The Problem and Its Background

CHAPTER I

THE PROBLEM AND ITS BACKGROUND

Introduction

It is quite inevitable to argue about the significant issues relating to inventory. Basically, almost all areas of the business activity is interrelated and connected the inventory it has. It is hard to imagine any merchandising and manufacturing entity that would not require inventory support. Thus, proper and efficient inventory management should never be taken for granted. Due to the importance of inventory on business, entity must devote enough time and effort on emphasizing, evaluating and implementing its inventory control and management.

Good inventory management is important in the successful business operation of most organizations. But unfortunately, its importance is not greatly appreciated by top management. This may be due to the failure to recognize the link between inventories and achievement of organizational goals are due to the ignorance of the impact that inventories can have on costs and profits (Stevenson, 1991,pp.53).

Differences in quantities shown by records and those actually in stocks are sometimes caused by errors of the store clerk. Said records occur due to mistakes in description, units of product, wrong counts or weighing, and issuance of wrong items. Though, some mistakes can be avoided by the usage of proper symbols, standard description and identification marks.

Because of the nature of its function and what it aims to attain, inventory control, is thus very significant. Inefficient and inaccurate storekeeping and inventory control can mean maximum opportunity for theft, wastage, over or under ordering, delayed orders, stock outs, and the like. The investment in the inventory would be increased in the attempt to maintain a steady supply of required merchandise and supplies. With poor control and inefficient storekeeping, there may also be a problem of product quality deterioration.

Lastly, inefficient inventory control and management would mean a larger investment in inventory, which mean that the firm’s working capital would be less liquid and effectively less adequate in amount in working capital financing.

Background of Study

As early as the 70's, Ever Gotesco initiated the "one-stop shopping" building along the university belt at CM Recto Avenue. It houses the Gotesco Cinemas, Ever Department Store and Supermarket and various fashion and food outlets. Ever Gotesco pioneered a lot of things in the retails arena. Ever Gotesco was the first one to lump it all together in a one-stop shopping centre style. The success of this concept led to the rise of four branches of Ever Gotesco Malls located at Caloocan, Commonwealth, Recto and Ortigas Extension. As a prime mover in the retail industry, focusing on the special needs of the family as a social unit, Ever continually strives to give its clientele an optimum product mix - ensuring maximum customer satisfaction .Ever is one of the leading supermarket chains in the Philippines, with an unrivalled reputation for giving customers outstanding value for money, high quality in fresh food and an unmatched range and world-class service.

Special significance is given to inventories because it is usually constitute the largest current assets of a firm and is susceptible to errors and irregularities. The basic function of inventories is that of decoupling. A buyer assumes the retailer to have the item they were looking for. If an item is not present at the moment the buyer demands, then the retailer loses a customer on that item and possibly in future times. As a remedy to this, retailer inventories are required. In the view the contrary, retailer must maintain inventories as an answer on the variability of replenishment times on its suppliers. Internal control for inventories affects almost all the functions directly connected with purchasing and disposing of products.

Effective control should;

1. Provide a supply of required inventories for effective uninterrupted operation.
2. Assume adequately inventory for prompt delivery to customers.
3. Provide ample stock in period of short supply and anticipate price charges.
4. Stock material with a minimum of handling time and cost and protect them from

lost by fire, theft and damage through handling.

1. Maintain the amount of capital tied up in inventories at a level consistent with

operating requirement and management plans

In achieving optimal service, entry records must be correct in both amount and quantities. Persons assigned to record entries should be very cautious. Mistakes may happen. And they are most likely to occur with records which require amounts to be computed after each related transaction. Records using cumulative totals are therefore sometimes preferable.

Inventory management is focused on planning the levels of stock on hand. Such stocks are needed to allow purchasing on optimum quantities and give a safety factor for periods of high demands or when new supplies may be expectedly cut off. Problems encountered in inventory management, generally deal with how many units should be placed on the stock at all. In able to encompass with the changing time of development, upgrading the inventory management must be done.

Inventory Management must be designed to meet the dictates of market place and support the company’s strategic plan. The many changes in the market demand, new opportunities due to worldwide marketing , global sourcing of materials and new manufacturing technology means many companies need to change their inventory management approach and change the process for inventory control. Inventory management system provides information to efficiently manage the flow of materials , effectively utilize people and equipment , coordinate internal activities and communicate with customers . Inventory Management does not make decisions or manage operations, they provide the information to managers who make more accurate and timely decisions to manage their operations.

