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Volume 4, Issue 9, September – 2019 International Journal of Innovative Science and Research Technology
ISSN No:-2456-2165
Effects of Inventory Management System on Firm
Performance – An Empirical Study
1 2
Everline Chebet and Dr. Samson Kitheka
1.
Lecturer, School of Business, Technical University of Mombasa
2.
Lecturer, School of Business, Technical University of Mombasa
Abstract:- The study was guided by the following production. The elevated workforce levels in many produced
objectives: to find out how the systematic application products have justified this approach. In latest years,
production in data processing (SAP), just in time system however, the labour unit cost ratio has reduced steadily. Even
and economic order quantity affect the organization big production companies, such as US automotive
performance. Literature review indicated that previous assemblers, buy up to 60% of the product value. This means
studies have brought out both positive relations and weak that the management of inventories of raw materials is an
relations between the inventory management practices area where productivity can be greatly improved.
and the operational performance of firms. The researcher
used an empirical evidence to analyze the findings. The Mangolo, (2016), has suggested that inventory
study established that systematic application and management improves its activities for many organisations in
production in data processing affect performance of Africa. High quality manufacturers can deliver a variety of
organization. The study concluded that Economic order products and create fast delivery from their backyards to
quantity should be continuously reviewed were by clients (Stanton, 2014). (Stanton, 2014). The management of
inventory control system is closely monitored at all time companies in Africa was asked about the effectiveness of
to make it more effective.On recommendations, the first stock management processes in place as a consequence of
recommendation made was that since SAP was found to inconsistence of stock rates leading to different flaws, such as
be significantly affects firm performance, organizations losses arising from over-extended stocking, under-inventory,
should appropriately use the SAP technology in expiry of inventories, inability to achieve the business
managing their procurement for an efficient operations. members ' objectives and low morality. These overcrowded
The second recommendation was based on EOQ. Since businesses make it hard to obtain late, departmental products
EOQ was found to be an important technique in from a warehouse keeper, resulting in bad stock service
inventory management, firms should ensure to order the delivery (Wood, 2014).
recommended lot size as determined by the EOQ.
The Effect of Inventory Management on Profitability of
Keywords:- Economic Order Quantity, Operational Cement Manufacturing Companies in Kenya, study done by
Efficiency, Systematic Application Production in Data Edwin and Florence (2015), the research results establish an
Processing. adverse connection with the business ' profitability between
inventory turnover, stock conversion and storage costs.
I. INTRODUCTION Furthermore, the inventory level has been discovered to be
directly linked to company size and storage costs and
Blanks (2014) research on the concept of leadership in suggested that companies in Kenya strive to guarantee that
Europe discovered that inventory control was not seen as an the appropriate stock in their stores is kept safe from
indicator of wealth as needed surplus inventories. excessive expense of holding and inventories.
Management was then taken into account in terms of storage.
However, today companies have begun to take over efficient Concept of Inventory Management
inventory control (Susan & Michael, 2015). In order to Inventory is a dormant inventory of physical objects
decrease cost and stay competitive (Closs, 2012), managers containing economic value that are kept under different
now need reliable and efficient inventory control more than custody by an organization waiting in time in the future to be
ever before. Inventory alone accounts for up to 30 per cent of packaged, processed, converted, used or sold (Selleemi,
the investing capital of Dobleer and Burn (2014) in the 2014). In order to satisfy customer service demands and
company. This is why Europe (2013) has established expectations, the choice concerning the quantity of inventory
processes and methods for adequate inventory control that a business should take and its place within the company's
through its Supplies Manual. network is extremely important. Inventory management is the
choice and control of operations to get the correct stock in the
Colling, (2015) argues that productivity enhancement correct location and at the correct moment at the correct
has been accomplished in the United States of America and price, (Lyson & Farrington, 2014).
