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ASSESSING THE EFFECT OF STORES MANAGEMENT ON ORGANIZATIONAL PERFORMANCE: A CASE STUDY OF SADOLINE PAINTS LIMITED

CHAPTER ONE

INTRODUCTION

Background of the study

According to Richardet al (2009) organizational performance encompasses three specific areas of firm outcomes one of which is financial performance concerned with profits, returns on assets, and return on investment; product market share and shareholder return that involves total shareholder return and economic value added. Organizational performance comprises the actual output or results of an organization as measured against its intended outputs which are its goals and objectives(Jabareen, 2009). It deals with the cost minimization and revenue maximization(Konke, 2003). Organizations that do not increase performance quickly lose competitive advantage. Increases in performance can be gained by increasing output while input remains the same, increasing output while input increases at a slower rate, maintaining the same output while the input decreases or by declining output while input falls at a faster rate (Needharm & Dransfield, 1995). 

Store management involves the planning, control of issues of stores (Kortz2003).  The objective of store management is to efficiently and economically provide the right materials at the time when it is required and in the condition in which it is required (Ogbo & Onekanma, 2014).A professionally managed store has a process and a space within, to receive the incoming materials (Receiving Bay), keep them for as long as they are not required for use (Custody) and then to move them out of stores for use (Miller,2010).In a manufacturing firm this process forms a cycle to maintain and run the activities of Stores (Kortz2003). 

The role of the store manager hence is to receive the goods and act as a caretaker of the materials and issue them as and when Production demands it. Needless to say store management activity does not add any value to the product but may be costly if poorly managed which may impact on organization performance interms of profits, market share (Schonsleben, 2000). The organization has to spend money on space that is to say expenditure on land, building and roads, equipment, machinery and other facilities provided such as electricity, people (salaries and wages), insurance, maintenance costs, stationary, communication expenses and the cost to maintain the inventory among others(Ogbo & Onekanma, 2014).  All of these get added to the organizational overheads and finally get reflected in the costing of the finished product. 

Sadoline paints limitednow requires that costs and cost centers be well managed and controlled. Consequently stores as a cost centers must be well managed. In practice Sadoline paints limited spendshuge amount of resources (i.e. time and money) managing and directing their suppliers to ensure that critical inventory/stock levels are maintained and the vital flow of product needs for operations continue. Sadoline paints limited stores are set up to provide safe custody of its properties and goods in stores (Ayad, 2011). Sadoline paints limited ensures that there are proper stock control systems and adequate measures to prevent abuse, unauthorized disposal of serviceable stores for personal gain, misappropriation of the assets and theft; this has enabled it to improve its performance in terms of high profits and a big market share (Mulondo, 2010). Thus, the study will make an assessment on the effect of stores management on organizational performance, a case study of Sadoline paints limited.

Statement of the problem

Performance of Sadoline paints limited in terms of profits, sales, and revenues is low and management continues to complain on the way stores are managed(Mulondo, 2010). It is against this background that the study seeks to assessthe effect of stores management on organizational performance.

Purpose of the stuy

The purpose of the study will be to make an assessment onthe effect of stores management on the performance Sadoline paints limited, Uganda.

Specific objectives

1. To examine the objectives of store management at Sadoline paints limited.
2. To establish the performance of Sadoline paints limited, Uganda.
3. To establish the effect of stores management on performance of Sadoline paints limited, Uganda.

Research questions

1. What are the objectives of store management at Sadoline paints limited?
2. What is the performance of Sadoline paints limited, Uganda?
3. What is the effect of stores management on performance of Sadoline paints limited, Uganda?

Scope of the study

The area of the study will be carried out at Sadoline paints limited. The study will be interested in trying to understand the objectives of store management, the performance of Sadoline and the effect of stores management on performance.The study will consider 2012-2016 as the period of data to be considered in the organization. The study will be carried out for a period of four months from February toMay, 2017.

