MAKERERE UNIVERSITY
COLLEGE OF BUSINESS AND MANAGEMENT SCIENCES
SCHOOL OF BUSINESS
THE EFFECT OF INVETORY MANGEMENT
ON ORGANISATION PERFORMANCE IN UGANDA
CASE STUDY: MAGANJO GRAIN MILLERS LTD
BY
KATO ROBERT
02/U/13438/EXT
SUPERVISOR: MR. NUWAGABA GEOFREY
RESEARCH REPORT SUBMITTED TO MAKERERE UNIVERSITY IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE AWARD OF BACHELOR OF COMMERCE DEGREE
MAKERERE UNIVERSITY
SEPTEMBER, 2011
DECLARATION
I KATO ROBERT, do hereby declare that the work presented is original and my own and has never been presented in any other Institution of higher learning.
Signature: ………………………………….. Date: …………………………………….
Kato Robert
APPROVAL
This research report by Kato Robert has been under my supervision and is ready for submission and examination.
Signed: …………………………… Date: …………………………….
MR. NUWAGABA GEOFREY
DEDICATION
This piece of work is dedicated to my family together with my Uncle Mr. Kileo who has done whatever could for me to have education up to this level.
May the Almighty God reward him for what he has done.
ACKNOWLEDGEMENT
For the success completion of this work, am greatly indebted to my supervisor Mr. Nuwagaba Geoffrey for the invaluable encouragement, guidance and co-operation.
My gratitude goes to all the people of Maganjo grain millers Ltd who assisted me in under taking the study for having allowed me to interview their members and willingly giving units and unnecessary released detailed information required for my work.
My heartfelt thanks are conveyed to my brother Waswa for the financial and moral support rendered to me.
Lastly, I would like to thank the Almighty God for the wisdom protection, guidance and decision made whenever I sat down to concentrate on this dissertation.
TABLE OF CONTENTS
DECLARATION
APPROVAL
DEDICATION
ACKNOWLEDGEMENT
TABLE OF CONTENTS
LIST OF TABLES
ABSTRACT
CHAPTER ONE
1.0 INTRODUCTION
1.1Background of the study
1.2Statement of the problem
1.3Objective of the study
1.4Research questions
1.5 Scope of the study
1.6 Significance of the study
CHAPTER TWO
LITERATURE REVIEW
2.0Introduction
2.1concepts defined
2.2Inventory management
2.3 Types of inventory
2.3.1Functions of Inventory
2.4 Inventory management system
2.4.1ABC Analysis
2.4.2Two- Bin System
2.4.3Just-In-Time (JIT) Production
2.5Material requirement planning (MRP)
2.6Inventory management and performance
2.6.1 Inventory costs
2.7Conclusion
CHAPTER THREE
METHODOLOGY
3.0Introduction
3.1Research design
3.2 Sample population
3.2.1Sample Size
3.3 Sampling design and procedure
3.4 Data collection methods and instruments
3.4.1Questionnaire
3.4.2 Interview
3.4.3Observation
3.5Data processing and analysis
3.6Limitations of the study
CHAPTER FOUR
DATA PRESENTATION, ANALYSIS AND INTERPRETATION OF FINDINGS
4.0Introduction
4.1Bio-graphical information
4.2Schedule of fresh supply of inventory
4.3Inventory management techniques
4.4Documents used in procurement department
4.5Methods employed to test the performance standards
4.6Relations between inventory management and performance
CHAPTER FIVE
SUMMARYOF FINDINGS, CONCLUSION AND RECOMMENDATIONS
5.0Introduction
5.1Summary of findings.
5.2Conclusion
5.3Recommendations
REFERENCES
QUESTIONNAIRE
LIST OF TABLES
Table 1: Age Distribution
Table 2:showing the marital status of respondents
Table 3: Sex Distribution
Table 4: showing academic qualifications of respondents.
