EFFECT OF INVENTORY MANAGEMENT PRACTICES ON THE OPERATIONAL PERFORMANCE OF MANUFACTURING FIRMS A CASE STUDY OF MUKWANO GROUP OF COMPANIES

BY NATABO SOPHIA REG NO: 1162-05014-04815

A RESEARCH REPORT SUBMITTED TO THE COLLEGE OF ECONOMICS AND MANAGEMENT FOR THE AWARD OF BACHELOR’S DEGREE IN BUSINESS ADMINISTRATION (ACCOUNTING AND FINANCE) OF KAMPALA INTERNATIONAL UNIVERSITY

APRIL, 2019 DECLARATION I, declare that this work represents my original and authentic writing and has never been to the best of my knowledge, submitted for any other award of degree or other qualification in any university.

NATABO SOPHIA

Sign..A~?~’~ Date.. APPROVAL This research will be been written under our supervision and has been submitted for the award of the degree of Public administration with our approval as Kampala University supervisors.

DR. NALELA~_~N

Sign..’J~Vl~.~ Date...k~ DEDICATION I dedicate this report to my lovely Parents and friend Shamim who supported me endlessly without question and who have always stood by me and encouraged me. Thank you for being there for me, showering me with your love and tolerance for the long hours away from home as I pursued my studies.

III ACKNOWLEDGEMENTS No man is an island. This study could not be accomplished without the help from other participants. Am thankful to the Lord Almighty for the gift of life. My heartfelt thanks go out to the respondents in this study. The Senior Inspectors of Schools and respective teachers. All of these and more voluntarily took part in the study. A worthy mention & salute goes to my classmate Nakayima Joan and Shamim among others. Together we drank from the same fountain of knowledge, those hot evenings we sat together discussing academic matters will be cherished memories. We may be geographically distanced, but at KIU we struck a bond that will forever last in our intellectual & professional profiles. Special thanks go to my supervisor Mr. Nalela Kizito for this study, for his constructive criticism and cooperation all through the study and compilation of this report. All the other members of the academic staff and non-teaching staff at Kampala International University deserve a mention for their warm & collegial nurturing that provided a good and productive study environment. To my faithful family; together we have paid the cost in time and other emotional currency to achieve this academic award. I can only say thank you for standing by me with encouragement for the whole time I have been away from home. Together we can achieve more.

iv TABLE OF CONTENT DECLARATION

APPROVAL ii

DEDICATION iii

ACKNOWLEDGEMENTS iv

TABLE OF CONTENT v

LIST OF TABLES AND FIGURES ix

CHAPTER ONE 1

INTRODUCTION 1

1.0 Introduction 1

1. lBackground 1

1.2 Statement of the problem 5

1.3 General objective 5

1.4 Specific objectives of the study 5

1.5 Research questions 6

1.6 Scope of the study 6

1.6.1 Geographical scope 6

1.6.2 Sampling Scope 6

1.6.3 Time Scope 6

1.7 Justification of the study 7

1.8 Conceptual Frame Work 8

V CHAPTER TWO. 9

LITERATURE REVIEW 9

2.0 Introduction 9

2.1 Theoretical Review 10

2.2.1 Strategic Choice Theory 10

2.2.2 Transaction Cost Analysis theory 11

2.2.3 Theory of Economic Order Quantity (Wilson’s EOQ Model) 12

2.3 Inventory Management Practices 12

2.3.1 Economic Order Quantity (EOQ) Model 13

2.3.2 Just in time (J.I.T) Model 14

2.3.3 ABC Analysis 14

2.3.4 Vendor Managed Inventory (VMI) 15

2.3.5 Bar-coding 15

2.3.6 Simulation 16

2.4 Challenges encountered in the use of Inventory Management practices 16

2.4 Relationship of the Inventory Management Practice and Operational Performance 18

CHAPTER THREE 24

RESEARCH METHODOLOGY 24

3.0 Introduction 24

3.1 Research Design 24

3.2 Study Population 24

3.3 Sample Procedure and Size 24

3.4 Data Sources and Collection methods 25

vi 3.4.1 Sources of Data Collection . 25

3.4.1.2 Primary data 25

3.5 Data collection instruments 25

3.5.1 Questionnaires 26

3.6 Data Analysis 26

3.7 Data Presentation 26

3.8 Ethical consideration 27

CHAPTER FOUR 28

PRESENTATION AND DISCUSSION OF THE FINDINGS 28

4.0 Introduction 28

4.1 Background Information 28

4.1.1 Response Rate 28

4.1.3 Sex of the Respondent 30

4.1.4 Educational level of the respondents 31

4.2 Inventory management practices employed by organizations 31

4.2.1 Inventory Management Techniques 31

4.2.2 Problems encountered in the use of inventory Management techniques 32

4.3 The Summary of Findings on How Inventory Management has influenced organization performance 35

CHAPTER FIVE 36

CONCLUSIONS, SUMMARY, RECOMMENDATIONS AND SUGGESTIONS 36

5.0 Introduction 36

VII 5.1 Summary of findings . 36

5.2 Conclusion 39

5.3 Recommendations 40

5.4 Areas for further research 43

REFERENCES 44

APPENDICES

APPENDIX I : SECTION A QUESTIONAIRE

APPENDIX II: SECTION B: Establish the extent to which inventory management practices are applied by Mukwano Group of Companies limited iii

APPENDIX III: SECTION C: Determine the challenges faced while implementing Inventory Management Practices iii

APPENDIX IV iv

APPENDIX V iv

vii’ LIST OF TABLES AND FIGURES Table 1: Showing the Selected Departments & Sample Size Structures 25 Table 2: Showing the duration in Organizational service of respondents 29 Table 3: Showing the sex of respondents 30 Table 4: Showing the level of education of the respondents in Mukwano group of companies.. 31 Table 5: Showing the aspects of inventory management practices applied by Mukwano group of Companies 31 Table 6: showing challenges faced Mukwano group of companies while implementing inventory management practices 33 Table 7: Showing kind of relationship between inventory management and performance 34 Figures

Figure 1: Showing the working experience of employees in Mukwano group of companies 29 Figure 2: A pie chart showing the findings on sex of respondents in Mukwano group of companies 30 Figure 3: Showing the inventory management practices used by the company

ix CHAPTER ONE INTRODUCTION 1.0 Introduction This chapter presents the background to the study, statement of the problem, purpose of the study, research objectives, research questions, scope of the study, and justification of the study.

1.lBackground Historically, Inventory management globally meant too much inventory and too little management or too little inventory and too much management. There can be severe penalties for excesses in either direction. According to Lysons (2016) define inventory management as controlling of stock inventory levels with the physical distribution function to balance the need of minimizing stock holding and maximizing handling costs. Inventory problem proliferated, as technological progress increased the organization ability to produce goods in greater quantities, faster and with multiple designs. According to Godan (2014), the public compounded the problem by its receptiveness to varieties and frequency design changes. There was no doubt that since the mid 80s, the strategic benefits of inventory management, production planning and scheduling have become obvious. For many organizations, there was no doubt that inventory management enhanced their operations. Organizations with high levels of inventories such as raw material, worked in process and finished good; sustained production, ensured free flow of materials and offered a wide range of products, which made easy the delivery of goods to the customers. According to Ahn (2014) Inventories therefore, needed to be controlled in such a manner, as to leverage on organizational productivity and overall performance. Inventory control involved procurement, utilization, controlling and co-ordination of available materials. Inventory control was the direction of activities with the purpose of getting the right materials, at the right quality and quantity, in the right place at the right time and it was directly linked to production function of any organization which implied that, the inventory management system operated, would affect the profitability of an organization, directly or indirectly. Inventories were the stock of raw materials, work in progress and finished goods held by a business organization facilitated operations in the production process.

1 Therefore, if a company failed to manage its inventory efficiently, it was likely to face profitability problems .The goal of inventory management was to provide the inventories required to sustain operations at minimum costs.

According to Anichebe (2013). 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 efficient management of inventory is required because a substantial share of a firm’s funds is invested in them. Every company must ensure that inventory is maintained at desired levels. Too much and too low inventories bring down the level of profitability of an organization. Whether it is a manufacturing organization or a merchandized organization, the goal should always be the same, that is, to ensure the inventory is ready and at the same time the inventory level should be low. Inventory represents an important decision variable at all stages of product manufacturing, distribution and sales, in addition to being a major portion of current assets of many organizations. A substantial share of an organization’s investment is in the inventories. Inventories, often represent as much as 40% of total capital of industrial organizations (Moore, Lee & Taylor, 2003). It may represent 33% of an organization’s total assets and as much as 90% of working capital (Sawaya & Giauque, 2003).

