Abstract

Inventory management hardly gets the attention it deserves from the smallest and medium enterprises today. This causes them to lose a significant portion of their profit.

This study set out to examine the effect of inventory management on the performance of SMEs in the Buea municipality. It seeks to understand how inventory management practices affect the daily operations of SMEs, the relationship between accurate inventory record keeping and the performance of SMEs.

Finally, it examines the relationship between stock out and the performance of SMEs in the Buea municipality. To achieve this, primary data was collected from 120 SMEs in the study using questionnaires and observation.

A purposive sampling technique was used in the study. The data were analyzed using the Pearson Product Moment Correlation Coefficient alongside the SPSS program.

This study argues that inventory management greatly affects the performance of SMEs in the Buea municipality. It also proved that there is a positive relationship between accurate record keeping and the performance of SMEs.

Finally, it argues that there is a negative relationship between stock out of items and the performance of SMEs. SMEs need to invest in managing their inventory given that it greatly affects their performance.

They should purchase appropriate software used in managing inventory in order to match up to the economy they find themselves in; which is fast moving towards technology.

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

The management of every organization is challenged with the problem of decision making.

Decision making is an important task that every organization has to carry out. The allocation of resources is primary in every organization.

Organizations have to acquire, allocate and control the factors of production that are necessary for the achievement of the business objectives. Inventory management is one of the key activities of every business and has always been a major preoccupation for a company’s survival and growth.

The need for an inventory cycle cannot be overemphasized as it is a means for improving the performance of distributing industries.

Inventory can be defined as a record of a business’s current assets including property owned, merchandise on hand, and the value of work in progress and work completed but not sold (for manufacturing industries) and it  is classified as a current asset because it can be turned into liquid cash within a short period of time (Chotkunakitti, 2005)

The main aim of inventory management is to hold inventory at the lowest cost possible, keeping in mind the objectives of the organization.

When making decisions on inventory, management has to find a compromise between the different cost components relating to inventory management.

Such costs include; cost of supplying inventory, the cost of holding inventory, and resulting from insufficient inventory (Hugo, Badenhorst and Rooyen, 2009).

Inventory control is the activity that organizes the availability of items to customers. It coordinates the purchase, manufacture, and distribution functions in order to meet the marketing needs of customers (Wild, 2009).

Inventory management is primarily about specifying the quantity and placement of stocked goods. Inventory management is required at various levels of a supply network in order to ensure regular protection against the random disturbance of running out of materials or goods.

The scope of inventory management involves aspects such as; replenishment lead time, future inventory price forecasting, available physical space for inventory, quality management, returns and defective goods, demand forecasting.

The characteristics of a good inventory management control system include the following.

1. It should be able to maintain a proper relationship between sales and inventory. Without a good inventory system in place, the inventory store can become understocked or overstocked.
2. An inventory control system should help an organization identify slow-selling items. Discovering such items early in the season will allow the business to make a change in its marketing strategy before consumer demand completely disappears.
3. A good inventory management control system will help identify inventory shortage or shrinkage. Excessive shrinkage will indicate that more effective inventory controls need to be implemented in order to reduce employee theft or shoplifting. (Clodfelter 2010)

Inventory in one area of logistics that has received a great deal of management attention in the last decade. Managers now realize that holding a large quantity of stock is simply too expensive.

Therefore, efforts have been expended to eliminate unnecessary inventory without compromising customer service. However, there are certain circumstances where inventory must simply be held, especially in meeting the needs of global customers.

Management’s goal should behold only what is necessary to satisfy customers’ requirements and manage it effectively. (Gourdin, 2011).

The inventory cycle plays a major role in the operation of many businesses and Distributing companies. Without inventory control and cycle, millions of FCFA could be lost because of the non-accountability of stocks, the timely ordering of inventory, dead inventory, and overstocking.

The process of cycling, control, and management of inventory is a very important factor in the success or failure of any business for example; little stock will result in an out of stock (OOS) situation which will disrupt the distribution cycle that is crucial to the survival of all distributing companies while too much stock will tie down the resources of the company thus disruption of the working capital.

Poor or inadequate inventory cycle management can present a serious challenge to the marketing and distribution capacity of an organization.

In addition to raw materials and finished goods, many companies also maintain items of assets, property, inventories of work in progress (manufacturing industries), office stationeries, business firms, and general operation supplies.

Inventories often constitute the most significant part of the cash flow of a large part of most organizations. In public limited companies, inventories are approximately 60% of current assets on average.

The US Bureau of census stated that inventory and accounts receivable are the two largest accounts of equal magnitude and together they comprise almost 80% of current assets and over 30% of total assets for all Manufacturing and distributing companies in 1982.

Considering the large sum of money that is committed to the stocks of finished goods, it is therefore of paramount necessity that these stocks be managed and cycled efficiently and effectively in order to avoid jeopardizing the financial position of the firm which mainly constitutes the cash flow of the company.

In the inventory cycle, there is an optimum level whereby inadequate inventory causes loss of sale and disrupts the production process while excessive stock level leads to unnecessary carrying cost and obsolescence or spoilage risks. This will in turn have adverse effects on the cash flow of that organization.

The optimum inventory level lies between the inadequate inventories and the excessive inventories. Inventory management aims at maintaining an optimum inventory level that will be carried at the least cost possible (Charles, 2007).