The Significance of the study

1. Other stakeholders such as customers, suppliers who need knowledge about stores management can use the research as a reference.
2. The findings will help customers by receiving good service from the organization as a result of the improvement in store management practices in the organization.
3. Stakeholders will find it useful since they will be able to know about the performance of store management in the organization and its general performance.
4. Suppliers will help the findings useful since they will have access to know the criteria followed in store management in the organization.
5. The research will benefit the management and the workers of the organization to know why there are challenges in their stores management system and what to do to improve stores management since the research will be conducted among them.
6. The study findings will to be useful to future researchers who will be studying a similar topic as they will use it as literature review.

CHAPTER TWO

LITERATURE REVIEW

• Introduction

This chapter provides the reader with important facts in order to increase the understanding of the area under investigation. The chapter also identifies what other authors have found out in the area of stores management and organizational performance.

2.1 Stores Management

Stores refers to an organization as an area within the company in which all kinds of materials needed for production, distribution, maintenance, packaging etc. are kept received and issue (Carter and Price, 1993).

Management refers to the function that coordinates the efforts of people to accomplish the goals and objectives by using available resources efficiently and effectively. This includes planning, organizing, staffing leading or directing and controlling an organization to accomplish the goal or target (Wikipedia).

Keeping a large amount of perishable inventory on hand risks the possibility that you will be unable to sell some of the inventory in time before it goes bad which can force you to throw away product. Again, certain goods might not sell due to shifts in market. Carrying too few goods on hand can also be harmful to a business. If you run out of certain product, you could miss out on potentially profitable sales and this could cause customers to give their business to your competitors. It would be reasonable to argue that, the most important aspect of stores operations are concerned with adequate supply of materials and parts consistent with economic inventory. In such circumstances, it would receive the right goods in the right condition, in the right quantity, at the right time and at right place and at the right time (Lysons, 2003). 

According to Emmett et al (2005) explain that stores management make sense if the following contributions is provided: to make available balance flow of materials, tools, equipment and stationary necessary to meet operational requirement; To provide maintenance materials, spare parts and general stock that is required; To accept and store scrap and other discarded materials as it arises; To account for all receipts; To issue goods in bulk and break bulks.

Store is a function of materials management in an organization. Hence it is generally found that stores function reports to the materials manager. But in some situations stores function reports to the production function. The earlier type of arrangement is based on the concept that stores along with other functions of materials management can be integrated into the materials organization. This will stream line all materials management functions effectively. The other arrangement is leaning on the fact that production function is very closely linked to stores and a common command can reduce cost and increase effectiveness and also keep material accounting outside the scope of procurement function. 

Centralized stores concept is to store all items at a central place and control materials movement from this central place whereas decentralization concept is moving the material to the respective consumer function or directly to the points of use. Centralization or Decentralization then is a matter of convenience. However, one basic organizational feature must be observed. The entire stores setup should be under the unified control of one department with senior controller of stores in charge, in order to efficiently achieve the objectives of the function of stores.

2.2 Organizational Performance

With the increasing number of analyses and research papers referencing financial performances, there is a need to have basic understanding of definition of financial performance and its various measures, (Burkhardt, 2013). Therefore, choosing a particular measure of financial performance depends on how well it meets the intended purpose. Financial performance of a bank is defined as its capacity to generate sustainable profitability, (European Central Bank (ECB), 2010). Therefore we can say that financial performance of a bank is its ability to employ the available resources to increase shareholders’ wealth and generate sustainable profits to strengthen its capital base through retained earnings to ensure future profitability.

Measurement of financial performance of any firm is crucial in deciding the strategies to be formulated to ensure that the firm is in the right path. This is particularly important in order to establish if a firm is making losses which if they become consistent may lead a firm to depleting its capital base, (ECB, 2010). Key drivers of measuring bank performances are earnings, efficiency, risk taking and leverage, (ECB, 2010). Firstly, a bank must be able to generate earnings to remain in operation, secondly, it should be efficient meaning it should be able to generate revenue from the given assets and make profits, thirdly, it should be able to adjust its earnings to overcome the various risks involved such as credit risk and finally it should be able to improve its results through the way it functions. 

