6. To provide a means of hedging against future prices and delivery uncertainties7. To provide a means of obtaining economic lot size and gaining quantity discounts.

On their own part, Chase and Aquilano (1995:547) enumerated five reasons for holding inventories. They are,1. To maintain independence of operations

2. To meet variations in product demand3. To allow flexibility in production scheduling4. To provide a safeguard for variation in raw material delivery time5. To take advantage of economic purchase order size.

Due to uncertainty in future demand, and because of the unguaranteed availability of supplies, stock is therefore held to ensure an availability of goods to minimize the overall costs associated with the management of stock. The purpose of holding stock by a firm is for three motives [Drury, 2000] that is the precautionary, transaction and speculative motives.

a) Precautionary Motives: According to Gittinger (1995), precautionary motive means that stock held to guard against risk of unpredictable changes in demand and supply. In most cases, the level of demand of goods and the time required for supply cannot be known with certainty. Therefore, to ensure product availability, the organization maintains additional amount of safety stock to meet regular production and market needs. Firms should invest in stock control for precautionary motive to act as a buffer or link between demand and supply so that production can be geared to a more constant output.Precautionary motive necessitates holding of inventories to guard against the risk of unpredictable changes in demand and supply forces and other factors. (Pandey: 2002)

b) Transaction Motive: Balloon (1987) stated that inventories should be held to improve customer service and therefore goods should be spotted at a place where customers can get them in the quantities they wish. The transaction motive is aimed at facilitating smooth operations on daily basis. According to Pandey (2002) Transaction motive emphasizes the need to maintain inventories to facilitate smooth production and sales operation.

c) Speculative Motive: Firms should maintain back up inventory either in excess or low levels to take advantage of current and future demands or price fluctuations. They should therefore purchase goods and stock them in advance when they anticipate price increase in future and also prepare for contingencies that may befall a company, for instance, strikes, prices, goods among others (Kakuru: 2000).Speculative motive influences the decision to increase or decrease inventory levels to take advantage of price fluctuations (Pandey: 2002).The above reasons in addition to encouraging production purchases and transportation economies will influence firms to hold stock to allow smooth operations in the organization.

According to Kenneth and Brian (2006) argued that reason for keeping inventory includes the following reason:

Reduce the risk of supplier failure or uncertainty. Safety and butter stocks are held to provide some protection against such as strikes, transport breakdowns due to floods or snow, crop failures, wars and similar factors, protect against lead time uncertainties, such as where supplier’s replenishment and lead time are not known with certainty – in such case an investment in safety stocks is necessary if customer services is to maintain at acceptable levels. Meet unexpected demands or demands for customization of products as with agile production and smooth seasonal or cyclical demand. Take advantage of lots or purchase quantities in excess of what is required for immediate consumption to take advantage of price and quantity discounts. Hedge against anticipated shortage and price increases, especially in times of high inflation or as

a deliberate policy of speculation and ensure repaid replenishment of items in constant demand, such as maintenance supplies and office stationery.According to Bloomberg, Lemay and Hanna [2002:136-137] have identified five reasons for holding stock, namely:a. Economies of scale. A firm can realize economies of scale in manufacturing, purchasing and transportation by holding inventory. If the business buys large amounts, it gets quantity discounts. In turn, transportation can move larger volumes and get economies of scale through better equipment utilization. Manufacturing can have loner production runs if more material is inventoried, allowing per units fixed cost reductions. b. Balancing supply and demand. Some firms must accumulate inventory in advantage of seasonal demand. A toy manufacturer see some demand year – round, but 60 percent or more of sales will come in the Christmas season. By manufacturing to stock, production can be kept throughout the year. This reduces idle plant capacity and maintains a relatively stable workforce, keeping costs down. If demand is relatively constant but input materials are seasonal, such as in the production of demand fruits, then finished inventory helps meet demand when the materials are no longer available.c. Specialization. Inventory allows firms with subsidiaries to specialize. Instead of manufacturing a variety of product and then ship the finished products directly to customers or to a warehouse for storage. By specializing, each plant can again economies of scale through long production runs.d. Protection from uncertainties. A primary reason to hold inventory that is to say to offset uncertainties in demand. If demand increases and raw material stocks run outs, the production line shuts down until more material is delivered. Likewise, a shortage of work in process means the product cannot be finished. Finally, if customer order outstrips finished goods supply, the resulting stock outs could lead to the lost customers leading the poor services delivery to the organization.e. Buffer interface. Inventory can buffer key interfaces, creating time and places utility. Key interfaces include [1] supplier and purchasing, [2] purchasing and production, [3] production and marketing, [4] marketing and distribution, [5] distribution and intermediary, and [6] intermediary and customer. Having inventory at these interfaces helps ensure that demand is met and stock outs are minimized.

From the foregoing, we observe that the authors and researchers are saying virtually the same thing, despite the fact that different points were listed from different of point of views.

We therefore subscribe to their views for holding inventories, and conclude that the reasons for holding inventories are to minimize cost and consequently, maximize profit in an organization.

- Costs associated with inventories:

According to Drury (2004) “as mentioned Liwiki,Ojera, Mugenda & Wachira 2013”, 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. Inventory cost categories into holding costs, ordering costs and shortage costs. Holding costs related to costs of having physical items in stock. These include insurance, obsolescence and opportunity costs associated with having funds which could be elsewhere but are tied up in inventory.

Ordering costs are costs of placing an order and receiving inventory. These include determining how much is needed, preparing invoices, transport costs and the cost of inspecting goods.

