THE EFFECT OF INVENTORY MANAGEMENT ON ORGANIZATIONAL PERFORMANCE

1.0 INTRODUCTION

This chapter presents the Background of the study, problem statement, Purpose of the study, general objectives, specific objectives, and research questions, Significance of the study, scope of the study and definition of key terms.

1.0 Background of the study

The main aim of inventory management is to ensure that organizations hold inventories at the lowest cost possiblewhile at the same time achieving the objective of ensuring that the company has adequate and uninterrupted supplies to enhance continuity of operations, (Mpwanya, 2005). A study carried out by Bhausaheb&Routroy, (2010) shows that companies are keen in managing their inventory so as to reduce costs, improve the quality of service, enhance product availability and ultimately ensure an improved organizational performance. Results of a study carried out by Rosenfield&Simchi-levi (2010) shows that inventory management has a huge financial implication on the performance of an organization.

High levels of inventory increases the probability that the customers are likely to get what they want, increases sales and service levels (Cachon&Terwiesch, 2006). High inventory levels however lead to both stock holding costs and in-store logistics errors. This is because it becomes difficult for the employees to perform shelving and replenishment which makes goods physically available in the store but the employees cannot trace those (phantom products) (Ton & Raman, 2005).

Maintaining optimum levels of inventory is important in an organization because excess inventory results in stock holding costs (rental charges, opportunity costs, obsolescence costs, breakages, pilferage) and inadequate inventory (stock outs) is also costly as customers may leave to competitors (Berling, 2011). For each sale that an organization does loose as a result of stock outs, the company not only looses profits but also the general performance of the organization becomes poor in the longrun, (Knights, 2008).

Inventories are vital to the successful functioning of manufacturing and retailing organizations. They may consistof raw materials, work-in-progress, spare parts/consumables, and finished goods. It is not necessary that an organization has all these inventory classes. But, whatever may be the inventory items, they need efficient management as, generally, a substantial share of its funds is invested in them different departments within thesame organization adopt different attitude towards inventory This is mainly because the particular functionsperformed by a department influence the department’s motivation. For example, the sales department mightdesire large stock in reserve to meet virtually every demand that comes. The production department similarlywould ask for stocks of materials so that the production system runs uninterrupted. On the other hand, thefinance department would always argue for a minimum investment in stocks so that the funds could be usedelsewhere for other better purposes however an organizational reduces the costs associated with inventory management performance of an organization is likely to improve substantially, (Vohra, 2008:427).

Inventory represents an important decision variable at all stages of product manufacturing, distribution and sales, in addition to being a major portion of total current assets of many organizations, Inventory often represents asmuch as 40% of total capital of industrial organizations in this case inventory management plays a significant role towards the better performance of an organization, (Moore, Lee and Taylor, 2003:321).

crown beverages  uses modern techniques of inventory management relying mainly on computerized systems but with an aim of reduction of unnecessary costs, improved values for money, reduction of stock outs in order to achieve better organizational performance , this study therefore intends to investigate into the effects of inventory management on organizational performance with specific reference to Crown Beverages ltd.

1.2 Statement of the problem

Inventory management is instrumental to thesuccess of an organization as it enables an organization to implement Just in time technique so that its able to reduce costs, and ensure faster response to customers’ needs apart from that this technique also helps an organization in planning by calculating the available stock against the predicted demand, easy management of an organization stock and improvement in organizations quality of goods by elimination of expiry of inventory, (Hyatt, 2007).

Crown beverages has of recent been experiencing numerous inventory management challenges including; increased expiry of stock, increased loss of inventory while in the store, mishaps in the organizational data concerning stored goods and the production data and above the contradiction with procurement records, slow response to customer needs, increased customer complaints this has continued to puzzle management as to what could be the cause. Therefore based upon the above the researcher intends to investigate into the role of inventory management on organizational performance at crown beverages.

1.3 PURPOSE OF THE STUDY

The purpose of the study is to assess impacts of inventory management on organizational performance at Crown Beverages limited.

1.4 OBJECTIVES OF THE STUDY.

1. To assess the Benefits of inventory management at crown beverages ltd.
2. To explore factors hindering inventory management at crown beverages ltd.