Limited or no access to timely information regarding both domestic and export markets especially with respect to such matters as supply volumes and quantities has led to supply shortages because players are never aware of how many orders a customer has placed and how much should be ordered from suppliers.

Customers are concerned with the availability of the product and the ability of the firms to meet their needs timely (Gunasekaran and Patel; 2001). To control and cycle inventory effectively, the organization needs to prioritize its inventory needs.

It might seem at first glance that the most expensive items in inventory should receive the most attention. But in reality, less expensive items with higher turnover ratios have a greater effect on cash flow than more costly items with a lower turnover.

If the organization focuses only on the high dollar-value items, it runs the risk of running out of the lower-priced products that actually contribute more to its bottom line.

Cycle stock inventory is the portion of an inventory that the seller cycles through to satisfy regular sales orders. It is part of on-hand inventory, which includes all of the items that a seller has in its possession.

For example, a retailer’s on-hand inventory would include the items on store shelves as well as most of those in a storeroom or stock area. Over time, cycle stock inventory refreshes itself or turns over, as new items replace older ones that are sold.

Inventory management coordinates and integrates all of the activities related to stock into a seamless process. During the process, inventory holding and warehousing play an important role in modern supply chains.

A survey of logistics costs in Europe identified the cost of inventory as being 13% of total logistics cost, while warehousing accounted for 24% (European logistics association, 2008).

As well as being significant in cost terms, inventory management is important in terms of customer service, with product availability being a key service metric and warehousing being critical to the success or failure of many supply chains (Frazelle, 2009).

At present, the growth of small businesses and their impact on the entire economy is becoming clear. Based on The European Observatory for SMEs- fifth annual report, more than 99% of the total number of enterprises in all of EU countries is small and medium-sized enterprises. However, most of these SMEs are striving to become big companies and go global.

Managing inventory has become a special issue when selling globally because holding goods in non-domestic markets is virtually a necessity if customer service levels are to be maintained.

Inventory management is of great importance especially for managers who must decide how much if any, to hold in order to ensure that customer service does not suffer as a result of lower inventory levels.

This is the reason why inventory management requires a lot of attention or the support of the entire company’s management levels to ensure customer satisfaction.

1.2 Problem Statement

For any SME to succeed, it has to focus on inventory management. Inventory constitutes a very significant portion of the current assets of SMEs.

Considering the level of investment required for inventory in SMEs, it is imperative to manage inventory effectively and efficiently in order to avoid idle resources and also ensure production continuity.

Inefficient management of inventory can lead to underutilization of capacity and loss of profit (Olowolaju, 2013). Underutilization of capacity can aggravate the problem of unemployment in every economy.

In most developing countries, SMEs employ a significant number of the workforce. Thus, the success of SMEs is quite important for an economy’s workforce to be within the standard.

Efforts of many countries to encourage SMEs have been directed towards the provision of funds. Unfortunately, in most cases, the crucial problem of inventory management has not been addressed. There is no doubt that inventory management is crucial to the sustenance of the operations of SMEs.

SMEs in most cases are faced with the problem of inadequate inventory or raw materials. These shortages most often lead to a breakdown in the normal operations of the business, machine breakdowns, and low capacity utilization (Wild, 2009). This constitutes a barrier to effective growth.

In most SMEs, it is common to notice that customers get disgruntled once they can’t have the product they want to buy. This often arises as a result of a lack of control of inventory. The Microsoft Midsize Business Center website states that poor inventory control can result in delayed servicing of customers because some products are not available when needed. Thus poor inventory management leads to poor customer service.

More so, the lack of a good inventory control system leads to a wastage of money. Without a good inventory control system, it is hard to determine exactly what quantity of inventory is obsolete, bad, or short in supply.

Thus, money is spent ordering goods that are probably not in short supply while goods that are in short supply continue to lack. If an organization is spending more on additional inventory that it doesn’t need, because it doesn’t know what it has, it is wasting money. (Microsoft Midsize Business Center website, 2008).

Lack of a good inventory system leads to poor planning. It is important for every business to plan well ahead of time to be able to meet up customer’s orders (olowolaju, 2013). Thus, if the inventory control system in place is bad, it makes it hard for the organization to know exactly what quantity of inventory is in store and consequently can’t plan well on meeting customer’s demands.

Based on the above issues raised, it is reasonable to say that efficient inventory management in SMEs is imperative for the meaningful economic growth of every economy. Thus, the main research question to be looked at is;

Does proper inventory management affect the performance of SMEs?

The specific research questions of the study will include the following;

1. Do inventory management practices affect the operations of SMEs?
2. To what extent does stock out affect the performance of SMEs?
3. To what extent does accurate record-keeping affect the performance of SMEs?
4. What are some of the challenges faced in managing inventory properly?
5. How can inventory management be improved in SMEs?

1.3 Objectives of the Study

The main objective of the study is to assess the effect of proper inventory management on the performance of SMEs in Buea. To achieve this, the following specific objectives are useful.

1. To assess how inventory management practices affect the operations of SMEs.
2. To determine the impact of stock out on the performance of SMEs.
3. To examine the extent to which accurate record-keeping affects the performance of SMEs.
4. To determine some of the challenges faced in managing inventory properly.
5. To make recommendations on how inventory management can be improved in SMEs.