According to Anichebe & Agu, (2013). Inventory management refers to all activities involved in developing and managing the inventory levels, whether the inventory is raw materials, semi finished materials or finished goods, so that adequate supplies must always be available and the form must make sure that the cost of over or under stocks are always low According to Mohamad, Suraidi, Rahman and Suhaimi (2016) an effective inventory management is able to generate more sales for the company which directly affects the performance of the company. For a inventory management to be effective, there must be a system which is managed by a group of employees who are experts in this area. The sales department may argue for a large amount of stock but the finance department may on the other hand argue for a minimal amount of stock so that the spare finance can be utilized elsewhere (Anichebe&Agu, 2013). Whichever, the case the inventory level must be able to generate the highest profit possible.

Inventory control helped organization to establish the proper inventory levels through the economic order quantity and to keep track of this level through inventory control system, of

2 which many were manual such as Two Bin Method and Red Line Method, or computerized inventory control systems. Kotabo (2002). Argued that Proper inventory control required an organization undertook stocking and used appropriate methods to value stock, so as to avoid under or over estimation of profits. Companies experienced substantial costs in the procurement and maintenance of inventories, which cost formed a large portion of production costs. Inventory costs included carrying costs such as storage and insurance, ordering costs like transportation and store placement, as well as stock out costs like redundancy and loss of sales. A company couldnot achieve an outstanding performance without proper and efficient control. Any theft, wastage and excessive use of materials were of immediate financial loss and led to poor performance of a company.

According to Bierderman (2004). Inventory management was important to all most every type of business whether product or service oriented; it was a system which ensured that the right quality of materials was available in right quantity at the right place and at a right time with the amount of investment. Donald (2009) also argued that Inventory management system helped the firm in managing the flow of raw materials, semi-finished products and provided the staff to coordinate various activities for effective inventory management and this would increase demand and supply of products which increased customer satisfaction. According Lewis (2014). Inventory management became one of the important issues that had to be handled with a lot of care in modern organizations. Inventory management helped to ensure that the organization was supplied with all necessary materials required to run a smooth production process furthermore, he Argued that Inventory management was very essential to firms that invested heavily in materials. Most service organizations invested huge sums of money in terms of supplies the relation for most service firms holding high amounts of Inventory was that they enjoyed quantity discounts, eliminated stick out, met customers’ demand, ensured company’s image and even checked price changes.

Most manufacturing organizations continuously emphasized the need for running an efficient inventory system, which ensured that the organization maintained the quantities of materials that minimized costs, through controlled inventory movement and recording. Kakulu (2000) also said

3 that given the benefits of holding stock of materials, there was also cost associated with holding large amounts of materials that included storage charges, opportunity costs of funds tide-up in materials, lighting, security costs, insurance charges,

Basing on the above facts, Cosker (2002) it became evident that the performance position of the firm largely depended on the firm level of investment in supplies,

In Uganda, Mukwano Group of Companies Ltd experienced excessive inventory costs that had greatly constrained its performance (Income statement, 2014). The increased cost of production made it to phase off certain activities. Owing to the nature of the operation, keeping inventory was inevitable. The biggest challenge to this organization had been in designing inventory management systems that minimized cost of production. Several efforts like keeping proper records of inventory, ensuring that there was stable supply of materials through forming strategic alliances with the suppliers and others, yielded less in reducing the costs as the biggest constraint into its profitability. Inventory management techniques got a strong impact on the operational performance of an organization, improved on the nature of the product, and created deeper connections to customers improved on the capability of the supplier which had a direct impact on the operational performance of an organization.

However, Essex (2007) said that managing inventory by organizations got challenges which included the following integrating demand planning and inventory planning, training users of demand planning and inventory management soft ware, change management, dumping those spread sheet and papers, standardized data some companies tripled up by having many definitions for the same data. This resulted to poor demand planning and inventory planning and control where the organization did not provide accurate services to its customers and had also resulted into loss of data due to damping spread sheets and papers and also lack of clear definition of the data due to many definition hence increasing losses for the organization.

4 1.2 Statement of the problem. Although inventory management involved activities such as controlling of stock and distribution of stock at the right time, poor performance existed in manufacturing firms. Organizations were concerned more with survival and securing the needed resources to develop their product and market in the right way. However, Poor operational performance led to riskier choices than performance that met or exceeded aspirations. Managers in firms threatened by organizational failure focused on a survival level. The inventory management practices that are implemented by organizations are associated with various advantages and disadvantages. As such, Agus (2012) argued that it was critical to evaluate how an organization is impacted by various inventory management techniques in order to advise the most suitable technique. In fact, intensive competition and low volume sales collaborate with importance of product availability and increasing of stock-out cost to weaken the growth of organizations’ market-power. According to Blazenko (2016) Organizations often mitigate weak market-power by holding more inventories of which holding more inventories is expected to affect performance negatively given that organizations have always experienced fluctuated demand, relatively small ordering quantity, and limited choices either in possibilities for purchasing or in supplier selection. All the success and poor performance of an organization was attributed to the Poor Inventory Management Practices, which formed the basis of the study to seek and establish the relationship between Inventory Management Practices and operational performance in Mukwano Group of Companies limited.

1.3 General objective. The main objective of this study was to establish the impact of inventory management practices on the Operational Performance. 1.4 Specific objectives of the study. The study was guided by the following research objectives. i. To establish the extent to which inventory management practices are implemented by manufacturing firms. ii. To determine the challenges faced while implementing Inventory Management practices. iii. To establish the relationship between inventory management practices and organizational performance.

5 1.5 Research questions The study was aimed at answering the following questions. i. To what extents are the inventory management practices applied in manufacturing firms? ii. What are the challenges faced while implementing Inventory Management practices? iii. What is the relationship between inventory management practices and organization performance?

1.6 Scope of the study The study was confined to inventory management practices in organizations, financial performance of organizations and factors that affect financial performance in organizations.

1.6.1 Geographical scope The study was conducted at Mukwano Group of Companies Limited’s headquarters located on Mukwano road (bypass), in the central division of Kampala, the coordinates of the company headquarters are; 0018 ‘45 .0”N,32°3 5 ‘27.O”E (latitude : 0.312500: Longitude:32.5 90840.This was because, this company has existed for over the years with the objective of maximizing profits and providing better services to customers at the right time. Till date, the company does not focus on how much of each inventory item, the firm should hold in stock, how much should be ordered at a given time and at what point inventory should be reordered. This has greatly affected its production, sales and hence reducing its financial profitability. It was therefore important for an organization to have a sound, effective and well-coordinated Inventory Management Practice because, the business environment is rapidly changing, highly competitive and it is drastically affecting the performance of many organizations.

1.6.2 Sampling Scope A sample of employees currently working in Mukwano Group of Companies Limited was sampled as it is difficult to include every member of the organization.

1.6.3 Time Scope The study covered a period of three years beginning from 2014-20 16 which will allow the researcher to conduct and gather/obtain relevant studies information concerning the study.

6 1.7 Justification of the study The findings of the study were important in the following ways, i. To the organizations, the result of this study benefited organizations that keep huge amount of inventories to hold just what is necessary so as to avoid the carrying costs. ii. The study findings enabled the management of Mukwano Group of Companies Limited to get in-depth insights of the benefits of management strategies, procedures, and practices to avoid making losses. This stimulated the desire of reviewing company policies. iii. The study inspired and aroused other researchers’ curiosity to conduct further research on inventory management and financial performance. iv. To future researchers, they used the study findings as reference to their work.

7 1.8 Conceptual Frame Work Fig 1: Showing Relationship between Inventory Management Practice and Operational Performance.

Independent variable Dependent variable

INVENTORY MANAGEMENT OPERATIONAL

PRACTICES ______PERFORMANCE • Just in time model o Quality o Economic order quantity Efficiency o Vendor management o On time delivery inventory o Financial profitability Bar coding Optimum Production o Simulation

ntervening Variable The Government Policy Taxes imposed on the company

Source: Adoptedfrom Cooper & S. (2006) and Modified The figure above shows the relationship between the independent variable and the operational performance of an organization. The independent variable is being represented by the Just In Time model, the Economic Order Quantity and the Vendor Management Inventory which have been presumed to have a direct effect of the Financial Profitability, Productivity and Sales of the organization as shown by an arrow pointing to the right.