• To assess effects of inventory management on organizational performance at crown beverages ltd.

1. To investigate the other factors affecting organizational performance at crown beverages ltd.

1.5 RESEARCH QUESTIONS

1. What are the Benefits of inventory management at crown beverages ltd?
2. What are the factors hindering inventory management at crown beverages ltd?

• What are the effects of inventory management on organizational performance at crown beverages ltd?

1. What is the other factors affecting organizational performance at crown beverages ltd?

1.6 SCOPE OF THE STUDY

1.6.1 Content scope

The study will include, benefits of inventory management, factors hindering inventory management and relationship between inventory management and customer satisfaction.

1.6. 2   Time scope

The researcher will carry out all this study from February to August 2015.

1.6.3 Geographical scope

The study will be carried out in crown beverages ltd , this is because crown beverages is one for the few companies in Uganda with modern inventory management system and above all the organization is also near the university so the researcher wont incur high transportation costs.

1.7 SIGNIFICANCE OF THE STUDY

The study will help future researchers with information regarding benefits of inventory management in an organization.

The study will help management of crown beverages have information regarding better ways of inventory management in an organization

The study will further enable the researcher to have information on factors which affect organizational performance.

1.8 Definitions of key terms

1.8.1 Inventory

This refers to the goods or materials that an organization holds for a specific purpose like resale, production purposes.

1.8.2 Management

Inventory management is a science primarily about specifying the shape and percentage of stocked goods.

CHAPTER TWO

LITERATURE REVIEW

2.0 Introduction

2.1 Benefits of inventory management

According to procurement news (2005), it was reported that where inventory planning is inadequate, it has resulted in short-comings of poor procurement made.

Sakire and Umit (2006) in their analysis of the public procurement procedures in Turkey sing led out more specifically that the first step as an important activity of inventory planning is identification of a need (s). And that procurement carried out under appropriate conditions and timely manner leads to efficient use of resources and effective service delivery, thereby leading to end-user satisfaction. Never the less, inventory planning does not only involve needs identification or what to procure. To achieve the above, there should be coordination between the inventory function and user department to critically identify what their needs are so as it is put into the inventory planning schedule in a given fiscal year. This is further supported and mandatory under PPDA sections 58, 34 and 62, 2003 for PDE, user department and PDU Inventory unit to make timely plans.

Inventory management is a useful tool, gives benefit from the ability to store and analyze data, and this can allow in making sound business decisions. It is also important to make sure that the correct information is published, and it should be easy to access by the people who are responsible for making decisions apart from that ware housing also is essential for Organizational planning, Organizing is establishing a structure and conscious planning where people work together in coordinated manner for the accomplishment of recognized goals, says that organization is a network of relationship among individuals and activities through structural arrangement of persons, positions, roles and specified tasks to be performed, the people to do the work, the levels of authority rules and the flow of information. Organization affects not only productivity and economic efficiency but also morale of the work force apart from that organization structure defines tasks and responsibilities, work role, relationships and communication channels, (Lysons, 2006).

Inventory management enables an organization to control inventory, this helps in minimizing the bull whip effect whose implications include: excess costs, excess inventories, slow response and lost profit, to increase the customer satisfaction, and also helps to gain competitive advantage over their rivals. Apart from that coordination between the ware house of the buyer and seller can easily be planned due to certainty in delivery of both manufactured and raw materials, Most organizations use inventory control techniques like vendor managed inventory, this technique helps in eliminating the mismatch between supply and demand and such this the most favored technique currently used in the control of inventory. Most organization are ensuring that there is proper buyer supplier relationship in order to ensure that there is effective physical distribution system and customer satisfaction in an organization the benefits of inventory control includes: It prevents wastage, increases on the organizational level of satisfying customers’ needs and also increases on the level of competitiveness of an organization against its competitors, (International Journal of Innovative Research in Science, Engineering and Technology, Vol. 2, Issue 2, February 2013).