Table 5: Terms of employment
Table 6: Period of employment
Table 7: Schedule of fresh inventory
Table 8: Inventory management techniques
Table 9: Documents used in the procurement department
Table 10: Methods employed to test the performance standards in Maganjo Grain Millers
Table 11: Relationship between inventory management and organization performance
ABSTRACT
The research study was undertaken on maganjo grain millers Limited in Kampala District. The major objective of the study was to investigate the inventory management systems within the organization. Important too was to examine the relationship between inventory management and performance. Modern inventory management systems that are in place within the performance of maganjo grain millers Limited and to recommend on the best way to conserve and manage inventory management systems.
The techniques used in data collection were self administered and they include, questionnaire, personal interview, observation, recording of data, documentation, coding, editing while tabulating and charting were the relevant technique in presenting and analysis of the data collection. Findings depicted that First, In First Out (FIFO) is the major inventory technique applied by Maganjo grain millers and it was strongly agreed that maganjo grain millers Ltd. Experiences inventory shortages and that poor inventory management practices lead to low performance levels. ABC analysis was commonly employed to test the performance standards alongside others like economic Order quantity (EOQ), Two-Bin system and Just-in-time. Further research indicates that various documents used in procuring materials with purchase requisition taking the highest percentage.
Among the documents the researcher recommended were use of invoices, local purchase order and bill of lading.
Considering the inventory management practices, the majority of the respondents accepted that maganjo grain millers Limited had better and well-equipped inventory management department in addition their great necessity for collaborative management enables the scheduling of fresh supply of inventory, carrying out more research about the inventory management treats and seeking of financial assistance from the government for smooth running of the program.
The research proved successful and is optimistic that this study will create a change in the negative and poor application of inventory management systems in maganjo millers Limited and other companies or organizations at large.
1
CHAPTER ONE
1.0 INTRODUCTION
1.1Background of the study
Inventory has been defined as current assets used for carrying out business on a continuous basic. Yarmouth & Francis, (1999).Inventory refers to physical stock of good kept for purpose of future production or for sale which though remains idle at any time but this is essential for smooth running of the organization hence have an economic value The types of inventory includes inventory of raw material for further processing purpose work in progress inventory that consists of material being worked on the finished production Gupta, (1987).
Inventory constitutes the most signification part of current assets of firms. Inventory management is a very important issue as far as organizational performance is concerned Cateora. P., (1975) .It is important to note that inventory management is a crucial issue to be regarded by management in maganjo grain millers limited under the procurement department .Inventory management remains an area that needs a lot of attention because organizations are affected by decision making regarding inventory thus inventory management becomes critical since it is normally approximated to 50% of the current asset in the balance sheet.
Because of factors like inflation rates and other natural instabilities, organizations in Uganda have tended to preserve and conserve large amount of inventory to enable the performance to be on a continuous basis so as to meet the need and demands of customers. All this leads to maximizing profitability objectives. Generally, in Uganda inventory management is a new phenomenon but little attention has been paid that has resulted into excessive stock expiring now and then. However, little has been achieved from huge inventory but rather associated problems like risks of stock have increase in form of storage costs, expired and reduction in working capital. Pany, (1995).
1.2 Statement of the problem
Maganjo Grain Millers has not performed to the satisfaction of the owners. They have experienced stock shortage through out the year .This is due to poor inventory management of the organization .Despite all that, there has been a negative variance in sales on material price, usage by 2580 per dollar to Ushs .2350 per dollar.(Maganjo grain millers limited management 2010.)There has been mishandling of inventory management practices that show the rejection of performance standards with the limits of 0.6 %( international Bureau of Standard 2001). This has raised concern to undertake the study on effect of inventory management on performance of an organization .According to the management issues such as over and under stock, thefty, absence of stock, store break in, lack of trust all of which increases the firm costs as well as reducing profitability and sales value
1.3 Objective of the study
- To assess the effect of inventory management and performance of the organizations focusing on Maganjo Grain Millers as the case study.
- To examine the relationship between inventory management and performance in Maganjo Grain Millers Limited.
- To relate management and performance
1.4 Research questions
- What is the relationship between inventory management and performance?
- What are inventory management systems within the organization?
- What is the way forward to improve on inventory management in Maganjo Grain Millers?