8 CHAPTER TWO LITERATURE REVIEW 2.0 Introduction This chapter focused on providing the theoretical models that are related to the topic of the research study. The chapter also presented the findings of the past researches in regards to the impact of inventory management practices and performance of organizations, with a special attention paid to Mukwano Group of Companies. 2,1 Inventory management Inventory is defined as the value of the quantity of raw materials, components, assembles, consumables work in progress and finished goods that are kept or stored for use as the need arises, it is the total amount of goods and all material contained in a store or factory forgiven time (Lysons, 2000). Inventory can be defined as items that are in a stock to decouple successive operations in the progress of manufacturing a product and distributing it to the customers the organization which consists of a list of goods and materials held available in stock (Lysons, 2000). According to Allen (2001) successful inventory control involves simultaneous attempts to balance both costs and benefits of inventory. Inventories can be purchased in varying quantities according to the requirements of the firm where as other elements of cost like labor and other services cannot be easily varied once they are established, therefore it can be concluded that material is the most flexible and controllable factor of production. Most organizations have three (3) types of inventory that is raw materials work in progress and finished goods which are kept to facilitate smooth production. Inventory management involves controlling of stock or inventory levels with the physical distribution function to balance the need for minimizing stock holding and handling costs (Lyson, 2000). It is aimed at ensuring that the company is supplied with the right inventories at the right time in the right place and ensuring optimization of the benefits of holding inventory in the organizations maximizing the benefits while minimizing the costs. Inventory management is the system which ensures that the right quality of materials is available in the right quantities at the right time and right place with the right amount of investment Jam and Narang (1986) inventory management is a system concerned with a question and recording, inspecting, handling, storage issuing and control of supplies (Lysons, 2000). Inventory is the stock purchased with the purpose of resale in order to gain a profit. It represents the largest cost to a manufacturing firm. For a manufacturing firm, inventory consists of between

20% and 30% of the total investment (Garcia — Teruel& Martinez, 2007). Inventory should

9 therefore be managed well in order to facilitate the firm’s operations. There are three main types of inventories namely; raw materials, work in progress and finished goods. However, Hopp and Spearman (2000) classify inventory into raw materials, work in progress, finished goods and spare parts. Raw materials are the stocks that have been purchased and will be used in the process of manufacture while work in progress represents partially finished goods. Finished goods on the other hand, represent those items of stock that are ready to be monetized (Nwankwo&Osho, 2010). Since the level of inventory is large, the financial manager has to put into consideration the ordering cost, carrying cost and stock out cost of the inventory in determining the inventory level. For the purpose of this study Inventory level and inventory control systems were considered.

2.1 Theoretical Review According to Sushma (2007) a number of inventory management best practices include, (Vendor Managed Inventory, Just in Time, Forecasting, Collaborative Planning and replacement, Automatic Replenishment, as well as Material Requirement Planning) thrive. However, the empirical evidence has shown that there is restricted knowledge and appreciation of such practices, their method of operation, as well as the practical significance in the Kenyan manufacturing industry. The lack of knowledge and partial adoption of these forward-looking techniques in the area of inventory management may explain the significant increase in the wastage of raw material, longer lead-time, loss of sales, the shortage of products, the penalty of backorder, increasing production cost, and issues of low quality presently devastating the industry. Therefore, there seems to be an enormous barrier of difference between theoretical inventory management and the practical approach in light of the manufacturing industry, and the necessity to link the gap of theory and practice is imperative. Therefore, the following theories discuss inventory management practices. 2.2.1 Strategic Choice Theory The strategic choice theory pointed out the link between the choices of management and the performance of a firm as well as relations of the firm’s internal and external environment. Child, (2016) the theory emphasized on the magnitude of the decisions made by management on the performance of firm. Michelson (2013) established a strategic choice model that demonstrated the inter-reliance between the environment and organizations, actions and general business

10 performance. The model focused on attaining a higher performance level so as to enhance efficiency especially in the face of limited resources; however, the strategic theory was unsuccessful in giving a more importance on contextual aspects, including environment, technology as well as the degree of operation into account and merely considered how the structure of a firm help in the performance of a business. Inventory management techniques were among the choices that the management considered while making decisions as regards how to improve the performance of an organization. This research study aimed at helping us understand the choices of inventory management techniques that are made by managers in order to improve the organizational performance of consumer goods manufacturing firms in terms of profitability, quality, efficiency, optimal production, production targets and on time delivery.

2.2.2 Transaction Cost Analysis theory According to Hall (2014) Transaction Cost Analysis (TCA) is a theory that guarantees expenses of the supply chain are maintained to a minimal level TCA was widely adopted in a number of areas, specifically in the study of economics and organizational structures and performance. In the beginning of 1970s, the mathematicians and economist, Williamson, integrated TCA into the model of general equilibrium and established his transaction costs economics in the novel theory of an organization. Williamson (2015) argued that firms can reduce their costs of transaction via vertical integration, as well as enhancing the degree of trust simultaneously. This type of integration was likely to decrease the expenses of inventory management whilst escalating the service level of the internal and external customers even as releasing capital to be utilized in other quarters of a business. The reduction of costs, which included the transaction costs experienced across the supply chain, was one of the key objectives of an organization. Commonly, the reduction of transaction costs resulted in an increase in the level of profitability. On the other hand, as explicated previously, the inventory management techniques were expected to play a major role in enhancing the efficiency of the supply chain management. Since one of the performance measurements in this study was profitability, this study aimed at helping us to understand whether inventory management techniques adopted by consumer goods manufacturing firms lead to an enhanced profitability.

11 2.2.3 Theory of Economic Order Quantity (Wilson’s EOQ Model) Coleman (2013) and Ogbo (2011) delineate the EOQ model as one that is focused on ordering portions that minimizes the stability of the cost between the inventories holding costs and the re order costs. On the other hand, (Ogbo, 2011) defined the EOQ model as assumptions that are critical to compute EOQ as provided: the costs of holding a stock are known, and are considered constant; there are ordering costs which are perceived to be constant; the level of demand was known and was regarded to be constant; that the lead time cycle was well-known and considered constant; the price per unit was also considered constant; the replenishments made immediately, the entire batch was delivered promptly and that the stock-outs are not allowed. One challenge of EOQ was that it tends to ignore the necessity to have shield stocks, which are preserved in order to cater for deviations during lead-time and demand making, and as such, it makes it complex to be practiced. The EOQ model demanded that for each item that is preserved in a store, it is critical to establish the point of ordering, which was considered the most cost operative quantity of ordering. The model made an assumption that all other variables were constant and disregarded the fact that uncertainties were frequent and ordinary in all firms. For instance, uncertainty comprised of change in the level of demand, damage while transporting an item and holdups during the delivery process. In this case, uncertainty in the level of demand would consequently compel EOQ to be attuned so as to shield against uncertain business situation. Due to doubts experienced in business environment, adjusted economic order quantity was an EOQ model that should be adopted in the event fluctuation in demand was a widespread phenomenon in this study, it was crucial to understand to what extent EOQ model was implemented by consumer goods manufacturing firms in Nairobi, as well as the impact of EOQ model on performance of consumer goods manufacturing firms in Nairobi.

2.3 Inventory Management Practices The inventory management techniques that were universally adopted by firms included Economic Order Quantity (EOQ) model, ABC model, Vendor Managed Inventory (VMI) and Just-In-Time model. Yet, this research study focused on Simulation, Economic Order Quantity (EOQ) model, Bar-coding, Just-In-Time model, ABC model and Vendor Managed Inventory

12 (VMI) because, as emphasized by (Noor, 2014), these inventory management practices enabled a practitioner to respond quickly to reduced inventory levels.

2.3.1 Economic Order Quantity (EOQ) Model The economic order quantity, which was also recognized as the Wilson EQQ model, was an inventory management technique that identified the most favorable quantity to order, which was in line with minimizing the total variable expenses that were needed to order as well as to hold inventories (Lee, 2002). Economic Order Quantity denoted the optimal ordering level of an inventory which helped in the minimization of expenses. This inventory management approach (EOQ) made the assumption that the demand for an item was well-known, the lead time was well-known and constant, that the receipt of an order happened immediately, the discounts of quantity were not computed as part of the model and that inventory’s shortages do not happen. The EOQ graphs demonstrated the association between the costs of ordering, the expense of holding inventories and the economic order quantity (Nair, 2013). This model is an inventory control model and is based on minimization of costs, between stock holding and stock ordering. It requires the determination of economic order quantity (EOQ) which is the ordering quantity at which stock holding costs are equal to stock ordering costs (Saleemi, 2012). It suggests that the optimal inventory size is the point at which stock ordering costs are equal to the stock holding costs. The optimal inventory size is also known as economic order quantity (EOQ). This model helps an organization to put in place an effective stock management system to ensure reliable sales forecasts to be used in ordering. purposes (Atrill, 2006). In order to ensure applicability of the EOQ model several assumptions must be taken into consideration. First, the usage of stored product is assumed to be steady. Second, ordering costs are assumed to be constant, i.e. the same amount has to be paid for any order size. Finally, the carrying costs of inventory which are composed of cost of storage, handling and insurance are assumed to be constant per unit of inventory, per unit of time. The EOQ model therefore merely takes variable costs into consideration, although it can easily be extended so as to include fixed costs (Ross et al., 2008). This model has been used in the past by Nyabwanga et al. (2012) in Kenya. The basic EOQ model is based on the assumptions that only one product is produced, annual demand requirements are known, demand is spread evenly

13 throughout the year so that demand rate is reasonably constant, lead time does not vary, each order is received in a single delivery and there is no quantity discounts

2.3.2 Just in time (J.I.T) Model According to Carison (2002) the Just in Time was an inventory management practices with the objective of maintaining just sufficient material at the right place and at the right time in order to make first the right quantities of inventories. According to Schonsleben (2012) the concept was established by manufacturing businesses in Japan in which inventories were acquired only when demanded in a business for the purpose of production and this focused on enhancing the return on investment of a firm through the reduction of in-process inventory and its associated costs. According to Lazaridis & D. (2005) the supplier had the responsibility of delivering the workings and part to the assembly line “Just in Time” to be assembled. Other names for just in time system was Zero stock inventory and production.