Inventory management gives away for to proper functioning of support system applications like trend reports, exception reports and the actual performance analyzing reports. Precisely, a data warehouse system proves to be helpful in providing collective information to all its users. It is mainly created to support different analysis, queries that need extensive searching on a larger scale. When an organization has efficient warehousing operations it’s able to plan for future anticipated challenges so that it’s in better position to maximize its operations and also to reduce costs, in period of uncertainties like floods, drought, or economic challenges organization with ware houses are able to plan efficiently for such challenging periods, ( Ford et al, 2006).

Promotes just in time (JIT), Just-In-time (JIT) is defined in the APICS (American Production and Inventory Control Society) dictionary as “a philosophy of manufacturing based on planned elimination of all waste and on continuous improvement of productivity”. It also has been described as an approach with the objective of producing the right part in the right place at the right time (in other words, “just in time”).Waste results from any activity that adds cost without adding value, such as the unnecessary moving of materials, the accumulation of excess inventory, or the use of faulty production methods that create products requiring subsequent rework. JIT (also known as lean production or stockless production) should improve profits and return on investment by reducing inventory levels (increasing the inventory turnover rate), reducing variability, improving product quality, reducing production and delivery lead times, and reducing other costs (such as those associated with machine setup and equipment breakdown).In a JIT system, underutilized (excess) capacity is used instead of buffer inventories to hedge against problems that may arise.JIT is just not a technique or set of techniques of manufacturing, but is an advanced approach or philosophy which embraces both new and old techniques and provides a wide range of benefits by renovation of existing manufacturing systems. A simple definition of JIT is to produce and deliver finished goods just in time to be sold, subassemblies just in time to be assembled into finished goods, fabricate parts just in time to go into subassemblies, and purchase parts just in time to be transferred in to fabricated parts. Companies with efficient and reliable ware housing systems, they are able to store goods and release them at the time when the customers actually needs, this also helps to save customers time and reduction of costs of the suppliers, (International Journal of Innovative Research in Science, Engineering and Technology, Vol. 2, Issue 2, February 2013).

Inventory management enables an organization to satisfy its customers, this is the way the customer thinks about the company and deals with the meeting or exceeding of expectation over the lifetime of the products and/or services. A company’s loyalty and product repurchase comes from achieving customer satisfaction. The measurement of customer satisfaction is not an exact science because of its subjectivity. Because customer satisfaction is non-quantitative in nature, it requires sampling and statistical analysis. There is a gap between customer expectations and performance perceptions when measuring customer satisfaction. As a result of this, it is important to establish a linkage between customer satisfaction and bottom line results. The term “satisfaction” refers to the quality of products and services, on-going business relationships, price-performance ratios with respect to products and services, and meeting and exceeding the customer’s expectations, (Journal of Business and Public Policy (ISSN: 1936-9794)Volume 1, Number 3 (Summer 2007).

Customer service quality is achieved as a result of proper inventory management in an organization, which is the main goal of most manufacturing companies across the globe are able to stand out of the competition in the manufacturing for example in the soft drinks markets customers service quality has mainly been associated with timely meeting of the markets industry but this has been realized by most companies who have created and well-structured physical distribution system. , “(Handfield, 2006) .

Inventorymanagement improves service quality by creating reliability, timeliness, availability of the products. This will therefore save customers time and also satisfies customers accordingly most of the new generation companies especially in the logistics systems they have used physical distribution efficiency as the strength to be able to maximize on their customers base this is due to the fact they are able to meet customers’ orders in time and be able to stand out of the competitive industry so that they are able to maximize profit,  Service quality is expected to lead to customer satisfaction in all types of service industries like logistics and also in the manufacturing organizations. (Global Journal of Management and Business ResearchVol. 10 Issue 6 (Ver 1.0) August 2010, 83).

When an organization has a proper inventory management facility Organizational control is easy, control refers to the process of monitoring activities to ensure that they are being accomplished as planned and correct any significant deviation cannot really know whether their units are performing poorly until they have evaluated what activities have been done and compared the actual performance with the desired standard, workers need a working environment in which they direct and control their own efforts towards goals they have been involved in making so as to ensure effectiveness, (Handfield et al, 2009).

