CHAPTER I

THE PROBLEM AND IT’S SETTING

Background of the Study

Sheik and Sohail (2018) defined inventory as the supply of raw materials, partially

finished goods called work-in-progress and finished goods, an organization maintains to

meet its operational needs. It represents a sizeable investment and a potential source of

waste that needs to be carefully controlled. Inventory is defined as a stock of goods that
is maintained by a business in anticipation of some future demand. The quantity to

which inventory must fall in order to signal that an order must be placed to replenish an

item.

Inventory plays a significant role in the survival and growth of any business in the

sense that inefficient and ineffective inventory management will imply that the

organization loses customers with a decline in sales. Inventory control involves the

coordination of availability of material, utilization, controlling and procurement of

materials. Inventory control is the combination of activities with the primary goal of

getting the right inventory in the right place, at the right time and in the right quantity.

Moreover, it is directly associated to organization’s production function which

means that the inventory management system will directly or indirectly affect the

profitability of an organization.

A study conducted in Kenya by Naliaka and Namusonge (2015) identified that

inventory management affects competitive advantage of manufacturing firms. The same

study further concludes that the firm is able to compete based on quality and delivery of

customer orders on time. Competitive advantage comprises capabilities that allow an

organization to differentiate itself from its competitors and is an outcome of critical

management decisions (Li, Ragu-Nathan, Ragu-Nathan, & Subba Rao, 2006).

According to Sohail and Sheik (2018), inventory problems of too great or too small
quantities on hand can cause business failures. Inventory management indicates the

broad frame work of managing inventory. The inventory management technique is more

useful in determine the optimum level of inventory and finding answers to problem of

safety stock and lead time.

This study examines the inventory management of hardware stores in Digos City

to provide relevant information that can be used for future research.

Statement of the problem

The overall objective of the research is to assess the practice of inventory

management system of hardwares in Digos City.

Specifically, this study aims to sought the following:

• What is the profile of market vendors in terms of:

• Legal form of the business

• Sector of business

• Type of business environment

• Product Line

• What is the level of inventory management in terms of:

• Inventory handling systems

• Perpetual inventory systems

• Stock evaluation & performance measures

• Inventory management constraints

• Inventory policy procedures

• Inventory control mechanism

• Is there a significant difference in the level of inventory management of hardware

when analyzed by profile?

Hypotheses

Ho. There is no significant difference in the level of inventory management of

 hardware when analyzed by profile.

Review of Related Literature

Inventory management

Inventories are an asset that represents a relevant amount of short-term

investments for the firms, the study of the existence of an optimal level of inventory

investments in relation to the firm’s performance and value creation is justified as a

collaboration to the understanding of whether there is an optimal level of inventory or

not. Inventory management is the optimization of stocks of goods produced, work in

progress, raw materials and other objects of activity by enterprises in order to reduce

storage costs while ensuring the level of service and uninterrupted operation of the

enterprise (Wisner, Tan, & Leong,2014). Inventory management in logistics -

optimization of operations directly related to the processing and clearance of goods and

coordination with the procurement and sales services, the calculation of the optimal

number of warehouses and their location.

The strategic benefits of inventory management have become obvious since the

mid-1980s. Nowadays many firms coordinate with other firms in their supply chains.

Instead of responding to unknown and highly variable demand, companies in the supply

chain share information so that the variability of the demand they observe is significantly

lower (Silver, Pyke, & Thomas, 2017).

According to Hedrick, Barnes, Davis, Whybark, & Krieger (2008) inventories

are all materials and goods which are maintained by firms in order to meet future

demands. In addition to this definition, Viloria & Robayo (2016) categorize them as

products in process, finished goods, raw materials and final products that are

available physically to the organization and is utilized by the company in the prospect

of finishing or starting the process of production or to market the finished

products. Inventory management is one of the most discussed phenomena of

management-related studies. Effective and efficient inventory management can be a

great competitive advantage to reduce costs, optimize operations and ensure business

profitability (Hugos, 2018). Inventory management is vital and often absorbs a

substantial part of an organizations operating budget, which means that it must be

strictly monitored. Another point of attention is the legislative issue (Ballou, 2007).