Inventory cost varies directly and proportionally with the relevance of a good inventory management. Many business downfalls are attributable to an entity’s hasty inventory management. Specifically speaking, enormous amounts of excess inventories cause idle funds, storage, obsolescence and disposal problem and marketing nightmares. However, if the level of supplies is too low to accommodate the needs of the buyers, delays occur often, broken deliveries are unavoidable and most importantly, existence of unsatisfied customers. Ergo, inventory management is the a spontaneous puzzle of “how much” and “when to”.

With the regards on the nature of its functions and what it aims to achieve, inventory control is indeed very significant. Poor and inaccurate storekeeping and inventory control might give big chance for theft, waste, over and under ordering, delayed orders, stock outs and other similar scenario. The investment in inventory would be increased in the attempt to maintain a steady supply of required merchandise and supplies. With poor control and inefficient storekeeping, there may also be a problem of product

Theoretical Framework

Inventory is a quantity or store of goods that is held for some purpose or use (the term may also be used as a verb, meaning to take inventory or to count all goods held in inventory). Inventory may be kept "in-house," meaning on the premises or nearby for immediate use; or it may be held in a distant warehouse or distribution center for future use. With the exception of firms utilizing just-in-time methods, more often than not, the term "inventory" implies a stored quantity of goods that exceeds what is needed for the firm to function at the current time (Inman, 2009, pp.85).

Most problems encountered in the inventory fall under one of the following categories.

1. The proper quantity of inventory to order at any given time is calculated using Economic Order Quantity (EOQ)
2. The proper time to order. (When to order)

Efficient inventory management should be maintained in order to bring down the total annual cost of inventory. There are two costs involved in annually inventory, i.e., ordering cost and carrying cost. The sum of the annual ordering cost and the annual carrying cost will bring up annual cost of inventory

There are number of reasons why organizations hold inventory. Among the most common reasons are the following:

1. To meet the expected customers demand.
2. As a hedge against stock-outs.
3. To take advantage of economic lot size.
4. As a hedge against price increase.

Inventory control system can be periodic or continuous. Robles and Empleo (2007), a company using the periodic system, does not maintain a continuous record of the physical quantities of inventory on hand. Therefore, the company will not be able to determine its inventory accurately until a physical inventory is taken at the end of the period.

On the other hand, a company using the perpetual system maintains a continuous record of the movement of the items in its inventory. Such a system is essential when management wants to maintain effective planning and control over the inventory and to avoid stock outs. The purchase or production and use of each item of inventory is recorded in detailed subsidiary records in units only or can be maintained for both costs and units.

Inventory control system can be periodic or continuous. Under the periodic system, a physical count of items in inventory is made at periodic intervals (weekly, monthly) in order to decide how much to order of each type of item (Buffa & Taubert, 1996, pp. 127).

A continuous inventory system (also known as a perpetual inventory system) keeps track of removals from inventory on a continuous basis so the system can provide information on the current level of inventory for each item. When the amount on hand reaches a predetermined minimum, a fixed quantity, Q, is ordered.

The continuous system can be either in batch or on line. In the batch system, inventory records are collected are periodically and entered into the system. While on the online system, the transactions are recorded instantaneously. The advantage of the on-line system is that the system is always up-to-date, while the batch system, a surge in demand could result in the reducing the amount of inventory below the re-order point between the periodic read-ins although frequent batch collection can minimize the problem (Broom, 1990).

Supermarkets, discount stores, and department stores have always been major of the users of the periodic system. One major aspect of inventory management deals with the fact that items kept in inventory are not of equal importance in terms of the peso invested, profit potential, sales or usage volume, and stock out penalties. For example, a convenience store might have food, beverages, stationeries, cooking utensils, diapers and other household supplies carried in inventory. It would be impossible to give equal attention to each item in the inventory.

Control of inventory is as complex as is it important to the business. But relatively require adequate and appropriate attention. Receipt is a written acknowledgement of value received or issued. Upon the receipt of the new item, it is first verified through the use of number/code, next then the item number/code is tallied to their respective purchase order. In the process of receiving a new item, inventory level automatically shoots up and a rigid routine for receiving inventories must be enforced. Prior to the acceptance of inventories, it should be counted by the storekeeper. By this time shortage that may have occurred between the time of the shipment of goods delivered to the store and the time when it was kept in the stockroom might be evident. Keeping accurate record of all the items received is important. It is a basis for computing the correct economic order quantity (EOQ) and other related inventory procedures.

Thus, inventories should be issued only upon receipt of a properly authorized withdrawal form. Strict issue system is important in order to avoid pilferage and other discrepancies.

Adjustments may be happened to correct an entry error or to reconcile the records with the physical count. In the process of adjustments, the inventory is updated. All adjustment should be noted in the inventory adjustment register.

In merchandising shortages and surplus are considered normal in this type of business. Loss of customer’s goodwill and low profit may be due to shortage of products. Meanwhile, excesses causes bigger maintenance cost, storage costs and obsolescence. Thus inventory control and management is critical to the success of the business.