Inventory management enables an organization in planning, According to Terrary and Franklin (1994) planning makes one orderly and focused on the purpose. It also points out the need for future change, provides answers for it Questions, is a control tool, compels visualization of entirely and assists the manager in gaining status and increases balance utilizing resources. Cole (1997) argues that planning can lead to improved efficiency and effectiveness in delivery of services and goods, According to Macibi (2003) says planning is a deliberate attempt to design a future course of action with view to optimize the use of resources. He goes ahead to ascertain that any organization without a plan has planned to fail because it will not have a particular route to follow.

2.2 Effects of inventory management on organizational performance

Elimination of over stoking phenomenon, According to (Thomson and Singh 2001) inventory management enable the buying organisation to order the needed items at the right time and once the need arises then an order will be placed. This helps the organisation to do away with bulk stock levels hence solving the problem of inventory costs like obsolescence and dampness leading to losses this leads to efficiency and effectiveness in the logistics operations.

Standardized stock management techniques, including faster tracking of errors, improved quality control, efficiency in record keeping, greater efficiency through the use of information and communication components like internets, satellites among others that enables tracking and tracing of the goods in transit, during shipment as well as giving up to date information to the accountants about the quantity of goods in storage so that the accountants are able to reconcile the books of accounts with the physical stock in the store, (Kotler 2000).

Simplified accounting process; The introduction of technology has not only simplified the accounting process but has also improved on the business process including control over suppliers, improved process cycle time, close cooperation relationships, improved supply chain efficiency, accuracy of shared information, (Kenneth Lysons 2000).

Process Automation. With the use of technologically components such as Bar coding, Satellite, internets and Image processing among others in the process of managing accounting efficiency, there has been reduction on paper work thereby leading to a substantial reduction of errors, as well as increased capability to obtaining and exchanging real time information. This is possible through the use of information technology systems such as Bar code and scanners which represents a series of alphanumerical characters, bar code readers to interpret bar code symbology, and bar code printers to reliably and accurately print bar codes on labels, cartons, and/or picking /shipping documents, (Ford et al, 2006).

Improved accounting process; Accounting process involves management of an organizations record with a view of minimizing organizational information in a cost effective way. Accounting information enables suppliers and buyers to get related information from the point of origin to the point of consumption Lysons and Farrington (2006). The introduction of technology has brought in tremendous improvements in the keeping of organizations records from the point of origin to the point of consumption including reduced arrangement costs and handling times, shortened response time for purchasing, improved order process speed and reduced labour costs.

Improved ware housing facilities. Warehousing is the primary link between the producers and the consumers; it is used for storing products (raw materials, in process inventory and finished goods) before they are finally worked upon or delivered to the ultimate consumers. Through the implementation of technology, ware house efficiency and effectiveness has improved greatly through using opportunities such as e- warehousing, e- receipts and e- issuing. These have brought about accurate operations in the warehouse hence complementing accounting management efficiency (R.J Carter et al, 2007)

Reduce product delivery time. Through the implementation of technological system in organizations like Crown beverages ltd the organizations’ processes of making payments to their suppliers have improved greatlyincluding faster payment systems like using ATMS, credit cards among others. This reduces among others interest rate, credit risk among others (Aberdeen group 2005).

Better communication and connection links. According to Nair N.K (2006), the use of modern inventory management techniques like bar coding has eased communication between buyers and sellers. Inventory management is an old age industry that has been one of the greatest holdouts against the waves of computerization that has swept the world. Until recently, most organizations were still using traditional systems like fax and letter writing among others as a means of communication. However with the introduction of information and communication technologies such as telephones, internets and satellites among others, communication has not only been eased but also made efficient and effective.

Faster sharing of information regarding inventory; Modern inventory management techniques enables faster transfer of information from one department to using modern equipments like internet, satellite and telephones enables a speedy transfer of information between the supplier and the buyer. Therefore, all the necessary information that the supplier needs to give to the buyer regarding how the goods in transit should be handled, stored and packed are given to the buyer prior to delivery so that special attention is taken by the buyer where necessary, According to Dave chffey (2010),  information transfers in the basis of survival for an organization.

Improved distribution process.According to Dobler and Burt (2001)Withimproved tracking and tracing as a result of using internet, satellites among others, the company that is to say the distributing company is assured of efficiency and effectiveness in the distribution process as their trucks are properly tracked and traced so that in case the deliveries are made to a different location, the mistake can easily be rectified. This has therefore, improved Logistics efficiency in organizations and this has all been because of the introduction of information and communication technology. Other benefits include; delivering on time, reduced delivery enquiring time and improved distribution management.