Inventory management is a vital issue and often absorbs a substantial part of an

organization’s operating budget. Since they do not add value to products, the
lower the level of inventory that a productive system can manage to work with,

the more efficient it will be (Wild, 2017). The efficiency of its administration can create

the difference with competitors, improving quality, reducing time, reducing costs

among other factors, thus offering a competitive advantage for the firm itself. It is

essential that companies minimize the quantity of stocks in the supply chain in

order to rationalize storage costs and maintain them. The improvement of the

productive quality, the reduction of operational times, the careful reduction of costs,

among other aspects, are some of the benefits obtained through effective inventory

management.

The study of Oballah, Waiganjo, & Wachiuri, (2015) investigates the effect of

inventory management practices on firms’ performance in public health sector in Kenya.

This study revealed that inventory accuracy has a positive impact on organizational

performance, while shrinkage of inventory has negative effect on a firms’ performance.

This fact is supported by the study of Miller (2010), where the author asserts that

inventory management involves all activities put in place to ensure that customer have

the needed product or service. In addition, this study also confirms that inventory

accuracy brings in its meaning the idea of precision. The accuracy of inventory can be

defined by the measurement (in percentage) of the amount of material physically found

by the quantity recorded in the information system (Miller, 2010). The results of the
study deduced that accuracy of inventory has a positive effect on inventory

management with the majority of the respondents strongly approving that up to date

inventory and proper records have a positive effect on firms’ performance.

Nsiah Asare, & Prempeh (2016) stated that there is a substantial relationship

between firm’s profitability and inventory management. Similarly, studies conducted by

(MwangI, 2016; Etale, & Bringilar, 2016; Koumanakos, 2008) also support the direct

association between inventory management and firm’s performance and profitability.

In contrast, the studies conducted by (Bratland, & Hornbrinck, 2013; Sitienei, &
Memba, 2015; Mawutor, 2014) showed vice versa. However, almost all the mentioned

studies fail to recognize the fact that management of inventory also have an impact on

operating cash flows of an organization.

Organizational Performance

Organizational performance remains a central theme in contemporary literature.

Scholars continue to ventilate on various factors that inform performance in diverse

organizations. Organizational performance is one of the most important constructs in

management research. Past studies reveals a multidimensional conceptualization of

organizational performance related predominately to stakeholders, heterogeneous

product market circumstances, and time (Pierre, Timothy & George, 2009).

Organizational performance, meanwhile, has not been frequently defined and has been

used differently according to the context, as well as being difficult to define and measure

(Erbisch, 2004 in Norashikin, Amnah Fauziah and Noormala, (2013). A general

definition of organizational performance by Stankard (2002) noted that it is the product

of interactions of different parts or units in the organization. Norashikin, et al. (2013)

opined that m organisational performance refers to the outcomes of various

organizational processes which occur in the course of its daily operations. Pierre,
Timothy & George, 2009) proposed that organisational performance is represented by

various dimensions such profitability, growth, sales turnover. Awino (2015) uses the

crosssectional survey of large manufacturing firms to show that non-financial measures

such as customer satisfaction, internal firm processes and firm image influences

performance among large manufacturing firms. On the other hand, Shisia, Sang,

Matoke and Omwario (2014) contend that strategic innovation has potential to impact

positively on the performance of public universities in Kenya. The influence of human

capital on organizational performance has also been investigated. Odhon’g and Omolo
(2015) focused on analyzing the effect the investment in human capital has on

organizational performance from a pharmaceutical perspective. Using the inferential

tests of association, the study revealed that organizational performance was associated

with investment in quality, relevance, and reliability in the human capital. On the other

hand, Kariuki and Murimi (2015) investigated employee empowerment and how it

impacts on organizational performance. The study explored the case Tata chemicals in

Magadi Kenya and found out that employee empowerment through information sharing

and training tended to have a moderate impact on organizational performance.

