Topic: Inventory Management and Revenue

MAKEREREUNIVERSITY

TOPIC: INVENTORY MANAGEMENT AND REVENUE

PERFORMANCE.

A CASE STUDY OF SAMEER AGRICULTURE AND LIVESTOCK

LIMITED (SALL).

BY

SSONKOMICHAEL

REG NO. 07/ U/ 15336/ EXT

SUPERVISED BY

MS. MAYANJA JAMIAH

A RESEARCH REPORT SUBMITTED TO MAKERERE UNIVERSITY

IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE

AWARD OF A DEGREE OF BACHELOR OF COMMERCE.

JUNE,2011

1

DECLARATION

I, Ssonko Michael, do here by declare that the work presented in this report is my original work, and that, to my best knowledge, it has never been submitted before by any body else for the award of a degree from Makerere University.

Signature: ...... Date: ......

SSONKO MICHAEL

Student.

APPROVAL

This final report has been submitted with my approval as a supervisor.

Signature: ...... Date: ......

Ms. MAYANJA JAMIAH

Lecturer / Supervisor.

DEDICATION

I dedicate this work to my father Mr.Bazilio, mother Ms. Namatovu, brother Mugera, all my young brothers and sisters, all employees of Sameer Agriculture and Livestock Ltd for their effective contributions towards the completion of this book.

May the almighty God Bless you all.

ACKNOWLEDGEMENTS

I owe a debt of gratitude to all those who have in one way or another contributed to the successful completion of this study / research.

My great thanks go first to my supervisor Ms. Mayanja Jamiah for the valuable support in terms of advice, encouragement, time and patience accorded to me throughout this research.

To my friends; Mawejje, Aganyira, Bro. Gordian Mzee Kayongo and Bbosa. I love you, each one of you has a special place in my heart, and all the footprints of your love, care, compassion and comfort are embedded in my heart.

Also extend my acknowledgement to the administration of Sameer Agriculture and Livestock ltd and entire staff for permitting me to conduct the study from their departments and courtesy accorded to me on the due course of gathering the relevant data.

To my family for the support, comfort and tolerance I received which enabled me to accomplish this course with less difficulty.

Lastly but not least, my sister Nassonko, young bros. Mugwanya, Muganga,and Lutaaya, and finally big brother Rev. Fr. Mugera Joseph for the financial and moral support you gave me throughout my years at the University.

May the good Lord reward you all accordingly.

TABLE OF CONTENTS

DECLARATION

APPROVAL

DEDICATION

ACKNOWLEDGEMENTS

LIST OF TABLES

ABSTRACT

CHAPTER ONE

1.1 BACKGROUND.

1.2 STATEMENT OF THE PROBLEM

1.3 PURPOSE OF THE STUDY

1.4 OBJECTIVES OF THE STUDY.

1.5 RESEARCH QUESTIONS.

1.6 THE SCOPE OF THE STUDY.

1.6.1 SUBJECT SCOPE

1.6.2 GEOGRAPHICAL SCOPE.

1.6.3 TIME SCOPE.

1.7 SIGNIFICANCE OF THE STUDY

CHAPTER TWO

LITERATURE REVIEW

2.0 INTRODUCTION

2.1 INVENTORY MANAGEMENT

2.1.1 FORMS OF INVENTORY

2.1.2 COSTS INVOLVED IN INVENTORY MANAGEMENT

2.1.3 INVENTORY MANAGEMENT MODELS

2.1.4 FACTORS AFFECTING EFFECTIVE INVENTORY MANAGEMENT SYSTEM

2.2 REVENUE PERFORMANCE

2.3 RELATIONSHIP BETWEEN INVENTORY MANAGEMENT AND REVENUE PERFORMANCE

2.4 CONCLUSION

CHAPTER THREE

METHODOLOGY

3.0 INTRODUCTION

3.1 RESEARCH DESIGN

3.2 SAMPLING DESIGN

3.2.1 SURVEY POPULATION

3.2.2 SAMPLE SIZE

3.2.3 SAMPLING METHOD

3.3 DATA COLLECTION

3.3.1 SOURCES OF DATA

3.3.2 DATA COLLECTION INSTRUMENTS

3.4 DATA PROCESSING, ANALYSIS AND PRESENTATION

3.6 LIMITATIONS OF THE STUDY

CHAPTER FOUR

DATA PRESENTATION AND INTERPRETATION OF FINDINGS

4.0 INTRODUCTION

4.1 GENERAL INFORMATION

4.3 FINDINGS ON INVENTORY MANAGEMENT TECHNIQUES ADOPTED BY SAMEER AGRICULTURE AND LIVESTOCK LTD.

4.4: FINDINGS ON THE LEVEL OF REVENUE PERFORMANCE

4.5 FINDINGS ON THE RELATIONSHIP BETWEEN INVENTORY MANAGEMENT AND REVENUE PERFORMANCE OF SAMEER AGRICULTURE AND LIVESTOCK LTD