2.2.1 Indicators of performance of an organization

To stay competitive, organization should manage with employees, processes, planned activities, reductions times, relations with suppliers, and other parts of the business. System for effective measuring of performances is used to understand, adjust and improve business in all department of the organization (Summers, 2005).

Measuring performances of the organization means qualitative and quantitative expression of some results by chosen indicators. Selection of appropriate indicators that will be used for measurement and appraisal of the performances is a very important activity. Among all information that can be got it is necessary to choose some critical quantity that on the best way represent the whole business.

Beside control function indicators of performances also have two next functions:

Developing and guiding function – because they present a base for formulating and implementation of the strategy of the organization (Pesalj, 2006). 

Motivation function – induce management to fulfill goals and motivate all stakeholders to realize those goals and on even higher level (Stamatović& Zakić, 2010).

In all organizations, an employee knows that there are activities that are very important for the management team. In sense of defining a control package of indicators that represent success of some business conception of key performance indicators were appeared. Key performance indicators (KPI) are financial and non-financial indicators that organization uses to testify how successful they were in achievement of long lasting goals.

KPI are static and stable indicators that carry more meaning when comparing information. They help to remove the emotion away from object of the business, and get one focused on the thing that job is really about, and that is making profit (Summers, 2005).

2.2.2 Measure of indicators of Performance 

There are various ways through which bank performance can be measured. European Central Bank (2010) report has categorized them in to three major categories which are traditional, economic and market based measures. The traditional measures are similar to those used by other firms which include Return on Assets (ROA) which is the net income for the year divided by the total assets. The other measure is Return of Equity (ROE) which is the internal performance measure of shareholder’s value and this is the most famous measure of financial performance. The Economic measures of performance aim at assessing the economic results generated by the bank from its economic assets. The market based measures depend on the way the capital market value the performance of firm as compared to its economic and accounting value. 

The main measure of financial performance is through ratio analysis which has been identified as convenient and efficient method of assessment since it combines information from financial statements and comes up with numbers that are more easily interpreted financial meaning, (Burkhardt, 2013). Financial measures are regarded as “lag” indicators of performance whereas Intellectual capital measures (like non-financial measures) are regarded as “lead” indicators since they are mainly intended to generate future earnings power (Kaplan & Norton, 2001). While all future earnings are uncertain, it is greater for intellectual capital than for tangible assets. Traditionally, firms relied on their tangible assets to drive their performance and firm-level strategy.

Therefore financial performance is a major factor in banking industry in order to be able to identify the growth of the economy at large. After 2008 financial crisis, major economies have tried to regulate the financial sector mainly through changes in capital requirements as per Basel III. This has also prompted the review of ROE and other bank performance measures since they form a major part of bank decisions (Seoh, 2012).

Profitability measures the extent to which a business generates a profit from the use of land, labor, management, and capital. It is measured by net firm income from operations (NFIFO), rate of return on firm assets (ROA), rate of return on firm equity (ROE) and operating profit margin (OPM) (Miller & Modigliani, 1966). Net revenues available from normal operations after fixed and variable expenses have been deducted and for accuracy, it is calculated on an accrual basis. Operating profit reflects ability to generate revenues and control costs. It is revenue available to compensate debt and equity capital. 

The measure of operating profit at divisional level is EBIT (earnings before interest and taxes). EBIT is calculated before interest and income taxes, and hence reflects the divisions’ profit and loss responsibility. The operating profit measure used at Group level is net operating profit. It comprises the EBIT of the divisions as well as profit and loss effects that the divisions are not held responsible for, including income taxes and other reconciliation items.

Rate of return on Assets (ROA) is the net income generated by all assets, after labor has been compensated but before interest payments. It is the operating profitability per dollar of assets and allows comparison between different sizes and types of businesses (Miller et al., 1966). Firm size acts as a proxy for the cost of hedging or economies of scale. Risk management involves fixed costs of setting up of computer systems and training/hiring of personnel in foreign exchange management. Moreover, large firms might be considered as more creditworthy counterparties for forward or swap transactions, thus further reducing their cost of hedging.