According to Konke (2003) For the just in time method to work successfully the quality of the parts were very high because defective materials could up halt the operations of the assembly line, there were dependable relationships and smooth co-operation with suppliers, ideally this implied that the supplier should be located near to the firm with dependable transportation available. In accordance with Dimitrios (2008) Just in time inventory management system helped in reducing inventory costs by avoiding carriages of excess inventories and mishandling of raw materials. According to Kortz (2003), Just in time purchasing recognized high costs associated with holding high inventory level and as such it became important in most organizations to order inventory just in time of production so as to cut costs of holding inventory like storage lighting, heating, security, insurance and staffing.

2.3.3 ABC Analysis According to Flores & C. (2012) this inventory control approach was based on the doctrine that a small portion of the items might characteristically represent the bulk of the value of money of the total inventory utilized in the process of production, whilst a comparative number of items can be from a small fraction of the financial value of stores.

14 ABC analysis was sound recognized categorization technique as far as the pare to principle was concerned, whose main purpose was for establishing the items that should be prioritized in the management of an inventory (Ramanathan , 2006). (Flores and Whyback, 2007) was of the view that ABC analysis was a method for prioritizing inventories. Inventories were classified into 3 sub-classes, including A, B and C. A large portion of the efforts of management were utilized on administering A Items A, B in-between and C items get the least attention.

2.3.4 Vendor Managed Inventory (VMI) Frahm (2015) argued that Management of inventory supply determined the way an organization would propel itself to high performance effectiveness and competence. Many firms resulted to VMI systems which assisted the provider to monitor clientele inventory usage. Through the VMI system customers avoided stock outs since the supplier already had replenished the stocks and also there were no costs related to handling of inventory since the supplier knew the quantity that was needed and which product was put on the shelves. The input phase here was communication which was of good intention from the beginning of business and brought about a positive relation between the supplier and the customer.

2.3.5 Bar-coding Bar-coding was the most popular used method of tracking a product for purposes of understanding the level of inventory, reorder and deliveries or sales; this enabled to avoid issues of stock outages or overstocking. According to Eroglu, W. (2011) Bar-coding helped to track a particular item at any specific time. The staffs in the stores along with overseers used bar-coding systems to ensure that work orders were linked, and that the purchase orders were thoroughly linked to the level of stock which was replenished, and that all auxiliary parts in addition to equipments were tracked. Once items left the store, they were instantly recorded in the system thus making it possible to understand which stock was running low and the items to be placed. So as to guarantee that the data processed by the barcode was helpful, the ERP (Enterprise Resource Planning) system, utilized as the pillar for the bar-coding system, had to be precise at the moment of roll-out in order to ensure the data was significant and effortlessly analyzed

15 2.3.6 Simulation The uses of simulation in inventory management usually occurred for purpose of responding to the wish for a proper decision making process that would take into consideration the complexities and variances within the environment of a system. A majority of simulation researches regarding inventory systems endeavored to establish the most appropriate arrangement for the inventory system in order to attain the predetermined goals. A small number of simulation models were established to address the inventory system optimization. A number of researches used simulation to establish an inventory control approach associated with tracking signals to assess performance. The other established models aimed at special situations of inventory state (Eckert, 2017). Badri (2012) established a simulation based decision-support system for controlling and managing inventory by taking into consideration the impact of changes in demand, the point of reordering, the control of the stock level, period between the reviews, as well as the lead time. Nonetheless, the approach took into consideration just the case of one product inventory model. In this research, the replica established by (Badri, 2012) was expanded to integrate a generalized multi-product inventory system. The model recognizes all important expenses: cost associated with purchase, expenses relating to ordering, the holding inventory’s expenses, the expense related to back ordering, as well as the cost of reviews, and cost associated with the lost sales.

2.4 Challenges encountered in the use of Inventory Management practices. According to Lyson (2015), high indirect expenses may lead to low profitability hence leading to low operating efficiency in the organization.

According to Cosker (2013), high levels of investment in inventories could lead to high liquidity position at the expense of profitability.

Kraljic (2014) asserts that, the profit impact of a given supply / demand item can affect; the volume purchased; percentage of total purchase cost and the impact on product quality or business growth.

16 High Taxes According to Ross (2012), the government imposes high taxes on organizations without consulting from the stakeholders of which the tax after taxes is significantly reduced. These taxes significantly negatively affect the performance of these businesses when using profitability to measure effectiveness.

Failure to use external advice Monczka, (2015) External advisors are people who can assist the business in times of difficulty unfortunately their services are never at use or being used. These external consultants are lawyers, business consultants and other professional people who would offer technical advice based on objective analysis rather than feelings.

Inadequate funding: According to Balunywa (2006) many business fail due to poor financial activities. They fail to keep a tight rein between debtors. These businesses do not have trained personnel to properly control the business, no proper reports are produced and there is no cash flow planning. Even when there are profits, the business can remain cash poor yet control and reporting are very crucial for management of funds in and out of the business.

Lack of adequate business plan: Murphy (2002) asserts that business lack clear attainable goals, even those with plans there is the failure to share communicate and enforce the business plan. As a result, many businesses are managed on a profitability principle thus making it had to assess the business process.

Inability to change with the changing business needs: Balunywa (2006) asserts that there is a tendency of most business owners to copy other people’s businesses since they have been successful. However, in the long run the market becomes congested and the returns of the business reduce because the business owners lack the creativity to study the market and produce according to the needs of the society

17 Costs of inventories Given the need for inventory management there will always be cost associated with supplies. The challenge will always be how to minimize these costs.

Ordering costs Pandey (2012) describes ordering costs as those costs that are incurred in acquiring raw material. They are costs involved in placing and receiving an order, bill paying, clerical and administrative costs and they decrease as the size increases due to economics of scale.

According to Lucey (2014), the four decision systems for inventory management can be classified with the help of two criteria. The resulting classification, comprising four classes as will be indicated.

2.4 Relationship of the Inventory Management Practice and Operational Performance Literature on the relationship Akelo, (2014) focused on determining the relationship between Inventory Management Practices and performance of Non-Governmental Organizations. By targeting ten Non-Governmental Organizations situated in Nairobi County, the research study focused on a total sample of seventy respondents. According to the analysis of the data via descriptive statistics, the study recognized that a unit in ABC Analysis would lead to an increase in operational performance of Non-Governmental Organizations by a factor of 0.683 whilst a unit increase in Economic Order Quantity leads to an increase in operational performance of Non-Governmental Organizations by a factor of 0.702. On the other hand, a unit increases in Demand focus inventory leads to an increase in operational performance of Non-Governmental Organizations by a factor of 0.699. Finally, Akelo (2014) argued that a unit increase in automatic replenishment leads to an increase in operational performance of Non-Governmental Organizations by a factor of 0.6 12. While this research study provides significant information on the impact of inventory management practices on organizational performance, this research study only focused on Non-Governmental Organizations in Nairobi County. As such, it does not ‘provide answer to the impact of inventory Management on the Operational Performance of Mukwano Group of Companies limited. Kitheka, (2010) focused on evaluating the extent of inventory management automation and to

18 determine the impact of inventory management automation with respect to the performance of supermarkets in Western and Nyanza provinces, Kenya. Based on a survey design, in which the researcher targeted all supermarkets (eleven operational supermarkets) in Kakamega, Bungoma and Kisumu, (Kitheka, 2010) established that inventory management automation impacts positively on the performance of supermarkets. However, instead of focusing on consumer goods manufacturing firms in Kenya, (Kitheka, 2010) focused on consumer services firms in Kenya. Muhayiniana, (2015) focused on highlighting and determining the contribution of inventory management techniques on better management of manufacturing firms. Muhayimana (2015) used Sulfo Rwanda Ltd, which deals with manufacturing of consumer goods and located in Kigali City and, as a case study. The purposive sampling technique was employed so as to ensure that only individuals who are able to provide relevant information regarding the research topic were included in the sample of the study. Through purposive sampling technique, fourteen respondents were selected. The study found out that inventory management practices have a significant impact on firm’s Operational Performance, especially on cost reduction. The research also established that inventory management enable firms to meet the demands of customers more effectively as instances of unevenness in regards to meeting customers’ demand is reduced. While the research study focused on consumer goods manufacturing firms, this research study chose a small sample (14 respondents from one firm); furthermore, the research was not carried out in Nairobi, Kenya. Therefore, besides failing to answer more reliably the impact of inventory management practices on performance of consumer goods manufacturing firms due to small sample, the results of the study are not applicable in Nairobi since the study was carried out in Kigali, Rwanda. Nsikan, E. (2015) are among the researchers who also carried out a research in regards to the impact of inventory management practices on the performance of firms. Furthermore they aimed at establishing the inventory management practices in flour milling manufacturing firms and their effects on operational performance. In this regard, five flour manufacturing firms were selected from which one-hundred and fifty respondents were further chosen to answer the research questions of the research study. The results of the study showed that with the exclusion of large assembly firms, a majority of the medium-sized flour milling firms use different inventory management strategies from the scientific models. However, most of the inventory management techniques were based on changing customers’ demand, the current industry

