THE IMPACT OF INVENTORY MANAGEMENT ON THE ORGANISATIONAL PERFORMANCE OF COMPANIES IN CAMEROON
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The overall objective of the study was to find out the impact of inventory management organizational performance of companies in Cameroon. The study was guided by three specific objectives; to examine the inventory management in Cameroon, to determine the organizational performance level of companies in Cameroon, and to analyze the relationship between inventory management and the organizational performance of companies in Cameroon. Data was collected using a questionnaire and interview guide, and during data collection, a purposive sampling method was used. Both qualitative and quantitative methodologies were used to analyze data as a sample size of 50 respondents was used.
The linear regression method was used to test the hypothesis. Inventory management is a supply chain determinant of performance. Companies in Cameroon appear not to be conscious of the importance of inventory management in the supply chain and have failed to put clear mechanisms in place and to invest in current material flow systems to oversee smooth and transparent material flow that can be tracked along a supply chain. At the end of the study, we found out that, there exists a very weak relationship between inventory management and organizational performance of companies in Cameroon. Thus, inventory management has no significant effect on the organizational performance of companies in Cameroon.
Based on the findings the researcher recommends that companies in Cameroon should develop a policy framework to facilitate faster implementations of the best inventory management practices such as JIT and MRP. Concerning procurement, inventory management should maximize space and timely delivery to avoid staying off production, management should closely monitor and manipulate their inventory system to maintain production consistency for organizational profitability and effectiveness.
Cost minimization techniques should be employed in the keeping and allocation of inventory, top management should emphasize the proper inventory management techniques and measuring of efficiency deviations to identify weaknesses in the process of managing inventories, companies should train their personnel in the area of inventory control management that will empower them to be in charge for the smooth running of the inventory management activities or program. Lastly, the researcher further recommends that similar studies should be replicated in other regions of Cameroon to see the consistency of the result to improve the external validity of the findings which will serve as a better basis for making generalizations for the case of Cameroon.
1.1 Background of the Study
Before their 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 handwritten notes and their gut feelings. This was an incredibly inefficient and inaccurate way of doing business. Merchants could not really account for stolen goods unless they did time-consuming physical counts regularly. They also had trouble making sure they got the right number of products when orders came in because of spares record keeping. But it was the best they could.
Herman Hollerith (1889) inverted 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 even 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 are fill out for catalogue items. Unfortunately, other management systems used to cost too much and was too slow to keep up with rising business challenges.
In the 1960s, a group of retailers (mostly grocery 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 companies became more efficient and cheaper, UPCs grew in popularity, in the mid-1990s, companies started experimenting with inventory management software that will record data as products were scanned in and out of the warehouse.
The technology evolved into comprehensive inventory management solutions by early 2000. 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. An organization doesn’t need to have all these inventory classes. But whatever may be the inventory item, 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 stocks in reserve to meet virtually every demand that comes. The production department similarly will ask for the task of materials so that the production process 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 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 total current assets of many organization represents as much as 40% of the total capital of industrial organizations (Moore, Lee, and Taylor, 2003). It may represent 33% of the company’s assets and as much as 90% of working capital (Sawaya Junior and Graque, 2006). Since inventory constitutes a major segment of total investment, it is essential that good inventory management could be practised to ensure organization.
According to (Temeng et al., 2010) historically, however, organizations have ignored the potential savings in inventory management, treating inventory as a necessary evil and not 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 being able to meet customers’ demands because of poor distribution of investment among inventory items, (Temeng, Eshun, and Essey, 2010).
Managing inventories 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 hold costs characterizes the transactions approach to inventory management, represented by the Economic Order Quantity (EOQ) model of inventory developed many decades ago (Koumanakos, 2008). In recent years, as the fields of operation management have 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) system, Just-In-Time (JIT) while another 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 affect a firm’s performance (Koh et al., 2007).
Inventory management and control are crucial to firms because mismanagement of inventories threatens a firm’s viability (Spraque 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 increases the probability of poor customer service. Inventory management is a crucial management issue for manufacturing companies, inventories are important to the successful functioning of manufacturing organizations. According to Buffa and Sarin, 2007 there are many reasons for keeping inventories. Too much stock could result in funds being tied down, increases holding cost, deterioration of materials, obsolescence, and theft. On the other hand, the material shortage can lead to interruption of products for sale; poor customer relations are underutilized.
1.2 Statement of the problem
The problem of inventory has continued to receive much attention in most businesses. Inventory levels of raw materials, semi-finished and finished goods need to be effectively managed to control the cost of inventory, (Kotler, 2002). Inventory Management is an important corporate function as it’s essential to the successful operation in the organizations. This is major since the amount of money invested in inventory is significant and also that inventories do have a great impact on the daily operations of an organization.
The inventory investment in most organizations takes up a big percentage of the total budget, yet inventory control is one of the most neglected management areas. Many firms have an excessive amount of cash tied up to an accumulation of inventory sitting for a long period because of the slack inventory management or inability to control the inventory efficiently. Poor inventory management translates directly into strains on a company’s cash flow. An effective and efficient management inventory flows across the value chain is one of the key factors for the success of large and small enterprises.