1.5 Scope of the study
The area of internets is Maganjo Grain Millers Ltd .It is located 10km or 6 ½ miles on Bombo road on plot 1072 Block 203.it was established in 1994 and engages in production of grain food like millet flour, Soya flour, bread flour and cakes .The organization operates countrywide with numerous branches in other countries like Rwanda, Kenya and Tanzania .However, the researcher only concentrated on the main branch where data was been collected for research.
1.6 Significance of the study
The study findings will be useful in the followings,
- The study will provide knowledge and information about inventory management in organization.
- It will also provide knowledge on the performance of organization which academicians will always base on
- To provide detailed insight on inventory management practices that may enable other researchers willing to conduct research in the same since information will be available in libraries that assist the research.
CHAPTER TWO
LITERATURE REVIEW
2.0Introduction
This chapter acknowledges that this research will not be an invasion but a phenomenon that has been pondered on by many researchers before but their central concern has been slight divergent from those this study because they have not fully addressed the effect of inventory on performance of an organization. This chapter entails the nature and definition of inventory management. Inventory management system, models of inventory management systems and objectives and conclusion.
2.1concepts defined
Redden and Stair, (2004) in his study define inventory as resources used to satisfy the current of future need and consist of all goods owned and hand of sale.
Larry A, (1994) defined inventory items available for sale in ordinary course of business which a company has the possession and holds legal title.
Inventory is the goods at hand for eventual sale by a firm; Meheshawn and Gupta, (1994)
Pandy, (2005) in his study defines inventory as the stock of the product a company is manufacturing for sale and the components that make up a product.
Material Requirement Planning(M.R.P). A computerized data processing system whose function is to schedule production and control the level of inventory for components with dependent demand.
Economic Order Quantity (EOQ). The order quantity minimizes the total inventory quantity costs in most fundamental inventory decision model (Tersine, 1982)
2.2Inventory management
Inventory is defined as a stock or store of goods. These goods are maintained on hand at or near a business's location so that the firm may meet demand and fulfill its reason for existence, Pearson Prentice Hall, (2004). If the firm is a retail establishment, a customer may look elsewhere to have his or her needs satisfied if the firm does not have the required item in stock when the customer arrives. If the firm is a manufacturer, it must maintain some inventory of raw materials and work-in-process in order to keep the factory running. In addition, it must maintain some supply of finished goods in order to meet demand, Cox, James F, (1998)
Sometimes, a firm may keep larger inventory than is necessary to meet demand and keep the factory running under current conditions of demand. If the firm exists in a volatile environment where demand is dynamic (i.e., rises and falls quickly), an on-hand inventory could be maintained as a buffer against unexpected changes in demand, John Wiley & Sons Inc., (2002) This buffer inventory also can serve to protect the firm if a supplier fails to deliver at the required time, or if the supplier's quality is found to be substandard upon inspection, either of which would otherwise leave the firm without the necessary raw materials. Other reasons for maintaining an unnecessarily large inventory include buying to take advantage of quantity discounts (i.e., the firm saves by buying in bulk), or ordering more in advance of an impending price increase, Irwin/McGraw-Hill, (2005)
Generally, inventory types can be grouped into four classifications: raw material, work-in-process, finished goods, and MRO goods.
2.3 Types of inventory
Raw materials
Raw materials are inventory items that are used in the manufacturer's conversion process to produce components, subassemblies, or finished products. These inventory items may be commodities or extracted materials that the firm or its subsidiary has produced or extracted, Boyd, Lynn H., and James F. Cox, (1997). They also may be objects or elements that the firm has purchased from outside the organization. Even if the item is partially assembled or is considered a finished good to the supplier, the purchaser may classify it as a raw material if his or her firm had no input into its production. Typically, raw materials are commodities such as ore, grain, minerals, petroleum, chemicals, paper, wood, paint, steel, and food items Denton, D. Keith (1995). However, items such as nuts and bolts, ball bearings, key stock, casters, seats, wheels, and even engines may be regarded as raw materials if they are purchased from outside the firm.