Christopher (2005 as cited in Chimwani, Iravo, and Tirimba, 2014) contends that in

order for any responsive organization to meet its desired procurement goals such as the

transformation of: functions to processes; inventory to information; products to

customers; profit to performance and transactions to relations, there is need to

continuously monitor the key measures of procurement performance. It is argued that

despite the wide array of measures that can be deployed to measure procurement

performance, the success of the measurement relies basically on a few indicators which

can be determined by use of the balanced score card (Chimwani et al., 2014). The

balanced scorecard takes cognizance of the procurement goals which are often a mix of

the organizations internal measures for managing resource utilization and total quality

measures expected by customers. Moreover, observations have been made to the

effect that adherence to supply chain practices has potential to reduce operational costs

and result in outputs that match organizational goals (Muma et al., 2014; Osuga et al,

2015). More evidence on the importance of supply chain practices is attributed to

Kimotho (2014) who argues that satisfactory procurement performance has a direct

impact on firm profitability, supplies, quality and competitiveness. There is no doubt

therefore that use of appropriate supply chain practices remains the panacea to

challenges facing the textile industry in Kenya. However, in the event of scanty evidence

from a textile industry perspective, the present study yearned to identify supply chain
determinants that could best predict firm performance in this important sector.

Organisational Growth

Organizational growth is better explained using the organizational life cycle. The

organizational life cycle according to Bess (1984) refers to the expected sequence of

advancements experienced by an organization, as opposed to a randomized

occurrence of events. Researchers have described the stages of growth in

organisations like that of a life cycle of a living organisms (Lester, Parnell, and Carraher,

2003). Scholars have suggested that there is a relationship between inventory control

and business growth (Elsayed and Wahba, 2016; Anichebe, 2013). A study by Elsayed

and Wahba (2016) shows that while inventory to sales ratio affects organisational

performance negatively in the initial growth stage and the maturity stage, it exerts a

positive and significant coefficient on performance in either the rapid growth stage or the

revival stage. Anichebe (2013) holds that efficient inventory management is very vital to

the success and growth of organisations.

INVENTORY ACCURACY AND ORGANIZATIONAL PERFORMANCE

The inventory record inaccuracy refers to the discrepancy between physical

inventory held in stock and the record of inventory stored in a firm‟s information system

Kök and Shang (2014). This discrepancy can deeply affect the performance of firms
Sarac, Absi, and Dauzère-Pérès (2010) by generating lost sales, delay penalties, re-

scheduling, suboptimal planning and the increased use of small transport vehicles,

among others Cannella, Framinan, Bruccoleri, Barbosa-Póvoa, and Relvas (2015);

(Chuang & Oliva, 2015). Such inefficiencies are a natural consequence of uncorrected

order patterns caused by the Supply Chain members affected by inventory errors.

Essentially, they create critical distortions in order placement, as almost every order

policy utilizes information regarding current inventory levels Bruccoleri, Cannella, and

La Porta (2014), and if the recorded inventory quantity does not match the actual
quantity on the shelf, the system will either order unnecessary items or fall short on

orders Metzger, Thiesse, Gershwin, and Fleisch (2013).

Shrinkage and Organizational Performance

Inventory shrinkage means the difference between the physical count of

inventory from the total inventory that is recorded in the official company records.

Inventory shrinkage is a real phenomenon that affects every single retail business on

the planet. If not managed on time and with proper systematic approach, it can prove to

be deadly in the long term. These differences might be due to various reasons ranging

from natural causes or managerial errors, being stolen by employees, shoplifting or

inventory getting damaged and disposed of without having any record. Whatever the

reason, there is a discrepancy referred to as inventory shrinkage which needs to be

accounted for to reconcile the accounting records with the physical count in order that

the organization improves on its performance.