The book value of assets is used as a measure of firm size. Rate of return on Equity (ROE) is the return after all labor and interest expenses have been deducted from the earnings. It measures the return to the owner of the business for their capital investment and can be compared to alternative investments. Liquidity (cash flow) is the ability of a firm business to meet financial obligations as they come due in the short term, without disrupting the normal operations of the business. It is measured by the Current ratio which is Current assets divided by the Current liabilities. It is a basic indicator of short-term debt servicing and/or cash flow capacity and also indicates the extent to which current assets, when liquidated, will cover current obligations. Firms with highly liquid assets or high profitability have less incentive to engage in hedging because they are exposed to a lower probability of financial distress. Liquidity is measured by the quick ratio, i.e. quick assets divided by current liabilities). Profitability is measured as EBIT divided by book assets. Cash flow refers to the amount of money available to meet the financial obligations of the company. 

Solvency on the other hand gauges the firm’s ability to pay all financial obligations if all assets are sold and to continue viable operations after financial adversity (Miller et al., 1966). It is measured by Debt to asset ratio, Debt to equity ratio and Equity to asset ratio. Finally yet importantly are ratios. Commonly used financial ratios can be applied to evaluate the performances of operators and top management more accurately. Performance measurement is perhaps the most important, yet most misunderstood and most difficult, task in management accounting. Traditional accounting performance measurement employs financial techniques such as Return on Assets (ROA) and Return on Equity (ROE) These have been criticized for being backward looking, unable to measure intangible resources and not suitable for assessing performance of investments in new technologies and markets which firms require to successfully compete in global markets (Seoh, 2012).

2.3 Effect of stores management on performance 

Stores management plays an important role in the growth and survival of an organization in the sense that failure to an effective and efficient management of stores, will mean that the organization will lose customers leading to poor services delivery and sale will decline. Emphasizing on the importance of stores on the balance sheet of companies. Coyle, Bardi and Langley (2003) state that “stores as an asset on the balance sheet of companies has taken an increased significance because of the strategy of many firms to reduce their investment in fixed assets, that is plants, ware houses, office buildings, equipment and machinery , and soon.

Virtually every enterprise finds it necessary to hold stocks (or stores)of various items and materials. That is because it would be practically impossible to operate with only one of each item to be sold or used in manufacture or used in office work. A reserve or a fundor storesof each item or material used or sold frequently is therefore maintained, so that as items or materials are sold or used they can be replaced or replenished from the stocks held in reserve. 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 (Drury, 2000).

Pandey (2002) argues that precautionary motive is one of the central roles of stores management. Accordingly, 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)

According to Kenneth and Brian (2006) includes keeping stores 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.

Kakuru (2000) illuminates 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. Firms should maintain back up stores 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).

Lucay (2003) observes that excessive levels of stock are undesirable because they increase the risks of stores becoming obsolete, stock loss through damage and theft, increased storage costs like rent, insurance and unnecessary tie up of the firm’s funds. He further state that a firm would be foregoing profits when it continues maintaining excessive levels of stores, which implies that the probability position of the firm is being threatened in the long run since funds are not being invested in other profitable ventures. Lower levels of stores are also undesirable because it interrupts production, loss of good will and high ordering costs especially when ordering is frequent. Inadequate stores levels leads to business closure due to shifting of customers to other efficient suppliers as a result of production/ operation interruptions (Gittinger 1995).

According to Lynch (2005), the main objective of stores management is to minimize the total cost of relevant costs to ensure profitable operations. Because of value attributed to stores management, two cardinal decisions must be faced if the stores management is; how much we buy at a time? When we buy (or manufacture)?

According to Pandey (2002), in many cases where stores management decisions have been effective, inventory planning models have been effective; inventory- planning models have been developed and implemented focusing especially on the twin problems of inventory size and timing. Usually stores management modes are defined to achieve a balance between the costs of acquiring and holding inventory. These costs are the ones that affect organizations profitability. These models are developed in order to help management maintain inventories of optimal level that will help the organization to realize profits. To be specific, the objective of stores management models is to maintain adequate inventory levels of minimum inventory costs. They specify the economic order quantity and re-order point and if well observed, companies earn profits (Hilton, 2000). 