The challenge in managing inventory is to balance the tradeoff between the supplies of inventory with demand. Ideally, a company wants to have enough inventories to satisfy the demands of its customers, no lost sales due to inventory stock-outs. On the other hand, the company does not want to have too much inventory staying on hand because of the cost of carrying an inventory. Inventory decisions are high risk and high impact on the supply chain management of an organization. The quantity of inventory ordered at once affects the ordering and holding costs and will ultimately have a bearing on profitability. If a few large orders are placed, the annual ordering cost was low, but the annual holding will be high (Hanger, 1982).
On the other hand, if many small orders are placed overall, the ordering cost was high but the holding cost will below. To be profitable, it is necessary to determine if increasing the order size to obtain large volume discounts and slightly lowering costs will be more off-set at a higher holding cost. Researchers concur that profitability can only be achieved at an optimum level of relevant costs, that is, holding costs and ordering costs, (Lynch, 2005). Enough but not too much is the ultimate objective according to Coyle, Bardi& Langley, (2003). Despite the establishment of re-order levels order, quantities are still determined somewhat based on past usage. Yet, there is no specific policy to facilitate the determination of the quantities to be ordered, meaning that orders are placed based on the staff’s familiarity with the process. Improper quantities ordered occasionally leads to unexpected situations of stock out and overstocking. Problems are likely to raise when inventory is not tracked properly, inefficiency and additional costs mount. Supplies get lost, shrinkage can go unchecked, stock-outs occur, critical equipment locations are uncertain, billing is inefficient since supplies are used without being associated with customer’s record, and on-hand inventory can balloon unnecessarily. All of this leads to inefficiency and additional costs. Inventory management practices involve control of stock levels and standards which include control of ordering, storage, loss prevention, and control of transaction costs, (Zipkin, 2000).
A viable inventory management system seeks to meet anticipated demand, smoothen production requirements, hedge against price increases, or take advantage of quantity discounts, decouple components of the production, protect against stock-outs, take advantage of order cycles and permit operations. According to Dimitrios (2008), inventory management practices have come to be recognized as a vital problem area needing top priority. As a rule of thumb in most manufacturing organizations, direct materials represent up to 50% of the total product cost, as a result of the money entrusted on inventory, thereby affecting the profitability and competitiveness of the organization. According to Sander, Matthias, and Geoff (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.
Inventory management according to R.M, Onyango (2013) is a fundamental pillar in an organization and it should be taken seriously. For years, small to large size enterprises have faced some challenges, implementing effective and efficient inventory management policies as a result of the level of inventory needed by different departments in the organization. Different departments in an organization handling inventory have varied goals on the level of inventory to hold. One of the major goals of stock control is to keep stock levels down to make cash available for other purposes. However, under this goal, the purchasing department prefers to order large batches to enjoy volume discounts (Bose, 2006). The production department also has its goal about inventory, of maintaining long production runs to avoid time-consuming setups and also have a large raw material inventory to avoid stops in production due to missing materials. On the other hand, the marketing department would like to have a stock of finished goods to be able to provide customers with a high service level.
Therefore, it is seldom trivial to find the best balance between goals and that’s why inventory control is needed (Mercado, 2007). Despite the marvel of computer, automation, and scientific management, the production process and marketing activities cannot still avoid the need to have inventories. Advances in information technology have drastically changed possibilities to apply efficient inventory control techniques. Besides, the recent progress in research has resulted in new and more general methods that can reduce the supply chain costs substantially, (Axsäter, 2007). Sound management should consider all viewpoints and develop a policy that minimizes total related inventory cost. This conflict of inventory objective is always resolved with great difficulty in a manufacturing environment. Brigham (1983) opined that proper inventory management requires close coordination among the sales, purchasing, production, and finance departments since improper co-ordination among the departments can lead to disaster and sub-optimization.
Inventory control facilitates organizations to find the appropriate inventory levels through different models such as economic order quantity and to monitor the level via inventory control systems, for instance, red line and two-bin method, or computerized inventory control systems. Appropriate inventory control requires organizations to perform stocking and apply suitable mechanisms to value stock to avoid overstating and understating profits (Kotabo, 2002). The study is seeking to establish the impact of Inventory management techniques on organizational performance and what should be done so that it can be of greater success to the firm through adopting new or improving existing techniques for competitive advantage. Based on the gap identified and discussions made on empirical and theoretical evidence, this research work is therefore out to investigate“what impact does inventory management has on the organizational performance of companies in Cameroon”. To do these we make the following specific questions.
1.3 Research questions
- what is inventory management?
- What is organizational performance?
- What is the relationship between inventory management and organizational performance?
- What are the recommendations to be made to what party as concerning the subject matter?
1.4 Objectives of the study
Considering the many inventory management challenges faced by companies in Cameroon, this study aims to analyze the impact of inventory management on the organizational performance of companies in Cameroon while considering Guinness depot, Molyko Buea.
To achieve this objective, the following (4) specific objectives were formulated.
- To examine the inventory management in Cameroon.
- To determine the organizational performance level of companies in Cameroon.
- To analyze the relationship between inventory management and the organizational performance of companies in Cameroon.
- To make recommendations.
1.5 RESEARCH HYPOTHESIS
(H0): Inventory Management does not significantly affect the organizational performance of companies in Cameroon.
(Ha): Inventory Management significantly affects the organizational performance of companies in Cameroon.