Profitability

Profitability is the ability of a business to earn profit. A profit is what is left of the

revenue a business generates after it must have paid all expenses directly related to the

generation of the revenue (Grimsley, 2017). Eroglu and Hofer (2011) found that

leanness positively affects profitability of a business firm. Similarly, Koumanakos (2008)

holds that lean inventory management leads to an improvement in a firm’s financial

performance, he maintained that the higher the level of inventories preserved by a firm,

the lower the rate of return. Companies successfully optimize inventory through lean

supply chain practices and systems to achieve higher levels of asset utilization and

customer satisfaction leading to improved organisational growth, profitability and market

share (Green & Inman, 2005). According to Richard, Devinney, Yip and Johnson (2009)

organizational performance comprises the actual output or results of an organization as

measured against its intended outputs (or goals and objectives). It encompasses three

specific areas of firm outcomes: (a) financial performance (profits, return on assets,
return on investment, etc.); (b) product market performance (sales, market share, etc.);

and (c) shareholder return (total shareholder return, economic value added, etc.).

Theoretical and Conceptual Framework of the Study

Independent Variable Dependent Variable

 Figure 1. The schematic Diagram Showing the Variables of the Study

Significance of Study

The purpose of the study is to examine the inventory management of hardware. In

Digos City.

Hardware owner. This research study can be a guide to administer their business

problem that they may encounter and to evaluate their inventory management from

suppliers to them. This study also may provide relationship to the supplier’s personnel

and even with their costumers

Future researcher. This study will provide valuable data that may serve as their

basis and source of information regarding inventory management business in Digos City

Definition of Terms

To facilitate a better understanding of the content of the study, the following are
defined conceptually and operationally. A word or phrase used to describe a thing or to

express a concept, especially in a particular kind of language or branch of the study.

Inventory management is the supervision of non-capitalized assets (inventory) and

stock items. A component of supply chain management, inventory

management supervises the flow of goods from manufacturers to warehouses and from

these facilities to point of sale.

Hardware stores. A hardware store typically sells hand and power tools, building

materials, fasteners, keys, locks, hinges, chains, electrical supplies, plumbing supplies,
cleaning products, housewares, utensils, and paint. They’re designed for DIY

consumers and handymen (as well as tradesmen) who need a place to source supplies

for projects.

Chapter 2

METHOD

This chapter presents the research design, research participant, research

instruments, data gathering procedure, and statistical treatment of data utilized in this

study to obtain valid and reliable answers to the problems of the study.

Research Design

The descriptive approach will be the methodology employed in this study.

Descriptive research is important for analyzing circumstances, pointing out the

issues and proposing practical approaches to the found issues (Singh, 2006). The

research will use systematic approaches to identify and interpret the knowledge

collected utilizing different data collection techniques.

Research Respondents

The target population for this study will be the hardware

owners/employees/managers. Employees who will be participating in the inventory

management system will be selected using purposive sampling technique. This

sampling technique is a non-probability sampling method, which enabled the researcher

to include relevant respondents who have direct relation to the issue under study by his

judgment. This sampling technique helped the researcher to include all members of the

target population under investigation.

Research Instrument

For this study, survey questionnaire will be designed and distributed in order to

collect information from selected sample respondents (employees at departmental

stores). A set of questions on each aspect of the inventory management practice

was derived from widespread literature review including but not limited to the

following studies (Gupta, Sipahi, Liudmyla,Ayalew, Guliti,Srivastva & Tefer, 2020).

Data Gathering Procedure

In asking permission to conduct the study, a permission letter will be sent to the

hardwares in Digos City.

Asking Permission to the Owner/Store Manager. The researchers will write a

letter of permission to conduct data gathering which will be signed by the research

adviser address to the owner or store manager.

Collection and Processing of Data. After conducting the interview, data will be

arranged for easy statistical processing to answer the questions made by the

researchers in the study.

Interpretation and Analysis of Data. When the data gathered through the

interview were organized and processed statistically, the said data will be analyzed and

interpreted to answer the problem in the study.