Economic order quality is the quality of inventory that should be ordered at once. They further noted that, the quantity of inventory ordered at once affects inventory ordering and holding costs and will ultimately have a bearing on profitability. For instance, if a few large orders are placed, annual ordering costs will be low, but annual holding costs will be high (Lynch, 2005).

Conversely, if many small orders are placed over all ordering costs will be high but annual holding costs will be low. To be profitable, it is necessary to determine it increasing the order size to obtain large volume discounts and slightly lowering costs will be more off- set at a higher holding cost. The scholars agreed that profitability would only be achieved at optimum level of relevant costs i.e. holding costs and ordering costs (Lynch, 2005)

According to Pandey (2002), this is the level of which an order for additional inventory should be placed, because inventory cannot be ordered and received instantly. Orders for additional inventories should be placed before current stocks are depleted. The re-order point must consider both the lead time required to replenish stocks after on order is placed and inventory demand during the lead time. 

Hilton (2000) agreed with other scholars and further observed that, because of the variation in lead-time and the daily demand for inventory, inventories are cushions to prevent “Stock out” and the resulting loss of sales or disruption of production.

As already noted above, in a merchandising establishment, stock out costs includes the extra costs of processing back orders and opportunity cost of lost sales is frequently specified as the selling price less the invoice price, opportunity costs are considered greater if dissatisfied customers subsequently patronize other establishments. In this case, the profitability of an organization remains fragile if no proper controls are considered .greater it dissatisfied customers subsequently patronize other establishments. In this case, the profitability of an organization remains fragile if no proper controls are ensured (Hilton, 2000).

Excessive inventories are the enemy of retail profitability. For stores management to be an effective profitability improvement tool, corporate culture must ensure that employees are empowered to make it successful (Laugero, 2002). Organizations like black and Decker fully realize the relationship between inventory production and profit. This is an international Corporation, with annual sales in excess of and 1 billion. It is the world’s largest manufacturer of power tools, and because of large required investment in inventory and the total cost associated with such, managers are alert for ways to control inventory. Gibson (2008) says that stores management is an important area of financial control, which is often neglected not knowing that a small percentage saving on inventory costs will represent millions of shillings on natural scale. All stocks represents on investment so they should keep to an absolute minimum. 

CHAPTER THREE

METHODOLOGY

3.1 Introduction

This  chapter  presents  methods  and procedures  that the researcher  used when  assessing  the findings  of the  study. It presents research design, sample population and size, data collection instruments, data type, data processing and presentation and the problems encountered during the process of data collection and limitation of the study.

3.2 Research Design

The research will be designed in such a manner, which enabled the researcher to meet the objectives of the study, the researcher therefore will use both qualitative and quantitative research designs, which will be descriptive in nature. The descriptive aspect of the research design will be used to investigate the effect of effective stores management on organizational performance.

3.3 Study population

The population of the study will be 1400 staff members of Sadoline comprising   of purchasing officers, store keeper, site foreman, site workers, accountant, technical manager and the general manager.

3.4 Sampling Size and selection

The sample size of 50 respondents will be determined by formulae of Krejcie Morgan (1970). The researcher will use purposive sampling to select the samples from the population. Here, the researcher will choose the sample based on who she thinks will be appropriate for the study. Simple random sampling will be used to limit on the biasness of purposive sampling.

Table 3.1: Sample Size

3.5 Source of data

Data will be both primary and secondary. Primary data will be collected by the use of questionnaires and secondary data will be got from reports, journals, and internet.