Shortage costs result when demand exceeds the supply of inventory on hand. The costs include opportunity costs of making a sale, loss of customer goodwill, late charges and similar costs.

Debler and Burts (1996) argued that from the managerial point of view: two categories of costs are associated with inventories (lyson and Farrington 2006) also state that the economies of inventory management and stock control are maintained by the analysis of the costs incurred in obtaining and carrying inventories under these categories.

1- Acquisition costs:

Julias kakuru (1998) asserts that many of the costs incurred in placing an order are incurred irrispectible of the size for example, the cost of an order will be the same respectable of weather.

Preliminary costs-preparing the requisition vendor selecting negotiation, Placement cost-order preparation stationary postage, Post placement cost-progressing receipts of goods material handling inspection and payment of invoices.(Julias kakuru 1996).

2- Carrying costs

These are cost incurred for maintaining a given level of inventory. These costs are usually expressed as a figure and as a percentage of the average inventory (Donnelly Gibson 1990).Carrying costs include storage costs, insurance costs, taxes, determination and obsolescence. If a firm maintains high level, the carrying costs will be high which will lead to a rise in the market. A high price will be attached to such goods which will lead to low sales and eventually low profits (T.Lucy1996).

3- Cost of stock out

Pandey (1999) asserts that these are costs of being without inventory. Stock out costs are the most important costs that the firm endeavor to avoid by maintaining a certain level of stock in the stores for continuous production. Such costs include costs of production stoppages caused by work in progress stock outs and raw material, loss of future sales because customers may go elsewhere which will lead to loss of customer goodwill and hence loss of profits.(T Lucy 1996).

- Inventory Control and Management

Control is the activity which organizes the availability of items to the customers of the organization. It co-ordinates the purchasing, manufacturing and distribution functions to meet the marketing needs. Inventory management is defined as the system in a firm to control the firm’s investment in inventory. It involves the recording and monitoring of stock level, fostering future demand and deciding on when and how to order.

As mentioned by Agu & Augustine (2013) in his paper, the purpose of inventory control throughout the inventory chain from raw material through to retail stocks, inventories are planned and controlled item by item. For each item in every inventory, two questions must be answered again and again:1. How many of this item should be ordered?2. When should it be ordered?

Inventory Control as highlighted by Patil & Pataskar (2013) refers to a system, which ensures the supply of required quantity and quality of inventory at the required time and at the same time prevent unnecessary investment in inventories.” Moreover, the objectives of Inventory Control as following:

- Maintain sufficient stock of raw material in period of short supply and anticipate price changes.

- Control investment in inventories and keep it at an optimum level. - Protect inventory against deterioration, obsolescence and unauthorized use.

1. ABC Analysis:

The ABC Analysis is a business term used to define an inventory categorization technique often used in materials management. It is also known as Selective Inventory Control. (Wikipedia, the free encyclopedia)

The purpose of the ABC inventory classification is to be able to assess the status of every item kept in inventory in addition to determining what specific attention is required by each group of inventory (Banjoko, 2004:198).

As per analysis done by Ashwini &Pataskar, 2013 argued the ABC inventory control technique is based on the principle that a small portion of the items may typically represent the bulk of money value of the total inventory in construction process, while a relatively large number of items may from a small part of the money value of stores. The money value is ascertained by multiplying the quantity of material of each item by its unit price. The items “A” Category – 5% to 10% of the items represent 70% to 75% of the money value. “B” Category – 15% to 20% of the items represent 15% to 20% of the money. “C” Category – The remaining number of the items represent 5% to 10% of the money value. The relative position of these items show that items of category A should be under the maximum control, items of category B may not be given that much attention and item C may be under a loose control.

They came up with conclusion: In case of Big & small projects it is recommended to use ABC analysis for inventory control in a year.

ABC analysis is a well-established categorization technique based on the Pareto Principle for determining which items should get priority in the management of a company’s inventory. (Ravinder &Misra, 2014). ABC analysis is a technique for prioritizing the management of inventory. Inventories are categorized into three classes - A, B, and C. Most management efforts and oversights are expended on managing A items. C items get the least attention and B items are in-between.They did a study of ABC analysis to understand and document how ABC analysis is discussed in today’s business textbooks.They come up with a conclusion: ABC analysis has been used to classify various inventory items into three categories - A, B, and C. This has been done based on the criterion of dollar volume. In the current globalized hyper-responsive business environment, a single criterion is no longer an adequate guide to the management of inventories and multiple criteria have to be considered. Researchers in operations and inventory management recognized this fact in the early 1980s and since then have proposed numerous approaches to multi-criteria ABC classification. As a result, companies will be able to manage their inventories better and be more competitive in the marketplace.

Based on study was done by Arunprakash & Nandhini (2013), the ABC analysis is the best way to classify the items. Almost every company keep the material access as centralized. The 50% companies use the stock overflow in other activities. Almost all companies say that maintaining stock will fetch them profit and they also do documentation work stock maintenance.

A study suggested on Inventory management by Dwivedi, Kumar & Kothiyal (2012) by applying ABC analysis and they come up with conclusion that Inventory management has become highly developed to meet the rising challenges in most corporate organizations and this is in response to the fact that inventory is an asset of distinct feature. Inventory management as one of the key activities of business logistics has always been a major preoccupation for the company’s survival and growth. It has been used to develop models to meet items assembling and requirement under conditions of uncertain demand. In this, ABC analysis is a feasible and efficient technique for inventory management. This will help in improved drug availability. This identifies drugs requiring stringent control for the optimal use of resources.

2. The Economic Order Quantity:

There are raw materials and other supplies, parts and components, which enter into the product during the production process and generally form part of the product.