19 practices, forecasted estimates, and available production capacity. The research also reveals that firms that adopt scientific inventory management techniques are more effective in enabling the attainment of enhanced performance, especially via capacity reduction, improved service level and reduced lead time. While this study provides significant information regarding the impact of inventory management practices on performance of consumer goods manufacturing firms, this research study is less reliable as it focused on one type of consumer goods manufacturing firms, that is, flour milling firms. Furthermore, the research results are not applicable in Mukwano Group of Companies Ltd located in Kampala Uganda as the research study was carried out in Kigali Rwanda.

A different study signifying a positive correlation between inventory management and performance was that of (Eroglu & Hofer 201 1), which used the Empirical Leanness Indicator (ELI) as a measurement for inventory management. Eroglu & H. (2011) argued that inventory leanness is the most effective inventory management instrument. According to (Eroglu & Hofer, 2011), lean production regards inventory as a form of waste that should be reduced, and has currently become one and the same with good inventory management (Eroglu & Hofer, 201 1)’s study on USA manufacturing firms, within the period of between 2003 and 2008, established that leanness has an impact on the profitability of a firm. According to Eroglu and Hofer (2011), firms that are slimmer compared to the industry’s average usually experience positive returns to leanness. (Eroglu & Hofer, 2011) established that the impact of inventory leanness on organizational performance is positive and in general non linear. Eroglu and Hofer (2011) asserts that research also denotes that the impact of inventory leanness is bowl-shaped which is aligned with inventory management theory that there is an optimal degree of inventory leanness beyond which the marginal impact of leanness with respect to financial performance ends up being negative. The survey of three-hundred and fifty-one management accountants by the National Association of Accountants (NAA) in a cross-section of diverse industries to evaluate the present inventory management techniques in the U.S showed that just in time inventory management approaches are facing increased levels of popularity; the researches also showed that automated time-phased inventory re-order systems are also experiencing increased usability among organizations. The survey furthermore found out that eighty-five percent of the respondents have no plans to

20 revolutionize their inventory techniques and that actual experience in business depended highly compared to the inventory quantitative models. In addition, Romano, (2011) the research found out that a number of inventory management approaches, including assessing inventory levels and balancing stock-out costs in relation to expenses associated with higher inventory levels are infrequently used in practice.

Lazaridis and D. (2005) highlighted the significance of firms maintaining their inventory at an optimum level by assessing the relation between corporate profitability and working capital management, and emphasized that its mismanagement would result in extreme tying up of money at the expense of cost-effective operations. A related research by Rehman, (2006) concluded that there is a strong negative relation between the daily inventory turnover and the profit of companies.

Sushma and P, (2007), with respect to the study of twenty-three Consumer Electronics Industry firms in India found out that firm’s inventory management practices played a major role in the income performance.

Lazaridis and D, (2005) in their study of one-hundred and thirty-one firms, listed on Athens Stock Exchange, established that mismanagement of inventories leads to tying up high levels of capital at the expense of cost-effective operations. Lazaridis and Dimitrios, (2005) recommended that the management can create value for organizations by ensuring inventories are maintained at optimal levels.

Also, Rajeev (2008), In a study of ninety-one Indian Machine Tool Enterprises to assess the association between inventory management approaches and inventory expenses ascertained that effectual inventory management techniques leads to better inventory performance of firms; furthermore, the effectual inventory management techniques have an ultimate impact on the performance of the general businesses’ processes. Juan and M, (2002), with respect to the study of eight-thousand, eight-hundred and seventy-two small and medium-sized firms in Spain, showed that that the firm’s management can create value

21 through minimization of the number of days of inventory. According to Pandey, (2004) effectual inventory management techniques enable to enhance to enhance the efficiency of operations of an organization. It also enables to improve the customer service, and reduce the expenses associated with inventories and distribution. Finally, it enables businesses track items and their expiration dates consequently balance between availability and demand.

According to Mohammad (201 1) managers can create value for shareholders by means of decreasing inventory levels. However, maintaining inadequate level of inventory is also dangerous because ordering costs are too high. It may also lead to stock out costs. Saleemi (2012) asserts that there are advantages of maintaining an ideal level of inventory. This includes economies of scale to be gained through quantity and trade discounts, less risks of deterioration and obsolescence, and reduced cost of insurance among others. A study carried out by Mathuva (2010) on the influence of working capital management components on corporate profitability found that there exists a highly significant positive relationship between the period taken to convert inventories into sales and profitability. This meant that firms maintained sufficiently high inventory levels which reduced costs of possible interruptions in the production process and loss of business due to scarcity of products.

Nyabwanga, Ojera, Lumumba, Odondo and Otieno(2012) found that small scale enterprises often prepare inventory budgets and reviewed their inventory levels. These results were in agreement with the findings of Kwame (2007) which established that majority of businesses review their inventory levels and prepare inventory budgets. These findings had already been stressed by Lazaridis and Tryponidis (2006) that enhancing the management of inventory enables businesses to avoid tying up excess capital in idle stock at the expense of profitable ventures. Nyabwanga et al. (2012) assert that good performance is positively related to efficiency inventory management. Conclusion of the Literature Review and Knowledge Gaps

The theoretical models that are chosen in this research study are strategic choice theory, transaction cost analysis and theory of Economic Order Quantity (Wilson’s EOQ Model). On the other hand, the literature review shows that Economic Order Quantity (EOQ) model, Just-In

22 Time model, ABC model and Vendor Managed Inventory (VMI) are commonly used by organizations since they enable a businessperson to respond quickly to reduce inventory levels. Furthermore, this research study has evaluated the past studies in regard to the impact of inventory management practices on the performance of manufacturing firms. The past researches indicated that the adoption and effective implementation of inventory management techniques impact positively the performance of manufacturing firms. However, there is no specific research that has focused on the impact of inventory management practices on performance of Mukwano Group of Companies Ltd. Thus leading to unreliability of such results as far as generalizing them to Mukwano Group of Companies limited is concerned. This research study aims at filling these knowledge research gaps.

Limitation There may be limited time to have face to face meeting to explain any confusion with the questionnaires. There may also be some difficulties in getting the employees’ responses to the survey questions because of their workload and the responsibility they have. Some employees also may feel unsure if it is legal with the organization to answer such questions through their e mail or to give true answers that may affect their job. The researcher intends to overcome this by using simple language while constructing the questionnaire and giving brief and direct questions that require short answers.

23 CHAPTER THREE RESEARCH METHODOLOGY

3.0 Introduction This chapter aimed at discussing the research method that was employed in carrying out the study at Mukwano Group of Companies Limited to determine the relationship between inventory management practices and operational performance. This chapter consists of the research design, target population, sampling design, and data collection methods, data analysis and the model to be used in order to get proper and maximum information related to the subject under study.

3.1 Research Design. Descriptive research design was used. Descriptive survey was more preferred in this study since this research design was effectively used to obtain information concerning the current phenomena. Cooper (2006). The purpose of the descriptive survey methods was to describe “what exists” at present with respect to situational variables This research design was useful because it allowed a comparative analysis.

3.2 Study Population The target population for this study comprised of a total of 50. These came from the different departments of Mukwano Group of Companies Limited that is from the Production Department, Accounts Department, Sales and Marketing Department and lastly the Stores Department. All these understood issues regarding the study. This was arrived at after conducting a pilot study to ascertain the sampling frames that were authoritative and up-to-date. The lists were obtained from the Human resource office.

3.3 Sample Procedure and Size The population of the study had four distinct categories. Therefore, stratified sampling was used. Thereafter, simple random sampling was used to select the final respondents from each category.

Slovene’s formula was used to reach the required sample size. Where:- n = the required sample size, N Total target population, e = confidence level. Therefore in the Accounts Department, a sample size of 10 respondents was considered, in Productions and Operations Department, a

24 sample of 16 was taken, in the Stores Department, 19 respondents were considered and finally in the Sales and Marketing Department 15 respondents were taken.