other western countries by decreasing labour cost per unit of
IJISRT19OCT1632 www.ijisrt.com 91
Volume 4, Issue 9, September – 2019 International Journal of Innovative Science and Research Technology
ISSN No:-2456-2165
Inventory management is a key task that determines In Kenya, a case study of Safaricom on influence of
both the health of the supply chain and the impact of the inventory management practices on organization’s
balance sheet on economic health. Every company strives competitiveness has been carried out by Kamau and Kagiri,
constantly to preserve the best stock in order to satisfy its (2015). The research found that stock management practices
demands and to prevent an inventory which may have an impact a company's profit maximisation, satisfaction of its
effect on its finances. Continuous and careful evaluation, customers and development in market share and
planning and evaluation, and control over inventory consequently impact its competitiveness. In particular,
management require external and internal considerations. Safaricom Ltd's performance was impacted by inventory
Most organizations have separate departmental functions or shrinkage, stock investment and turnover. The study
jobs called inventory planners which track the stock and recommended that increasing forecast accuracy and use of a
interface with manufacturing, procurement and finance vendor managed inventory system would lead to lower out of
departments, continually and continually (Saleemi, 2014). stock incidences, lower costs and increased customer service
levels. The study recommended use of an inventory
Chandra, (2014) has indicated that inventory management practice that tackles issues of information
management is likely to comprised activities such as demand management such as the Systematic Application and
management which ensured that required operation and Production software (Kamau & Kagiri, 2015). It however did
maintenance of supplies are available at the right time in the not explore the impact of these systems on organization
right quantity. Reviewing safety stock levels and controlling performance.
minimum and maximum amount of inventory in terms of
both quantity and value ,implementing lean inventory Naliaka and Namusonge, (2015) explored inventory
policies such as JIT contract to minimized investment in management and its role on competitive advantage of
inventory liaising with purchasing to ensure that supplies are manufacturing firms. The study also identified IT, inventory
replenish in accordance with cooperate and procurement control systems and inventory management practices as key
policies, developing cost effective system and procedure factors impacting a manufacturing firm’s competitiveness.
relating to the ordering, procurement budgeting of supplies, The sole focus of this study was manufacturing firms hence
controlling the receipt inspection ,recording location and the findings cannot be generalized to the retail sector.
issue of supplier to the user (Chandra, 2014). Therefore this study intends to bridge this gap by establishing
the effect of inventory management practices on firm
II. STATEMENT OF THE PROBLEM performance.
Inventory is a key business consideration in the attempt III. THE GENERAL OBJECTIVE
to achieve supply chain optimization. In this complex and
dynamic market a firm should be able to come up with varies The general objective of this study was to determine the
techniques of having efficient inventory levels that would be effect of inventory management systems on firm
economical to the firm if they were to hold stock (Chandra, performance.
2014). Poor inventory management brought about capital
being tied up as stock and hence impact negative on the firm A. Specific Objective
by having to incur storage and carrying cost which prove to To find out how Systematic Application and Production
be very expensive to the organization at large (Mwangi, software of inventory management system affects the firm
2015). The store department is also faced with some performance, an empirical review.
challenges of inaccurate forecasting whereby they are unable To assess the effect of economic order quantity of
to anticipate future changes in external or internal forces that inventory management on the firm performance,an
affect the inventory level of the firm (Ngugi, 2014). empirical review.
To determine the effect of Just in time inventory control
The effect of inventory management on organisational system on the firm performance, an empirical review.
performance was assessed in local research. Ogbo and
Onekanma (2014) noted that organisations, by attaining B. Research Questions
lowered operating costs and enhanced sales efficiency, Does Systematic Application and Production Software of
benefitted from inventory control management. The study inventory management system affectsfirm performance?
also established that there exists a relationship between Do Economic Order Quantity of inventory management
operational feasibility, utility of inventory management in affects firm performance?
customer related issues and the cost effectiveness technique Does Just in Time Inventory control system of inventory
used to enhance the return on investment of the company. management affects firm performance?
The study recommended further research on the impact of
personnel training and use of advanced technology to firm’s
inventory control success.
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Volume 4, Issue 9, September – 2019 International Journal of Innovative Science and Research Technology
ISSN No:-2456-2165
IV. LITERATURE REVIEW that e inventory management and suppliers relationships have
excellent implications for supply chain efficiency in the
Anichebe & Agu (2013) performed in chosen manufacturing sector while order management and
organisations in Enugu, Nigeria, the impact of inventory warehouse management have a mild effect. This study shows
management on organisation's effectiveness. Data was that the suggested strategy is practically and effectively
produced by means of surveys, oral interviews, comments, harmonised through this study, decision makers be presented
books, newsagents and the Internet. From the analyzes, it was with procurement performance and valid solutions for
found that, whatever the fact that companies studied, they harmonization of inventory management (Koin, Cheruiyot &
painted the picture that they applied the principles of good Mwangangi, 2014).
