Effects of Inventory Management on Organisational Performance

CHAPTER ONE

INTRODUCTION

Background of the Study

This study seeks o examine the effects of Inventory Management on Organisational Performance. Before the industrial revolution, merchants basically had to write down all 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 record keeping. But it was the best they could.

Luckily, in 1889, a man named Herman Hollerith invented the first punch card that could be read by machines by feeding sheets of papers that have little holes in specific places, people could record complex data for a variety of purposes from census taking to clock in and out of work.

This was basically the precursor to computers that can read data in tiny microchips. And Hollerith’s company event went on to form the world’s first computer company. 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 card customers would fill out for catalogue items. Unfortunately, other management systems used to cost too much and were to 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 taking inventory: the barcode. There were several competing types of barcodes before they were standardized with the universal product code (UPC ) in 1974. It is still the most used barcode in the United States.

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 the warehouses. The technology evolved into comprehensive inventory management solutions by the early 2000s.

Now even small and medium-size businesses can find affordable inventory management software to meet their needs. Inventories are vital to the successful functioning of manufacturing and retailing organizations. They may consist of 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 the same organization adopt a different attitude towards inventory. This is mainly because of the particular functions performed by a department influence the department’s motivation. For example, the sales department might desire large stock in reserve to meet virtually every demand that comes.

The production department similarly would ask for tasks of materials so that the production system runs uninterrupted. On the other hand, the finance department would always argue for a minimum investment in stocks so that the funds could be used elsewhere for other better purposes (Vobra, 2008).

Inventory represents an important decision variable at all stages of product manufacturing, distribution and sales, in addition to being a major portion of the total current assets of many organizations represents as much as 40% of the total capital of industrial organizations (Moore, Lee and Taylor, 2003).

It may represent 33% of a company’s assets and as much as 90% of working capital (Sawaya Jr and Graque, 2006). Since inventory constitutes a major segment of total investment, it is essential that good inventory management be practised to ensure organizational growth and profitability.

According to (Temeng et al., 2010), historically, however, organizations have ignored the potential savings from proper inventory management, treating inventory as a necessary evil and not as an asset requiring management. As a result, many inventory systems are based on arbitrary rules.

Unfortunately, it is not unusual for some organizations to have more funds invested in inventory and still not be able to meet customers’ demands because of poor distribution of investment among inventory items (Temeng, Eshun and Essey, 2010).

Managing assets of all kinds can be viewed as an inventory problem, for the same principles apply to cash and fixed assets (Koumanakos, 2008)’ The trade-off between ordering costs and holding costs characterizes the transactions approach to inventory management represented by the EOQ model of inventory developed many decades ago (Koumanakos, 2008).

 In recent years, as the field of operations management has developed, many new concepts have been added to the list of relevant inventory control topics.

These more management-oriented concepts include material requirement planning (MRP) systems, Just-In-Time (JIT) while another emerging stream of studies postulates the characteristics of a firm’s demand and marketing environments also play an important role.

In the determination of optimal corporate inventories, notwithstanding the theoretical and practical shortcomings inherent in these concepts and techniques, their application in real business life should have an effect on a firm’s performance (Koh et al., 2007).

Inventory management and control are crucial to a firm because mismanagement of inventory threatens a firm’s viability (Sprague and Wacker, 1996). Too much inventory consumes physical space, creates a financial burden and increases the possibility of damage, spoilage and loss. On the other hand, too little inventory often disrupts manufacturing operations and increase the likelihood of poor customer service.

Inventory management is a critical management issue for manufacturing companies, inventories are vital to the successful functioning of manufacturing organisations. According to (Buffa & Sarin, 2007), there are several reasons for keeping inventory.

Too much stock could result in funds being tied down, an increase in holding costs, deterioration of materials, obsolescence and theft. On the other hand, the shortage of materials can lead to interruption of products for sales; poor customer relations are underutilised.

1.2 Problem Statement

Inventory is a vital part of current assets mainly in manufacturing concerns. Huge funds are committed to inventories to ensure a smooth flow of production and to meet customer demand. However, maintaining inventory also involves holding or carrying a lot of costs.

Inventory management, therefore, plays a vital role in balancing the benefits and disadvantages associated with holding inventory. Efficient and effective inventory management goes a long way in the successful running and survival of business firms, when organizations fail to manage their inventory effectively; they are bound to experience stock out, a decline in productivity and profitability, customer dissatisfaction.

Due to the slit completive that exists in every industry, inventory management has become mandatory on each and every manager responsible for production in an organization. Inventory is one vital resource that any organization requires and just like any other resource that is very scarce and that requires effective management rather than neglect.

The cost of acquiring these inventories is also important for the fact that too much of it will mean tying down capital and risk of becoming obsolete while having little could lead to shortage and production bottleneck. How then can Guinness depot determine an adequate quantity of raw materials to buy on a regular basis devoid of scarcity, the amount to invest in the inventory is the concern of the researcher?

This problem has led the poser to ask the following questions: What is the inventory management in Guinness Depot Buea? To what extent does inventory management affect the performance of Guinness Depot Buea? What is the effect of inventory management on the competitive position of Guinness Depot Buea?

1.3 Objectives of the study

The main objective of this study is to examine the effects of inventory management on organisational performance.

The specific objectives are;

1. Examine the inventory management system at Guinness Depot Buea
2. Determine the effect of inventory management on the performance of Guinness Depot Buea
3. Evaluate the effect of inventory management on the competitive position of Guinness Depot Buea