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.