inventory management, they occasionally found that
inventory problems were inadequate. The result was that the A research on the impact of an efficient stock
manufacturing of one brand of its goods was scarce and thus management scheme on organizational performance of the
negatively impacted their profitability and consequential seven-up bottling business, Nile Mile Enugu was conducted
efficiency. The management of stocks has an important by Ogbo, Onekanma and Wilfred (2014). The researchers
impact on the productivity of organization. The relationship were encouraged to undertake this research to show the
between excellent stock management and corporate significance of an efficient organisational performance
profitability is extremely positive. The Anichebe and Agu inventory control scheme in the bottling company. The
research (2013) found that inventory management is very sample for the research consists of a total of 83 respondents.
important for organizational achievement and development. It was discovered, by simple storage and recuperation of
The full profits of an organisation are linked to the volumes material, increased sales efficiency and decreased operating
of products sold, which relate directly to the quality of the cost, that organisations benefit from inventory management.
product. The research suggested that organizations diversify The research also discovered that there is a link between
their inventory systems to meet particular requirements of operational feasibility, the utility of inventory control
manufacturing and manage their inventory system carefully leadership in organization-related client questions and cost-
to preserve manufacturing consistency. effectiveness techniques to improve the company's return on
investment. Effective inventory management should be
A case study of the listed cement companies in Kenya, acknowledged as one area for managing an organisation.
Edwin and Florence, 2015: The impact of inventory Organizations were advised to embrace the highest inventory
management on the profitability of Cement manufacturing technique of their activities (Ogbo, Onekanma & Wilfred,
companies in Kenya. Given Kenya's milestone contribution 2014).
to the Kenyan economy, this study is needed to assess the
impacts of inventory management on Kenyan cement V. THEORETICAL FRAMEWORK
companies ' profitability. An assessment of the annual
accounts for the three sampled companies listed on the Technology Diffusion Theory
Nairobi Securities Exchange (NSE) was completed using Rogers ' Innovation Theory is intended by proposing
cross-sectional data from 1999 to 2014. In order to create a five innovation characteristics that are "observability,
connection between inventory conversion, inventory compatibility, capacity to test, comparative benefit and
concentrations, inventory costs, company size, gross profit complexity" in the theory, which explain how innovation was
margin and return on investments and development, the adopted for fresh concepts as well as for innovations (Rogers,
common lower squares (OLS) were employed in information 1965). There is a comparative benefit to an attribute when it
analyzing as multi-regression modelling. The findings is seen that fresh inventions are better than the prior concept
provide a adverse relation with the profitability of the that they replace. The theory of Rogers points out that it is
business between inventory sales, stock conversion period simpler for innovations to be implemented, which
and storage costs. Moreover, stock levels were directly linked demonstrate an increased benefit over the one before and
to the size and storage costs of the company. The study by facilitate adoption. In addition, Greenhalghet al., (2014)
Edwin and Florence (2015) suggested that cement companies states that consumers do not embrace innovations with no
in Kenya try to guarantee that they maintain the correct comparative benefit. An innovation's capacity to be accepted
inventory in their stocks to protect themselves from excessive readily is that it must be consistent with a prior concept,
expense of holding and supplies. satisfy its past experience and fulfil current values. This
means that if it is more consistent, an innovation can be taken
Koin, Cheruiyotand Mwangangi, (2014) carried out a more likely. An innovation which is considered difficult to
survey on the impact of stock management on the use and comprehend is said to be complicated. New
performance of an organization. The study will also employ a innovations, which define the significance of users, are
descriptive research design that will make the study classified from simple to intricate and readily implemented
population 459 and will guarantee that the available (Greenhalgh, 2014). It is called testing capabilities if the user
population sampled is considered significant to inform the is able to experiment with an innovation in a minimum
scientist of the research targets formulated. The results show period of time, and if the user can check the item in full
IJISRT19OCT1632 www.ijisrt.com 93
Volume 4, Issue 9, September – 2019 International Journal of Innovative Science and Research Technology
ISSN No:-2456-2165
before its implementation saves them resources, energy and be used to illustrate the relationship between JIT lot sizing
valuable time. The visibility of the results of innovation as and the cost related to determine the procurement
seen by adopters is called observability, where innovation performance in an organization.
becomes better acceptable if the findings are positive.