Work-in-process
Work-in-process (WIP) is made up of all the materials, parts (components), assemblies, and subassemblies that are being processed or are waiting to be processed within the system. This generally includes all material—from raw material that has been released for initial processing up to material that has been completely processed and is awaiting final inspection and acceptance before inclusion in finished goods. James Williams and Ronald E. McCaughey, (2005)
Finished goods
A finished good is a completed part that is ready for a customer order. Therefore, finished goods inventory is the stock of completed products. These goods have been inspected and have passed final inspection requirements so that they can be transferred out of work-in-process and into finished goods inventory. From this point, finished goods can be sold directly to their final user, sold to retailers, sold to wholesalers, sent to distribution centers, or held in anticipation of a customer order. Hinton, Matthew, and David Barnes (2005)
Inventory in Transit
Transit inventories result from the need to transport items or material from one location to another, and from the fact that there is some transportation time involved in getting from one location to another. Sometimes this is referred to as pipeline inventory. Merchandise shipped by truck or rail can sometimes take days or even weeks to go from a regional warehouse to a retail facility. Some large firms, such as automobile manufacturers, employ freight consolidators to pool their transit inventories coming from various locations into one shipping source in order to take advantage of economies of scale. Of course, this can greatly increase the transit time for these inventories, hence an increase in the size of the inventory in transit, Kaplan, R.S., and D.P. Norton (1999)
Buffer Inventory
As previously stated, inventory is sometimes used to protect against the uncertainties of supply and demand, as well as unpredictable events such as poor delivery reliability or poor quality of a supplier's products. These inventory cushions are often referred to as safety stock. Safety stock or buffer inventory is any amount held on hand that is over and above that currently needed to meet demand. Generally, the higher the level of buffer inventory, the better the firm's customer service, Keegan, D.P., R.G. Eelier, and C.R. Jones (2001)
Anticipation Inventory
Oftentimes, firms will purchase and hold inventory that is in excess of their current need in anticipation of a possible future event. Such events may include a price increase, a seasonal increase in demand, or even an impending labor strike. This tactic is commonly used by retailers, who routinely build up inventory months before the demand for their products will be unusually high (i.e., at Halloween, Christmas, or the back-to-school season). For manufacturers, anticipation inventory allows them to build up inventory when demand is low (also keeping workers busy during slack times) so that when demand picks up the increased inventory will be slowly depleted and the firm does not have to react by increasing production time (along with the subsequent increase in hiring, training, and other associated labor costs), Robson, Ian (2005)
Decoupling Inventory
Very rarely, if ever, will one see a production facility where every machine in the process produces at exactly the same rate. In fact, one machine may process parts several times faster than the machines in front of or behind it. Yet, if one walks through the plant it may seem that all machines are running smoothly at the same time. It also could be possible that while passing through the plant, one notices several machines are under repair or are undergoing some form of preventive maintenance. Barbara Gray, & Dennis A. Gioia, (1990) Even so, this does not seem to interrupt the flow of work-in-process through the system. The reason for this is the existence of an inventory of parts between machines, a decoupling inventory that serves as a shock absorber, cushioning the system against production irregularities. As such it "decouples" or disengages the plant's dependence upon the sequential requirements of the system (i.e., one machine feeds parts to the next machine). Tangen, Stefan, (2004)
Cycle Inventory
Those who are familiar with the concept of economic order quantity (EOQ) know that the EOQ is an attempt to balance inventory holding or carrying costs with the costs incurred from ordering or setting up machinery. When large quantities are ordered or produced, inventory holding costs are increased, but ordering/setup costs decrease. Conversely, when lot sizes decrease, inventory holding/carrying costs decrease, but the cost of ordering/setup increases since more orders/setups are required to meet demand. When the two costs are equal (holding/carrying costs and ordering/setup costs) the total cost (the sum of the two costs) is minimized. Cycle inventories, sometimes called lot-size inventories, result from this process. Usually, excess material is ordered and, consequently, held in inventory in an effort to reach this minimization point. Hence, cycle inventory results from ordering in batches or lot sizes rather than ordering material strictly as needed Vokurka, Robert, and Gene Fliedner (1999)