3.6 Data Collection Methods and Instruments

Questionnaire

Questionnaire is a carefully designed instrument for collecting data in accordance with the specifications of research questions. This contained a form of set questions to be answered by the respondents and the researcher asked simple logic questions every respondent could comprehend fully. Self-administered semi structured questionnaire will be designed to collect quantitative data. It involved both open-ended and closed ended questionnaires. This research tool will be considered to be central for this study simply because it will be a convenient tool whereby the respondents could chose when to answer the outlined questions without panic. Quantitative data will be collected by the use of questionnaire method. A Self-administered questionnaire will be designed and they will be distributed to staff members who filled them within 3 days of research period.

3.7 Reliability and Validity

Validity refers to the degree to which a test measures what it is supposed to measure and consequently permits appropriate interpretation of scores. As suggested by (Kathari, 2003; Enon, 1998), content and construct validity will be determined by expert judgment. The researcher thus used help of the supervisor who will examine and confirm content validity by checking the items’ and  content coverage, relevance, clarity of questionnaire, persistency and ambiguity.

The reliability of research instruments will be ensured by the researcher throughout the study, discussing them with the supervisor when seeking expert opinion, taking great care in the choice of section, order and proper structure of questions. The researcher will develop instruments that will be easy to understand for instance interviews will be conducted in the language that suits respondents.

3.8 Data processing, analysis and presentation

Quantitative data collected by the questionnaire will be first coded. In the coding process, a coding sheet will be constructed. A number then assigned to each answer in the questionnaire with a corresponding number on the coding sheet. Then the same questionnaire will be constructed on the computer using Ms-excel. Frequency tables will be worked out basing on the data entered. In this frequency tables analysis will be done with a corresponding percentage. However a Pearson correlation coefficient will be used to determine the relationship between the two variables.

3.9 Limitations and anticipated solution

Respondents will be not willing to give confidential information, which will be sufficient to the researcher. However, the researcher will convince them that research will be intended to help them improve on their problems.  

There will be too much pressure as a result of limited time for the researcher. However, the researcher will devote most of the time on the research. 

Financial constraint since research requires money for printing and transport. However, the researcher will minimize the costs as lowest as possible.

QUESTIONNAIRE FOR THE COMPANY WORKERS

I am a 3rd year student pursuing a Bachelor of Procurement Logistics and Management at Kyambogo University carry out a study on the “Assessing the Effect of stores management on organizational performance”, a case study of Sadoline paints ltd. Your feedback is very important as your inputs will be used for academic purposes only. I greatly appreciate if you could take a few minutes to provide me with information. Your response will be kept confidential and it will not be divulged to any person or institution outside this corporation. 

SECTION A: BIOGRAPHIC DATA

(N.B Answer by Ticking where applicable) 

1. Gender 

 (1) Female                                                             (2) Male 

2. Age in years

(1) 25-30                                                                   (2) 31-36

(3) 36-40                                                                   (4) Above 40

3. Education Level 

(1) Diploma                                                             (2) Bachelor

(3) Postgraduate (4) Masters

4. Number of years in Service
5. 1-5years 2. 6-10years
6. 11-15years 4. Above 15years

SECTION B: OBJECTIVES OF STORE MANAGEMENT

5. What are the objectives of store management? (Tick on the following suggestions)

1. How has effective stores management enhanced performance in the organization?

(1) Reduced on lead time (2) Reduced documentation

(3) Improved information flow (4) Reduction in operating costs

(5) Others specify …………………………………..

SECTION C: PERFORMANCE OF SADOLINE PAINTS LIMITED

7. In this section, tick the best option by using strongly Agree (SA), agree (A), Not Sure (NS), Disagree (D). SD=1, D=2, NS=3, A=4, SA=5

SECTION D: THE EFFECT OF STORES MANAGEMENT ON PERFORMANCE

8. In this section, tick the best option by using strongly Agree (SA), agree (A), Not Sure (NS), Disagree (D). SD=1, D=2, NS=3, A=4, SA=5

THANK YOU FOR YOUR TIME

INTERVIEW GUIDE FOR COMPANY WORKERS

1. What are the objectives of store management at Sadoline paints limited?
2. What are the indicators of performance in Sadoline paints limited, Uganda?
3. What is the effect of stores management on performance of Sadoline paints limited, Uganda?

THANK YOU FOR YOUR TIME