Proper monitoring.The introduction of computerized inventory management techniques in an organization has brought about efficient and effective monitoring of the materials during transit to their various destinations. This is done through use of technologies that allows communication across a very wide geographical area. Satellite communication provides a fast and high volume channel for information movements. Satellite technology facilitates real time interaction which provides up to date information about location and delivery information about the products in transit. The satellite devices can also be used in tracking and tracing the materials in transit. Tracking is specifically achieved through the use of internet and others, this therefore enables both the delivering organization or the supplier and the buyer to know where specifically the goods in transit is and also in case of any problem encountered say by the truck being used for the transportation purposes, it can easily be recognised by the parties concerned (Kenneth Lysons 2003)

2.3 Other factors affecting organizational performance

Procurement planning

Procurement planning to procurement news (2005) it was reported that were procurement planning is inadequate; it has resulted in short comings of poor procurements made. Sakire& Unit (2006) in their analysis of the public procurement procedures in Turkey singled out more specifically that the first step as an important activity of procurement planning or procurement law is determination of needs. Therefore procurement planning has to be done after knowing needs of end-user. Procurement planning is essential in determination of needs and procurement carried out under appropriate conditions and timely manner leads to efficient use of resources. LGDP reports and guidelines (2001 to 2005) also support the above view.

Coordination of various future activities of an organization is by preparation of plans actions for future periods this minimizes risks and increases the degree of organizational success procurement plans made by the district should be to help in organization control and facilitate communication to ensure success in achievement of the required objectives (Drury et al, 2000).Planning can lead to improved efficiency and effectiveness in delivery of goods and services and planning is a deliberate attempt to design a future course of action with view to optimize the use of resources, (Cole et al, 2000).

Level of Coordination between end user with procurement staff

Procurement staffs decide on the contracts to take on, the tenders to award preparation of bids, advertisement of bids and also proposing appropriate procurement methods (PPDA ACT and regulations 2003).

Procurement staff also is completely aware of the market situation so they always advice end user on the better alternatives available which helps in organizational achievement, (Lysonset al, 2006).

Public procurement contracts provide the mechanisms by which the national development goals of states can be attained public procurement contracts are means of achieving national development objectives and therefore ensuring proper coordination between end user with procurement staff, ( Arrow, 2007),

Public procurement is often plagued with corruption, unfair practices and price collusion in view of the huge amounts of money involved and there should coordination between different departments to encourage effectiveness in the system, (Basheka, 2009).

Corruption has been placed high on the international agenda. Corruption has taken an alarming dimension in recent years at the same time spreading in geographical and growing in intensity. Illicit payments now account for approximately ten to twenty percent of international transactions mostly due to limited coordination between the end user and procurement department.(Basheka ,2009).

Procurement policies.

If policies are ineffective, employees lack comprehension and it is difficult to explain to end users the why of the policies. Policies are only good if everyone understands them and can explain and defend them. Planning is deciding in advance what to do, how to do it, who will do it and when it will be done. If an organizations  employees don’t know why the  business does what it does, where the business is going and how the business will measure success, then it’s difficult to communicate entity’s business value to customers end users therefore good procurement policies need to be adopted and developed in order to achieve procurement effectiveness by formulating proper procurement policies, (Erridge, 2001).

Communicationbetween buyer and supplier

In order to supplier what is needed all correspondence and communications with the vendor regarding problems, proposed changes, or the implementation of the procurement decision should be effective,(Nicol, 2003).

Managing outsourcing relationships, communication with the vendor is of utmost importance during the life of the contract. Knowledgeable internal staff must be available to identify problems and work with the vendor to resolve them. Vendor selection should have provided a vendor whose business/functional culture aligns with that of the organization, so that communication is fostered and developed to support the effort should be documented and kept in order to resolve disputes or identify areas of strengths and weaknesses, (McIvor, 2005).