Lean Theory
Economic Order Theory Heizer and Render (2014) indicate that “inventory
The role of the Model Economic Order for the management or “inventory planning and control” refers to the
reduction of costs of inventory of raw materials in a dairy on-going provision of standard items with independent
farm project was evaluated by Kisaka (2016). The project- demand, where some speculative quantity should always be
employed method compared the total cost of the raw material on hand. Therefore, lean theory concentrates on cost
inventory with the total costs of the inventory of raw optimization in stock systems. Decisions on production,
materials that the application for EOQ could have induced. storage and overall supply chain matters can be accelerated
Kisaka, (2016) discovered that cost savings could be by this theory (Tempelmeier, 2015). It is suggested. The
achieved by using the EOQ model. Wisner, Tanand Leong, theory is based on the financial quantity (EOQ) model, which
(2014) poised that inventory administration includes seeks to optimize the amount of each ordered product.
adjustments between customer service, or item accessibility,
and cost of stock. Wisner, Tanand Leong, (2014) indicated Choice of Lean Theory for this study was informed by
further that there are factors influencing the uncertainty of the the need to examine how inventory management influences
quantity of inventory to be kept in the store at a particular organizational performance thereby calling for a prudent
time; cost factors and the uncertainty factor, which approach to inventory management. The theory therefore
incorporates demand uncertainty and time uncertainty. Tayur brings to the fore, the possibility of diversity in operating
(2012) discovered that procurement efficiencies can be systems used to monitor levels of stock, and the difference in
improved by controlling stock purchases and stock storage so items that may and Nadler, (2014), elaborates just in time as
that the flow of products is even and excessive investment in a pull-based scheme to align manufacturing and business
stock can at the same moment be maintained. Theory linked processes across the supply chain in a timely way. The effect
to improving the balance or balance between the expenses of of lean theory on economic performance was evaluated by
maintaining stock versus the advantages of holding inventory Green and Inman (2005). Theory is that buffer stocks may be
in chambers, Lacey, (2015), when evaluating EOQ within a eliminated and waste in manufacturing processes reduced to
service company. The advantage of an inventory is that a minimum. Eroglu and Hofer (2011) discovered that
products are accessible as necessary. Chambers & Lacey leanness has a positive impact on a company's profitability.
2015 The main cost of a stock is the capital chance cost used You claim that lean inventory is the best instrument for
for financing the stock, ordering expenses and the storage controlling inventory. The theory examines how producers
charges. Similarly, as indicated by Brigham and Daves, can achieve flexibility in ordering choices, decrease
(2014) inventory management seeks to maximize on the inventory stocks retained on site and eliminate carrying
net benefit Brigham and Daves, (2014) has indicated further expenses in inventory. On the overall level, both the timing
that financial managers have an obligation both for and the magnitude of adoption are the empirical strength of
raising the capital expected to convey inventory and for the lean account. In theory, however, inventory restricts the
the organizations performance. The concept of EOQ capacity of a company to react to demand changes. Studies
guarantees the inventory administration a balance between show that businesses are effectively optimizing stock via lean
the inventories expected to manage activities are and on the supply chain methods and technologies in order to attain
same hand holding the expenses of ordering and greater rates of asset use and client satisfaction that lead to
conveying inventories to the least conceivable level. Since enhanced business development, profitability, and market
inventory is emphatically identified with customer service, it share (Green & Inman 2015).
is worth close consideration (Rakesh, 2016). Rakesh, (2016)
analyzed EOQ inventory as a feature of association's general VI. CONCEPTUAL FRAMEWORK
cost regulation systems and several organizations used it as a
strategy to manage a balance in cost element on the In this section, the conceptual framework is presented
inventory. KuoHsien(2015) while analyzing EOQ, indicted in a schematic interpretation as shown in figure 1 below. It
that the optimal order size and optimal backorder level for identifies the variables that when put together explain the
each order cycle can be minimized by administering JIT issue of concern. It is formulated from the reflection of ideas.
concept and the lot size calculated by EOQ model. EOQ will
IJISRT19OCT1632 www.ijisrt.com 94
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