Table 1: Showing the Selected Departments & Sample Size Structures

Selected departments Target population Sample size Accounts department 12 10 Productions and Operations 20 16 Stores Department 22 19 Sales and Marketing Department 16 15 Total 70 60 Source: Researcher’s construct 2019

3.4 Data Sources and Collection methods. Primary data was collected using a questionnaire as the instrument of the research procedure which was distributed to the staff of Mukwano Group of Companies. The secondary data was collected from various sources, which included textbooks, journals, internet, papers and the internal annual reports.

3.4.1 Sources of Data Collection The two main sources of data that were used in the research will be primary data.

3.4.1.2 Primary data Primary data was collected by use of self-administered questionnaire. This was because of its confidentiality and efficiency that enabled the researcher to get responses and reveal the respondents views.

3.5 Data collection instruments The researcher used the following data collection instruments.

25 3.5.1 Questionnaires This research study used the primary data to meet the three objectives that were established at chapter one. For the purpose of collecting primary data, the researcher used a semi-structured questionnaire. The questions were designed in such a manner as to elicit the opinions of the respondents in the most effective way. In particular, the questionnaires were structured in terms of likert scale measurements, which provided the respondents an opportunity to provide their varied views on diverse aspects of inventory management practices and operational performance. A self-administered questionnaire was delivered to each respondent of Mukwano Group of Companies Limited after which it was picked within a period of one week. Once the questionnaires were received, they were coded and edited for completeness and consistency.

3.6 Data Analysis This research study used quantitative method to analyze primary data in order to meet the three research objectives. In particular, the statistical package for social science (SPSS) version 16.0 was employed. The information to be obtained was presented in terms of frequencies and percentages. Tables were used to present the data. The quantitative data was interpreted and inferences were made and presented descriptively. This technique gave simple summaries about the sample data and present quantitative descriptions in a manageable form. However, for objective three, which aimed at establishing the relationship of Inventory Management Practices on Operational Performance of Mukwano Group of companies, were further assessed using graphs, tables and percentages. The graphs showed the relationship between operational performance and the inventory management practices of Mukwano.

3.7 Data Presentation The findings from primary, and or quantitative (numerical) data were presented in tables, pie charts and bar graphs using frequencies and percentages to make the reader appreciate the output. Also narration and descriptive methods were used to quote the exact responses, comments and observations from the respondents during the process of interaction with respondents.

26 3.8 Ethical consideration Informed consent was sought from the respondent before any step was taken. The data was collected by use of reliable and valid tools, coded and data collection tools which were burnt to avoid any form of information misuse. The researcher maintained the confidentiality of the respondents and protected their privacy at all times. The researcher tried to be professional when presenting herself to the respondents as this might have affected the attitude and expectations of the respondents. The researcher used the language that is as neutral as possible regarding the terminology involving people and avoided discriminative language. Lastly, the researcher tried to be considerate during the interactions with respondents.

27 CHAPTER FOUR PRESENTATION AND DISCUSSION OF THE FINDINGS

4.0 Introduction This chapter presents the findings on inventory management and organizational effectiveness. The data was obtained from Mukwano group of companies. The objectives of the study were; to identify inventory management practices employed by organizations, to examine problems encountered in the use of Inventory Management Techniques and to establish the relationship between inventory management and financial performance. The presentation follows the order of the objectives.

4.1 Background Information In a bid to come up with the background information of the respondents, the respondents were presented with different options pertaining to key issues like the response rate, sex, marital status, duration in organizational service, educational level and the time the organization had spent in existence. The respondents were asked to tick the most appropriate option. The results are presented in the tables below;

4.1.1 Response Rate. Out of a total number of 60 respondents that received the self-administered questionnaires, 52 respondents were answered and returned to the researcher. This gave a positive response rate of 86.7% and a non-response rate of 13.3%. This was a good representative sample of the targeted population and helped the researcher to arrive at the right conclusions. Table showing the age range of the respondents in Mukwano group of companies Age range Frequency Percentage 25-3oyrs 12 23.1 31-34yrs 5 9.6 35-4oyrs 20 38.5 41-44yrs 5 9.6 45-Soyrs 6 11.5 51&above 4 7.7 Total 52 100

28 The table above showed that the age range of respondents at Mukwano group of companies, according to the research findings, it was observed that the 23.1% of the respondents were under the age range of 25-30 years, 9.6 %under the age range of 31-34, 38.5% under 35-40, 9.6% under 40-44,11.5% under 45-50 and 7.7% under 51 and above years. Therefore this implies that the respondents at the organization were mature enough to give vital and relevant information pertaining the study.

4.1.2 Duration in Organizational service

Table 2: Showing the duration in Organizational service of respondents Response Frequency Percentage (%) 6-month -2 yrs 20 38.5 3-5yrs 13 25.0 6-8yrs 15 28.8 9 years and Above 4 7.7 Total 52 100 Source: Primary data 2019 From the table above, 38.5% of the respondents had spent 6-2 years in the service of the organization, 25.0% of the respondents had spent in the organization 3-5 years; 28.8% of the respondents had spent in the organization 6-8years and a percentage of 7.7% had spent 9 years and above. This implies that majority of the respondents had spent some considerable period of time with the organization and hence their responses could be relied upon. Figure 1: Showing the working experience of employees in Mukwano group of companies

6-month -2 yrs ~ 3-5 yrs u 6-8yrs ~ 9 years and Above uTotal

Source Primary Data

29 4.1.3 Sex of the Respondent. Table 3: Showing the sex of respondents Sex Frequency Percentage Male 31 59.6 Female 21 40.4 Total 52 100 Source: primary data.

The table above indicates that, 59.6% % of the respondents were males while 40.4 of the respondents were females. This implies that majority of the respondents were males and hence the organization had more committed staff as ladies tend to show more commitment than men.

Figure 2: A pie chart showing the findings on sex of respondents in Mukwano group of companies

U Male a Female ~Total

Source: Primary Data

30 4.1.4 Educational level of the respondents Table 4: Showing the level of education of the respondents in Mukwano group of companies Educational level Frequency Percentages Certificate 10 19.2 Diploma 16 37.8 Degree 15 22.2 Masters 11 28.8 Total 52 100 Source: Primary Data From the table above, 19.2% of the respondents were certificate holders; 37.8% of the respondents were Diploma; 22.2% of the respondents were Degree holders and 28.8% of the respondents held Masters degree. This implies that Mukwano group of Company Ltd employed a cross section of people from all walks of life.

4.2 Inventory management practices employed by organizations From the research findings, inventory management was found to be a superior management tool since it optimizes inventory stocking levels for excellent profit maximization. Basing on the study carried out in Mukwano Group of companies, it was found out that the company practiced inventory management techniques in different departments so as minimize the total cost of stock.

4.2.1 Inventory Management Techniques. The researcher asked the respondents if the company uses any techniques to control stock. The following graph shows the findings collected. Table 5: Showing the aspects of inventory management practices applied by Mukwano group of Companies Inventory management Frequency Percentage techniques ABC Analysis 12 23.1 Just in Time 15 28.8 EOQ 12 23.1 Simulation 6 11.5

31 Bar-coding 4 7.7

Vendor Managed Inventory 3 5.6 (VMI)

Source: Primary Data Figure 3: Showing the inventory management practices

35

30

25

20 Number of a Frequency Respondents 15 u Percentage 10

5

0 1 2 3 4 5 6 7 8 9 ~nventory Management Practices

Source: Primary data From the graph above, 28.8% of the respondents noted that Just In Time was used by the company, 23.1% of the respondents noted that ABC analysis was in use, 23.1% of the respondents noted that Economic Order Quantity is often used by the company and 11.5% of the respondents noted that simulation method, 7.7 agreed that bar-coding was applied in the organization and finally a very low percentage of 5.6 noted that Vendor Managed Inventory was used less because it involves some computations.

4.2.2 Problems encountered in the use of inventory Management techniques The researcher asked the respondents in relation to the above inventory management techniques, to state the problem they encountered in the use of stock control techniques, thus the table below represents their response: -

32 Table 6: showing challenges faced Mukwano group of companies while implementing inventory management practices Challenges Faced Frequency Percentage (%) I-ugh taxes 14 27.0

Cost of inventories 12 23.1

Failure to use external advise 09 17.3

Ordering costs 08 15.4

Inability to change with the changing business needs 07 13.5

Others like (labour turnover, load-shedding etc) 02 04

Total 52 100 Source: primary data

The table above shows that those of the respondents covered by the study majority revealed high taxes as the greatest challenge faced by the Mukwano group of companies in the process of inventory management as was revealed by (27.0%) of the study respondents, this was followed by the cost of inventories and this was reported by (23.1%) of the respondents, then (17.3%) of the respondents that was reported by failure to use external advise, ordering costs that were indicated by (15.4%) of the study respondents each, inability to change with the changing business needs is depicted by (13.5%) then others like labour turn over and load-shedding with (04%) of the covered study respondents during data collection process. This generally implies that the organizations performance is greatly affected and dragged down by such challenges otherwise it would be performing better than currently.