CHAPTER FIVE

SUMMARY, CONLUSSIONS AND RECOMMENDATIONS

5.0 INTRODUCTION

5.1. SUMMARY OF FINDINGS

5.1.1 FINDINGS ON INVENTORY MANAGEMENT TECHNIQUES AT SAMEER LTD.

5.1.2 FINDINGS ON REVENUE PERFORMANCE OF SAMEER LTD.

5.1.3 FINDINGS ON THE RELATIONSHIP BETWEEN INVENTORY MANAGEMENT AND REVENUE PERFORMANCE

5.2 CONCLUSIONS

5.2.1 INVENTORY MANAGEMENT TECHNIQUES.

5.2.2 LEVEL OF REVENUE PERFORMANCE.

5.2.3 RELATIONSHIP BETWEEN INVENTORY MANAGEMENT AND REVENUE PERFORMANCE.

5.3 RECOMMENDATIONS

5.4 AREAS OF FURTHER RESEARCH

REFERENCE

APPENDICES

APPENDIX A: QUESTIONNAIRE

LIST OF TABLES

Table 1: Showing Sample size………………………………………………..…………….14

Table 2: Gender of people working with the organization………………..……………. 16

Table 3: Age of Employees…………………………………………………..…………. 17

Table 4: Education background of the company staff contacted……………..……….. 18

Table 5: Period spent with the company………………………………………….…… 19

Table 6: The inventory management systems in place………………………………...... 20

Table 7: Store keeper’s authority on inventory movements…………………………… 21

Table 8: Types of inventory held by the company…………………………………..… 22

Table 9: Whether inventories are delivered in time by suppliers………….…………… 23

Table 10: Inspection and stock taking on receipt…………………………….………… 24

Table 11: Period taken to do stock taking and inspection………………….…………... 25

Table 12: Computerization of stock recording………………………………..……….. .. 26

Table 13: Shows the agreement of records with stocks in stores…………….….……… 27

Table 14: Purchasing officer’s authority on making purchases………………..……… .. 28

Table 15: Effectiveness of inventory management system on ordering costs…...…….... 29

Table 16: Whether quantity purchased is determined by discounts from suppliers…...... 30

Table 17: Inventory reliability………………………………………………………...... 31

Table 18: How to arrive at re-order level…………………………………………...... 32

Table 19: Company’s poor revenue performance since 2007………………………...... 33

Table 20: Stock levels matched with demand…………………………….……………. 34

Table 21: Demand usually exceeds stock……………………………………………… 35

Table 22: Cash sales as the most used sales method…………………………………..… 36

ABSTRACT

The study was about inventory management and revenue performance. The study examined how inventory management affected the revenue performance of Sameer co. ltd.

The researcher used a cross sectional research approach to establish the relationship between the variables. A sample of 40 respondents was got from a total of 5 departments out of 8 departments in Sameer Agriculture and Livestock Ltd.The researcher employed a combination of stratified sampling and simple random sampling method. The survey population was divided into strata (departments) to represent all company staff and practices.

Findings indicated that Sameer Agriculture and Livestock Limited had inventory management systems in place such asABC analysis, Just-In-Time, Re- Order-Point level, and Economic Order Quantity.Findings further revealed that revenue performance in Sameer Agriculture and Livestock ltd was subject to frequent fluctuations. The company does not provide financial services such as large credit facilities to its clients in its bid to increase sales volume.It was also found out thatthere is a moderate positive relationship between inventory management and revenue performance.The poor inventory management negatively affected the revenue performance of Sameer Agriculture and Livestock Ltd with r =0.491.

Management of Sameer ltd needs to provide training services to its staff in order to improve on accuracy in determining the stock levels to match with the market demands. Management also has to identify financial needs of its clients and extend credit facilities to credit worth or financially constrained customers so as reduce on inventory holding costs an at the same time increase sales volume.The management of Sameer ltd also needs to ensure that effective inventory management systems are put in place with effective inventory cost control and reliability.

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CHAPTER ONE

1.1 BACKGROUND.

Inventory management is the system, which ensures that the right quality of materials is available in the right quantities at the right time and place with the right amount of investment (Kyomugisha J.A, 2005).

Revenue is the gross inflow of economic benefits during the period arising in the course of the ordinary activities (core activities) of an entity when those inflows result in increase in equity. Therefore revenue includes the gross inflow from the sale of goods, fees from services, and interest which are received in the course of ordinary activities, (International Accounting Standards Board-IASB 18).