Level of competition and accountability

Erridge et al (2001) point out that competition should deliberately enable bidders to compete with one another under the same terms and conditions using a relevant procurement method with a view to maximizing value for money. They point out that such competition should be non-restrictive, give sufficient time for bidding, and use standard bidding document and make bid evaluation using the same criteria. The authors describe accountability to include promotion of information sharing among all the players indicating reasons/ bases for certain actions / decisions and providing written or spoken description of what has happened under ones trust.

CHAPTER THREE

METHODOLOGY

3.0       Introduction

This chapter presents the methodology which consists of the research design, area of study, study population, sample population and selection, sampling technique, data collection method, data quality control, data collection procedures and limitations of the study.

3.1 Research design

The study will use descriptive research design. The researcher will employ descriptive research design since it provides the opinion of people about the subject knowledge on the effect of inventory management on organizational performance. The design will avail the researcher with comprehensive information about the research study as a way of getting solutions. Descriptive approach, in this case will be used because the study seeks descriptive analysis of information.

3.2 Area of the study

The area of study will be Crown beverages limited, it’s a soft drinks manufactures that, produces soft drinks like Pepsi, Mirinda orange, Mirinda orange, and mountain dew among others, located at plot M214 Nakawa Kampala, Uganda.,

3.2Study population and sample size

The study will target crown beverages administrators, the procurement staffs of crown beverages, accounting officers of the organization, accounts, and stores, and distributors.

3.3 Sampling techniques

According to (Amin, 2005) sampling involves selecting a sample of the population in such a way that samples of the same size has equal chances of being selected.

The sample will comprise of 30 respondents that will be selected in a way that 3 respondents will be from the procurement department, 10 from administration, 10 from accounts and 4 respondents who are stores, 3 Distributors. While carrying out research, purposive sampling will be applied to the above different categories of respondents.

3.4 Data sources

Source of data will be from both primary and secondary sources.

• Primary data

Primary data will be obtained from the questionnaires administered on the target respondents to gain opinions and practices on the effect of inventory management on organizational performance.

3.4.2 Secondary sources

Secondary data is data which has been collected by individuals or agencies for purposes other than those of a particular research study. It is data developed for some purpose other than for helping to solve the research problem at hand (Bell, 1997). This will comprise of literature related to effect of inventory management on organizational performance in relation to the case study. Secondary data will be sourced because it yields more accurate information than obtained through primary data, and it is also cheaper

3.5 Data Collection Instruments

The major instruments for data collection will be questionnaires and interview guide. Surveys will be just one part of a complete data collection and evaluation strategy. The major method of data collection for the study will be the survey, which will be done using selected instruments like questionnaires. The questionnaire will provide respondents with ample time to comprehend the questions raised and hence, they will be able to answer factually.

3.5.1 Questionnaires

The questionnaire will be used to collect quantitative data. The researcher will administer the questionnaires to respondents in different departments including, procurement, administration, and accounting. Pre-qualified service providers, and suppliers, which will be designed basing on study objectives and questions. Respondents will read and write the questionnaires themselves. The questionnaires will be close ended and will be considered convenient because they will be administered to the literate and its anonymous nature will fetch unhindered responses.

3.5.2 Interviews

Qualitative data will be collected from the informants using interviews. The interview guide will be structured. The interviews will be held with administration and suppliers, and will take approximately thirty to sixty minutes. This will be used since it’s the best tool for getting first-hand information /views, perceptions, feelings and attitudes of respondents. Both formal and informal interviews will be used to get maximum information from the different respondents to participate in the research.

3.6 Data collection procedures

Upon receiving the University permission to carry out research, the area of study will be visited for purposes of familiarization.  The researcher will seek permission from staff and once allowed to proceed with research, questionnaires will be issued and interviews will be carried out with the selected staff.

3.7 Quality control of data instruments

The instrument will be taken to the supervisor to check its correctness there after pilot study will be carried out to find out if it measures what it is meant to for.

3.8 Data processing and analysis

The raw data will be coded, edited, and arranged ready for analyzing only completed raw data will be analyzed using statistical tables and graphs.

3.9 Limitations of the study

Financial constraint, cash flow may not flow as   expected but this will not affect the study. Respondents may delay in filling the questionnaire and fear to give information, but they will be persuaded that the information will be kept secret.