33 Table 7: Showing kind of relationship between inventory management and performance Relationship Frequency Percentage (%) Positive 46 88.5

Negative 06 11.5

Total 52 100 Source: Primary Data

From the table 6 above, majority of the respondents (88.5%) said that materials handling techniques have a positive relationship between inventory management and performance of Mukwano group of companies. The study respondents claimed that inventory management techniques has a positive influence on the performance of Mukwano group of companies they went ahead and said that since techniques of managing inventories help in proper planning of the materials needed by identifying the gap between the desired and the actual level of materials, allocation of resources, purchasing, sales and employment of staff and everything concerned to human resources management, it therefore implies that there will be reduced costs incurred by the organization in the production departments for improved performance of the company.

However some of these respondents said that the positive relationship of the inventory management techniques on the performance of Mukwano Group of Companies branch depends on how the techniques are used by the users at the company plus the prevailing conditions like power in form of electricity.

The above results may hence indicate that proper use of inventory management techniques like application of JIT reduces on ordering costs such as air time costs, in organizations when employed. This was further evidenced by the study respondents who were able to say that” proper use of JIT had improved on the performance of private organizations like Mukwano group of companies.

Qualitative results from the majority of interviewed participants on the matters concerning whether inventory management techniques have any influence on performance of production department of the company revealed that the influence between the two variables of inventory management techniques and the performance of Mukwano group of companies exists. This is because respondents explained that good management of inventories maintains quality of the

34 company products out of the production department, control time management especially during production process and that materials can be easily identified especially in the store department when need in the production section of the company. Most of the respondents still argued that proper materials handling reduce on labour with its associated costs for improved performance of the Company operations.

Also that, (11.5%) of the respondents indicated inventory management having a negative relationship on the operational performance of the firm. These same respondents believed that, inventory management involves a lot of costs, inconsistence as there is over charging of customers, use of highly skilled workers in charge of managing inventories, theft, obsolescence among others all of which increase on the costs hence reducing much of the on the performance of the organization in question especially in the production department. On the same note, the study respondents further cited that purchasing of raw materials after the customers have ordered for goods from the company among the inventory management techniques influence the company performance in terms of profitability level negatively as most of the study respondents indicated that such does not help to maintain the company Customers. However, basing on the most of the study respondents as eluded in table above, the study therefore established that there is a positive relationship of inventory management on performance private organizations like Mukwano group of companies as was revealed by majority (88.5%) of the covered respondents during data collection process.

4.3 The Summary of Findings on How Inventory Management has influenced organization performance. Renshaw (2002) Macro and David (2006) found out that majority of the respondents showed confidence in taking inventory management techniques as the major drivers of organizational effectiveness. Besides other factors such as Customer loyalty, 16.5% stated that the company took inventory management due to the reason above as supported by

35 CHAPTER FIVE

CONCLUSIONS, SUMMARY, RECOMMENDATIONS AND SUGGESTIONS.

5.0 Introduction This chapter seeks to come up with a clear stand on the purpose and objectives of the study. This chapter provides the summary of findings, conclusions, recommendations and suggestions on the study inventory management and financial performance.

5.1 Summary of findings The research was conducted to investigate the relationship between inventory management and organization effectiveness in Uganda. The study was conducted at Mukwano group of companies Limited’s headquarters in Kampala. Findings on the age showed that the age range of respondents at Mukwano group of companies, according to the research findings, it was observed that the 23.1% of the respondents were under the age range of 25-30 years, 9.6 %under the age range of 31-34, 38.5% under 35-40, 9.6% under 40-44,11.5% under 45-50 and 7.7% under 51 and above years. Therefore this implies that the respondents at the organization were mature enough to give vital and relevant information pertaining the study.

From the table above, 38.5% of the respondents had spent 6-2 years in the service of the organization, 25.0% of the respondents had spent in the organization 3-5 years; 28.8% of the respondents had spent in the organization 6-8years and a percentage of 7.7% had spent 9 years and above. This implies that majority of the respondents had spent some considerable period of time with the organization and hence their responses could he relied upon. The table above indicates that, 59.6% % of the respondents were males while 40.4 of the respondents were females. This implies that majority of the respondents were males and hence the organization had more committed staff as ladies tend to show more commitment than men.

From the table above, 19.2% of the respondents were certificate holders; 37.8% of the respondents were Diploma; 22.2% of the respondents were Degree holders and 28.8% of the

36 respondents held Masters degree. This implies that Mukwano group of Company Ltd employed a cross section of people from all walks of life. From the graph above, 28.8% of the respondents noted that Just In Time was used by the company, 23.1% of the respondents noted that ABC analysis was in use, 23.1% of the respondents noted that Economic Order Quantity is often used by the company and 11.5% of the respondents noted that simulation method, 7.7 agreed that bar-coding was applied in the organization and finally a very low percentage of 5.6 noted that Vendor Managed Inventory was used less because it involves some computations. The table above shows that those of the respondents covered by the study majority revealed high taxes as the greatest challenge faced by the Mukwano group of companies in the process of inventory management as was revealed by (27.0%) of the study respondents, this was followed by the cost of inventories and this was reported by (23.1%) of the respondents, then (17.3%) of the respondents that was reported by failure to use external advise, ordering costs that were indicated by (15.4%) of the study respondents each, inability to change with the changing business needs is depicted by (13.5%) then others like labour turn over and load-shedding with (04%) of the covered study respondents during data collection process. This generally implies that the organizations performance is greatly affected and dragged down by such challenges otherwise it would be performing better than currently.

From the table 6 above, majority of the respondents (88.5%) said that materials handling techniques have a positive relationship between inventory management and performance of Mukwano group of companies. The study respondents claimed that inventory management techniques has a positive influence on the performance of Mukwano group of companies they went ahead and said that since techniques of managing inventories help in proper planning of the materials needed by identifying the gap between the desired and the actual level of materials, allocation of resources, purchasing, sales and employment of staff and everything concerned to human resources management, it therefore implies that there will be reduced costs incurred by the organization in the production departments for improved performance of the company.

However some of these respondents said that the positive relationship of the inventory management techniques on the performance of Mukwano Group of Companies branch depends

37 on how the techniques are used by the users at the company plus the prevailing conditions like power in form of electricity.

The above results may hence indicate that proper use of inventory management techniques like application of uT reduces on ordering costs such as air time costs, in organizations when employed. This was further evidenced by the study respondents who were able to say that” proper use of JIT had improved on the performance of private organizations like Mukwano group of companies.

The company uses various techniques and systems to ensure inventory management and these have greatly enhanced its effectiveness in a number of ways as earlier mentioned. The inventory management techniques used by the company have also facilitated and enhanced the possibility of automating the company operations especially in the stores and ware house operations. For instance, economic order quantity system has facilitated automation in addition to the manual method of handling stock though the disadvantages of it was that this method was too slow and exhaustive since it involved double handling of stock.

The company also faced the problem of high taxes, variances in stock levels, these slowed down company financial performance. The company’s procurement and accounting employees also complained that they were faced with problems in accounting for stock as an important way of ensuring effective inventory management. However, the company’s employees agreed that the following factors amongst the procurement staff and company departments in general, if at all implemented by the company would result to effective inventory management which in the long run enhanced financial performance. These amongst others included customer loyalty minimizes costs avoiding stock out quantity discount For the findings therefore, the researcher proved that better inventory management practices has got the following impacts on company financial performance, added value to the company’s products and enhanced company’s making.

The company was able to support its production system by effecting objectives such as reliability, speed ,flexibility as well as minimum costs ensured real control of company resources, helped the company to determine the point at which the combination of order costs

38 and stock carrying costs were at least leveled, helped the company to safe guard itself against uncertainties, facilities automation of its store, purchasing and warehouse operations, provides faster feedback information on products within the company and between the company and its suppliers’ ensures reduced setup costs to the point that economic order quantity equals zero, in addition to just-in time system which involves a relentless process of improvements especially in the company’s production process thereby efficiently enhancing company financial performance. 5.2 Conclusion Inventory management is increasingly being employed by many organizations in the entire world and it’s growing at an increasing rate which delivers benefits that may be desired or targeted if proper choice of techniques is made, however there are many challenges associated with Inventory management which firms need to consider before taking up the Inventory management decision. The results indicate a positive relationship between the two variables. The review and analysis also shows that Inventory management alone cannot lead to better operational performance of the organization, other factors like production control, selling and distribution, storage of the stock should also be considered.

In light of the above, the study concluded that Inventory management leads to improved profitability in firms.

The manufacturing firm is a medium of job opportunities in the country. Effective control of the inventory would go a long way to improve its annual turnover and profitability, hence sustaining the growth of manufacturing firm for further contribution towards development. However, adequate attention is not paid to scientific methods of management of these inventories due to a number of reasons Inadequate fund Lack of trained personnel Inaccurate forecasting If every manufacturing firm will employ one inventory trained staff with little training. Some of these scientific inventory techniques could be translated into charts, tables, graph which could easily be followed by other staff with little training.