In the year 2006, Sameer Group of Kenya, in conjunction with the RJ Corp. of India, established a joint venture company, Sameer Agriculture and Livestock Limited (SALL) operating in the brand of Fresh Dairy Products, which entered into an agreement with the government of Uganda to lease the assets of Dairy Corporation in Kampala on the 1st, August 2006 (Ssempijja.D. 2011). Sameer ltd. Like other organizations, holds a variety of inventories and they include raw milk, processing machines, milk coolers, testing kits, generators for supplying to farmers, milk crates, trucks for milk transportation, and inventory in form of finished products like powdered milk, UHT milk, yoghurt, butter, ghee, stationary and other office supplies, (Stores Records, 2010).

A good inventory management framework is a requirement for every business or organization in a competitive economy. Sameer ltd employs different inventory management techniques which include ABC inventory system that measures the significance of each item in terms of value to the organization, Economic Order Quantity (EOQ) which determines how much to order, and the Reorder point which suggests when to order (Company records, 2011). In line with the operations of Sameer ltd, the company has on several accounts registered serious interruptions in its operations, and failed to meet its production and revenue targets (Dairy Development Authority, 2009). The report blamed such failures on partly, the lack of adequate inventories particularly raw milk. In 2007 Sameer was reported to get between 70,000 and 80,000 liters of milk per day while the plant’s capacity was 120,000liters per day. This resulted into the company realizing about $1million instead of the estimated $5million annual revenue (Dairy Mail Africa, 2007).

In 2009, it was again reported that Sameer ltd had shortages in raw milk supply causing it to produce 320,000 liters of milk per day compared to 450,000 liters of installed capacity, (Enviro Conserve Africa, 2009). The report further revealed that Sameer lost huge volumes of sales due to inadequate stocks to serve its domestic and foreign markets. In the same year, the company realized a turnover of about $20 million, and exports worth $6 million compared to the expected $30 million because of the suspended exportation to its major foreign markets like Syria, Mauritius, Kenya, Rwanda, Southern Sudan, Burundi, and Eastern Zaire resulting from inadequate stocks (Market Report, 2009).

1.2 STATEMENT OF THE PROBLEM

According to the inventory controls report for the month June 2010, the head of marketing department indicated that the sales performance had not reached the required level of $50million annual turnover. The 200,000liters of milk that Sameer can convert to powdered milk daily may sound big; it remains very small by world standards. This contributes about $6 million compared to estimated $30 million from exports annually (Dairy Development Authority, 2009). Despite the company’s upgrading of its inventory management systems in line with the requirements of ISO 900-2000 and all inventory controls put into action, it leaves questions as to why the annual turnover has persistently fallen below the estimated company returns. (Ssempijja.D. 20011). Therefore, this prompted the researcher to establish the relationship between inventory management and revenue performance.

1.3PURPOSE OF THE STUDY

The main objective of the study was to establish the relationship between inventory management and revenue performance using the case study of Sameer Agriculture and Livestock Limited.

1.4 OBJECTIVES OF THE STUDY.

1. To examine the inventory management techniques adopted by Sameer ltd to improve her revenue performance.
2. To establish the levels of revenue performance for Sameer ltd.
3. To establish the relationship between inventory management and revenue performance.

1.5 RESEARCH QUESTIONS.

1. What inventory management techniques are adopted by Sameer ltd?
2. What is the level of revenue performance for Sameer ltd?
3. What is the relationship between inventory management and revenue performance?

1.6 THE SCOPE OF THE STUDY.

1.6.1 SUBJECT SCOPE

The study intended to examine the relationship between inventory management and revenue performance independent and dependent variables respectively.

1.6.2 GEOGRAPHICAL SCOPE.

For the purpose of the topic and collecting firsthand information, research was carried out at the Headquarters of Sameer Agriculture and Livestock Limited located on plot 49, 5th street Industrial Area Kampala-Uganda. The company that has established itself as the leading milk processor in the country, holding relatively large volumes of raw milk and processed milk products as inventory.

1.6.3 TIME SCOPE.

The research was based on the relationship between inventory management and revenue performance for the period from 2007-2011.

1.7 SIGNIFICANCE OF THE STUDY

1. The research will benefit the industry and the Sameer ltd in particular, by identifying the areas of inventory controls that are badly managed.
2. The study will enable the researcher to attain the research skills.
3. Academicians and other companies interested in the inventory management and revenue performance may learn and expand on the existing body of research.

CHAPTER TWO

LITERATURE REVIEW

2.0 INTRODUCTION

This chapter provides a review of the existing literature by earlier scholars and research articles concerning inventory management and revenue performance. It looks at the concepts of inventory management and revenue performance, forms of inventory, techniques of inventory management, and inventory management vis-à-vis revenue performance.