The Cardex file system is a simple virtual control where each item is represented by an inventory card. Each card states the beginning inventory, orders placed and received, and current level. A dated record per transaction is made (Adam, Everett, & Ebert, 1992).

The assumption of this model are:

1.) there is only one product

2.) usage or demand is known

3.) usage is constant

4.) lead time does not vary and is independent of demand

5.) there is a single delivery for each order

6.) no quantity discounts

The basic EOQ formula is as follows:

Q0=√2 D S

H

Where:

Q0, is the Economic order quantity in units

D, is the total usage

S, is the order cost in peso

H, is the carrying cost in peso per unit

The Reorder Point Model (ROP) determines when to order, that is, when the quantity on hand is down to a specified level or safety stock (Heizer & Render, 1997).

The formula is as follows:

ROP= (daily usage x lead time) + safety stock

Abraham Maslow developed a theory of personality that has influenced a number of different fields, including education. This wide influence is due in part to the high level of practicality of Maslow's theory. This theory accurately describes many realities of personal experiences. Many people find they can understand what Maslow says. They can recognize some features of their experience or behavior which is true and identifiable but which they have never put into words.

A person's needs in the order of importance are physiological needs, safety needs, social needs, esteem needs, and self-actualization needs. A person does not feel the second need until the demands of the first have been satisfied or the third until the second has been satisfied, and so on. - Abraham Maslow. (Salvador & Geronimo, 2008, p.86)

Maslow is a humanistic psychologist. Humanists do not believe that human beings are pushed and pulled by mechanical forces, either of stimuli and reinforcements (behaviorism) or of unconscious instinctual impulses (psychoanalysis). Humanists focus upon potentials. They believe that humans strive for an upper level of capabilities. Humans seek the frontiers of creativity, the highest reaches of consciousness and wisdom. This has been labeled "fully functioning person", "healthy personality", or as Maslow calls this level, "self-actualizing person.

Figure 1. Maslow's Hierarchy of Needs

Maslow has set up a hierarchic theory of needs. All of his basic needs are instinctoid, equivalent of instincts in animals. Humans start with a very weak disposition that is then fashioned fully as the person grows. If the environment is right, people will grow straight and beautiful, actualizing the potentials they have inherited. If the environment is not "right" (and mostly it is not) they will not grow tall and straight and beautiful (Drinnien, Irwin, & Simons, 1987).

Maslow posited a hierarchy of human needs based on two groupings: deficiency needs and growth needs. Within the deficiency needs, each lower need must be met before moving to the next higher level. Once each of these needs has beensatisfied, if at some future time a deficiency is detected, the individual will act to remove the deficiency (Huitt, 2004).

The Physiological needs. The first tier of the hierarchy concerns physiological needs, those basic for survival. They include such things as hunger, thirst, fresh air, and sex. To take a closer look, the biological functions needed to sustain our bodies are included in this category. These may include the need for oxygen, water, protein, salt, sugar, and other vitamins and minerals. Functions to be cited are the need to be physically active, to sleep, to get rid of waste, and to maintain the correct temperature and ph balance in the body. This need, when not satisfied, will take the priority of the employee. Maslow himself, in his Theory of Human Motivation calls these needs the most "prepotent" and says they will be the most dominating ones when not satisfied. Obviously, this most basic of needs manifests itself in the job environment as the pay required to satisfy it.

When all physiological needs are satisfied and are no longer controlling thoughts and behaviors, the needs for security can become active. Adults have little awareness of their security needs except in times of emergency or periods of disorganization in the social structure (such as widespread rioting). Children often display the signs of insecurity and the need to be safe.

When the needs for safety and for physiological well-being are satisfied, the next class of needs for love, affection and belongingness can emerge. It is basically described as the social needs of a person. Maslow states that people seek to overcome feelings of loneliness and alienation. This involves both giving and receiving love, affection and the sense of belonging.

When the first three classes of needs are satisfied, the needs for esteem can become dominant. This category of needs can be divided into to two subcategories. The individual will seek first to gain the respect and admiration of others through achievements, before seeking that respect within himself. The satisfaction that comes with respecting one's self and feelings of worth and confidence can afford one a sense of personal freedom, while the second type, consisting of the gaining of a successful reputation and appreciation for one's efforts, has been relatively neglected by the Freudians and Behaviorists. Adler, a contemporary psychologist of Maslow's, postulated that the inferiority feelings resulting from not having these needs met was at the root of most of society's problems, and Maslow tended to agree with him. An employer can offer much in the way of public praise to suffice some of this need, while fellow co-workers must shoulder some of the load as well (Dintelman, 2002).