39 Seminars and lectures on inventory management techniques are also desirable and it is the hope of the researcher that the funding in this study be useful to stakeholders! manager in both manufacturing firm and other business organization.

5.3 Recommendations This research has established a number of factors militating against effective control of inventories. Based on this finding and conclusion drawn, I now make the following recommendation:

It was found that management policies influenced inventory planning. It is recommended to the manufacture company’s management to ensure that the manufacture has put in place policies and procedures to be adhered to during inventory management.

The manufacture company management is also urged to ensure that there are standardized and written manuals with the policies regarding inventory management. From the findings and conclusion, the study further recommends that there is need for manufacturing companies in Uganda to increase inventory planning so as to increase their internal management as it was found that an increase in inventory planning positively affect the financial performance.

There is need for the manufacturing companies in Uganda to increase their inventory controlling as it was founded that inventory controlling positively affects the financial performance of manufacturing companies in Uganda.

There is need for the regulator to introduce inventory recording that will be applied across all the financial performance of manufacturing companies. This will go way further towards increased inventory recording in the sector and contributes towards better financial performance in the sector.

The study further recommends the need to strengthen this study via a longitudinal study and compare the performance of different categories of businesses as well. The implications from the

40 findings point to a configuration approach on the implementation of inventory management by manufacturing companies.

Basing on the findings from the field, the literature review and the conclusion, the following recommendations are made.

Firms should use ABC analysis as a stock control technique because it will facilitate the firm in analyzing each stock, according to cost and frequency of usage. This technique is flexible and offers the highest degree of control on those items that are valued highest, thus it helps minimize costs and maintains high profit margin.

Employees should be given specific duties to perform for instance in the stores, the person concerned with the receipt of stock should be different from the stock issuer in the company.

The company procurement personnel should also put more emphasis on drafting better stock specifications such that wrong and late deliveries are avoided or minimized.

Firms should invest in training of their employees so as to develop their skills and provide them with the basic knowledge pertaining to inventory management so as to avoid poor quality delivery and damages arising from court cases.

Most of the inventory replenishment system for the low value class such as C items should be automated with computer programs. On the other hand, class A items that require the attention of a responsible executive since decisions about them are crucial and significance to the success of the company. Mukwano group of companies should forecast market for its products so that it stocks enough inventories to avoid under stocks and reduce on damaged inventory.

The company should also fix the stock levels that is, maximum, minimum, and reorder levels for all items in stock in order to avoid inadequate stocks or stock outs suffered by the company.

Mukwano group of companies should minimize on its inventory expenses by using skilled labour and also increase on its sales by widening on market for its products.

41 Mukwano group of companies should identify the order quantity that minimizes total cost of stock holding, stock ordering and purchase costs in order to maximize profits.

Mukwano group of companies should put into consideration inventory management when planning for better profits in the coming years and should also minimize the cost of production as lowest as possible.

For purposes of effective Inventory management, there is need to emphasize and implement the best inventory control systems like inventory safeguards and inventory audits since it minimizes cost, avoids stock out, a quantity discount and continuous monitoring of processes for compliance with the set company goals and objectives.

Since organization cannot relegate the importance of evolving and maintaining effective inventory control system to the background. There is the need for them to adopt a proactive attitude towards the issue. Being proactive requires maintenance of the right level of inventory at any point in time. Organizations should avoid the dangers that are inherent in keeping too little or too much of stock.

To achieve the above, it is recommended that organizations adopt the inventory keeping method that best suits their operation. Here, just-in-time method could be considered as an option as it has been proven to be effective in maintaining the right level of inventory and also prevent stock- outs. There is also the need for organizations to train their personnel in the area of inventory control management. What this means is that only trained professional with the requisite skill should be in charge of inventory management. The reason is obvious as most organizations inventory control programmers failed to achieve the intended objectives due to lack of skilled and trained professionals to manage it. The present advancement in technology has made inventory control management easier with the use of software. The implication of this is that organizations have wide range choice of soft-ware that it can adapt to its operations, in respect of inventory control system. In fact, the era of manual control of inventory is gone; especially, with increasing volume of inventories in organizations, computer based inventory systems will be more effective than using manual method.

42 5.4 Areas for further research Reflecting on the findings of the study and the conclusions, further research may be carried out in any one of the following areas below; Inventory management and Service delivery Inventory management and organizational performance Inventory management and cost reduction Inventory management and customer satisfaction

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52 APPENDICES

APPENDIX I: SECTION A QUESTIONAIRE I am Natabo Sophia a student of Kampala International University pursuing a Bachelors Degree of Business Administration! Accounting and Finance and carrying out a study entitled “Effect of Inventory Management Practices and on operational Performance, a Case study of Mukwano group of Companies Limited. You are kindly requested to answer the following questions as you have been selected to be part of the sample that is going to participate in this research study. Please answer accurately by filling in !ticking the appropriate answer in the space provided. The information obtained will be used purely for academic purposes and treated with utmost confidentiality. Thank you. PERSONAL DATA (Please tick as appropriate) 1. Gender Male Female

2. Age range 25~3Oyrs 31-34yrs 35-4Oyrs 41-44yrs 45-5Oyrs 51 & above

3. Level of education Certificate Diploma Degree Master

4. How long have you served in Mukwano group of companies Kampala 6-month -2 yrs 3-5 yrs 6-8yrs 9 years and Above

II APPENDIX II : SECTION B: Establish the extent to which inventory management practices are applied by Mukwano Group of Companies limited Direction: please rate your ability, knowledge or skill on the following statement by ticking the right number corresponding with each question. Key; lStrongly Disagree; 2 = Disagree; 3 =

Neutral/Not Sure; 4 = Agree and 5=Strongly Agree.

Statement 1 2 3 4 5

Strongly Disagree Neutral Agree Strongly disagree agree

1 Economic order quantity model

2 Just in time model

3 ABC analysis

3 Vendor managed inventory

4 Bar coding

5 Simulation

APPENDIX III: SECTION C: Determine the challenges faced while implementing Inventory Management Practices 1 High taxes 2 Failure to use external advise 3 Cost of inventories 4 Ordering costs 5 Inability to change with the changing business needs

III APPENDIX IV: SECTION D: Establish the Relationship between Inventory Management Practices and operational Performance.

1 Inventory management practices enable optimal production 2. Inventory management practices enhance quality 3 Inventory management practices enable meet assembly targets 4 Inventory management practices ensure on time delivery

APPENDIX V: SECTION E: Effect on Operational Performance

Key; 1=Strongly Disagree; 2 Disagree; 3 = Neutral/Not Sure; 4 = Agree and 5=Strongly Agree

Statement 1 2 3 4 5

Strongly Disagree Neutral Agree Strongly disagree agree

Effect on Operational Performance

I Does the reduced cost of production increase on the profitability

2 An increase in the number of sales that a firm makes, increases on the profitability

3 Decreased cost of production leads to reduced prices thus increasing sales and profitability.

iv Slovene’s formula ,~ = N 1+N(e)2

Where;n = the sample size

(e) Margin of error that is 0.05

N = Target population of respondents that is 70.

70 1 + 70(0.05)2

70 1 + (70x0.0025)

70 1 + 0.175

70 1.175

n = 60

V Ggaba Road, Kansanga* P0 BOX 20000 KampaLa, Uganda ~ KAMPALA TeL: +256 777 295 599, Fax: +256 (0)41 * 501 974 I ~ I NTERNATI ONAL E*mait: rnugurnetrn~gmai1 .com, U * Website: http://www.kiu.ac.ug ~ UNIVERSITY

COLLEGE OF ECONOMICS AND MANAGEMENT ~DEPARTMENT OF ACCOUNTING AND FINANCE

MARCH, 26~~~/2oj9 To whom it may concern

Dear Sir/Madam,

RE: INTRODUCTORY LETfER FOR NATABO SOPHIA 1162~05O14~ 04815

This is to introduce to you the above named student, who is a bonafide student of Kampala International University pursuing. a Bachelor’s Degree in Business Administration (Accounting and Finance), Third year Second semester.

The purpose of this letter is to request you avail her with all the necessary assistance regarding her research.

TOPIC: EFFECT OF INVENTORY MANAGEMENT PRACTICES ON THE OPERATIONAL PERFORMANCE OF MANUFACTURING FIRMS

CASE STUDY: MUKWANO GROUP OF COMPANIES

Any inforrn~ttoo~shared with her from your organization shall be treated with utmost\ coñfldthitiality

~esh~ll be~r~eful for’yO~ur positive response

D R~ ~Ej~q~BOV HOD -~A~CQ1V7fI?rN.G AND FINANCE 07723 23344~