2.1 INVENTORY MANAGEMENT

Inventory management is the system, which ensures that the right quality of materials is available in the right quantities at the right time and place with the right amount of investment (Kyomugisha J. A, 2005)

Slack N. et al (2007) defines inventory as the stored accumulation of material resources in a transformation system. The scholar further notes that no matter what are being stored as inventory, or where it is positioned in the operation, it will be there because there is a difference in the timing or rate of supply and demand. There is thus a need for proper management of inventories, thus inventory management.

Stevenson W. J, (2005), continues to define an inventory as a stock or store of goods. Firms typically stock hundreds or even thousands of items in inventory, ranging from small things like pencils, paper clips, screws, nuts, and bolts to large items such as machines, trucks, construction equipment, and airplanes. Naturally, many of the items a firm carries in inventory relate to the kind of business it engages in.

2.1.1 FORMS OF INVENTORY

Inventories are a vital part of business. Not only are they necessary for operations, but also they contribute to the company’s total revenue. Some very large firms have got tremendous amounts of inventory. For example, General Motors was reported in 2004 to have as much as $40 billion worth of materials, cars, parts, and trucks in its supply chain. A typical firm probably has about 30 percent of its current asset and perhaps as much as 90 percent of its working capital invested in inventory, ( Stevenson W. J. 2005).

Stevenson W. (2005) suggests that the major of revenues for manufacturing firms is the sale of inventory. A typical manufacturing firm carries the following inventories:

1)Raw materials and purchased parts

2)Partially completed goods, called work-in- progress (WIP).

3)Finished-goods inventories.

4)Goods-in-transit to warehouses or customers (pipeline inventory).

2.1.2 COSTS INVOLVED IN INVENTORY MANAGEMENT

Kotler .P. (2003) emphasizes that inventory levels represent a major cost. Sales people would like their companies to carry enough stock to fill all customer orders immediately. However, this is not cost effective. Inventory cost increase at an accelerating rate as the customer service level approaches 100 percent. Management needs to know how much sales and profits would increase as a result of larger inventories and promising faster order fulfillment times, and then make a decision. Marketing managers who want their companies to carry larger inventories need to show that the larger inventories would produce incremental revenue to exceed incremental carrying costs.

Basically there are three categories of costs that are associated with inventory management (Andrew Grassley, 2008), these are ordering costs, holding or carrying costs, and shortage costs.

Ordering costs

These are costs of ordering and receiving inventory. They are the costs that vary with the actual placement of an order. Besides shipping costs, they include determining how much is needed, preparing invoices, shipping costs, inspecting goods upon arrival for quality and quantity, and moving the goods to temporally storage. Ordering costs are generally expressed as a fixed dollar amount per order, regardless of the order size. (A. Greasley, 2008).

Holding or carrying costs

These costs relate to physically having items in storage. Costs include interest, insurance, taxes, depreciation, obsolescence, deterioration, spoilage, pilferage, breakage, and warehousing costs (heat, light, rent, security). They also include opportunity costs associated with having funds that could be used elsewhere tied up in inventory. Holding costs are stated in either of the two ways: as a percentage of unit price or as a dollar of amount per unit. Typical annual holding costs range from 20 to 40 percent of the value of an item. (Stevenson W. J. 2005)

Shortage costs

These costs result when demand exceeds the supply of inventory on hand. These costs can include the opportunity cost of not making a sale, loss of customer goodwill, and late charges. Furthermore, if the shortage occurs in an item carried for internal use (to supply an assembly line), the cost of lost production or downtime is considered a shortage cost.

Such costs can easily run into hundreds of dollars a minute or more. Shortage costs are sometimes difficult to measure, and they may be subjectively estimated (Slack N. et al 2007).

2.1.3 INVENTORY MANAGEMENT MODELS

Inventory models are used to asses when inventory requires ordering and what quantity should be ordered at that point in time. In order to enhance handling, storage, and inspection of the inventory, different inventory management models have to be adopted.

ABC Analysis

Here items of inventory are classified into groups according to the amount of annual expenditure they incur. ABC classification system measures the significance of each item in terms of value to the organization. Items with the highest value are classified as ‘A’ items. They represent 10-20 percent of the items and account for 60-80 percent of annual expenditure. ‘A’ items need to be controlled closely to reduce overall expenditure. The B items account for next 20-30 percent of items and usually account for similar percentage of total expenditure. These items require fewer inventory level reviews than A items. Finally C items represent the remaining 50-70 percent of items but only account for less than 25 percent of total expenditure (Stevenson W. J, 2005).