Role of Inventory Management On Company's Profitability: by Faizan Pervaiz 2142106

Role of Inventory Management on
Company’s Profitability
By Faizan Pervaiz
2142106
Master in Business Administration (MBA)

September, 2016
National College of Business Administration

& Economics
1
Supervised by
Miss Saima Hassan
Submitted by
Faizan Pervaiz
2143261
MBA
September, 2016
Dissertation submitted to the

National College of Business Administration & Economics
(NCBA&E)
In partial fulfillment of the requirements for the degree of
Master in Business Administration (MBA)

& Economics
2
CERTIFICATE
It is certificated that Dissertation entitled “Role of Inventory Management
on Company’s Profitability” prepared by Faizan Pervaiz, Registration
Number 2142106, to fulfill the requirement of Master in Business
Administration (MBA) degree has been completed under my supervision
and has been approved for submission.
Miss Saima Hassan

Supervisor
3
By: Faizan Pervaiz
Approved by
________________
Supervisor
________________
Chairman
________________
Member
_______________
Rector

& Economics
4
DECLARATION (A)
"This thesis is my original work and has not been presented for a Degree
or any other academic award in any University or Institution of Learning".
___________________
Faizan
Pervaiz
___________________
Date
5
DECLARATION (B)
“I confirm that the work reported in this thesis was carried out by the
candidate under my supervision”.
___________________
Miss Saima Hassan
___________________
Date
6
DEDICATION
This work is dedicated to the Almighty ALLAH in Appreciation of His

guidance and blessings during the course of pursuing this master program.
I dedicate this work to my family, especially my father and my mother. They
always help me in my every work and at all times help me when I want
them. Their appreciation always encourages me to work hard and achieve
my goals.
I also want to dedicate this to my friends who are always with me in the
time of an hour and especially to my younger sister who always
encourages me to lead in every field of life with sincerity.
Faizan Pervaiz
2142106
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ACKNOWLEDGEMENT
It is beyond my comprehension to count the bounties and blessings of Allah

for paving the way during my completion of this huge task. This research
could not have been completed without the time, effort, and support of a
number of people. This credit goes to my teachers, my parents and also
administrators in our college that assisted me this project. Therefore, I wish
to acknowledge the contributions of all of them.
There lies the excellently supporting and superbly assisting hand of my

parents, brother and friends who stood by me with dignity to ease me by
providing substance, pelf and prayers to continue my pursuit with great zest
and flow.
I will remain ever thankful to my research supervisor Miss Saima Hassan
for providing intellectual ink to inscribe my research work. The proper
guidance and suggestions of madam helped me in abundance to
accomplish my target. I express my deep gratefulness for the approval of
the research topic and his continuous guidance makes it possible for me to
complete my project. Her fearless deeds, gigantic liberality encouraged me
a lot to collect knowledge into bits and pieces to prepare a sort of record of
my subject.
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Table of Contents
CHAPTER ONE: INTRODUCTION
1.1 Introduction……………………………………………………………..…11
1.2 Problem Statement………………………………………………………..12
1.3 General Objectives…………………………………………………….....13
1.4 Specific Objectives…………………………………………………….....13
1.5 Significance of the Study………………………………………………….13

1.6 Operation Definitions………………………………………………………14
CHAPTER TWO: LITERATURE REVIEW
2.1 Inventory and inventory management…………………………………....17
2.2 Inventory Policy for Inventory Management……………………………..18
2.3 Physical inventory control………………………………………………….18
2.4 Basic communication forms or Documentation…………………………19
2.5 Basic communication forms used in perpetual inventory control……...20
2.6 The inventory management system methods……….…………………..21
2.7 The perpetual inventory system…………………………..………………21
2.8 The periodic inventory system……………………………………….……22
2.9 Common inventory management problems……………………………..23
2.10 Inventory Management System maintains supply and demand…..…27
2.11 There are three basic reasons for keeping an inventory……………..27
2.12 Advantages of Inventory Management System……………………….28
2.13 Economic Order Quantity………………………………………………..28
2.14 Profitability…………………………………………………………………30
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2.15 Reasons for Computing Profitability ……………………………………32
2.16 How to analyze profitability: ……………………………………………..32
2.17 Relationship between inventory management and profitability………35
CHAPTER THREE: METHODOLOGY
3.1 Research Design…………………………………………………………...38
3.2 Study Area…………………………………………………………………..38
3.3 Research Population……………………………………………………….39
3.4 Sample Size………………………………………………………………...39
3.5 Sampling Procedure……………………………………………………….40
3.6 Data collection and instruments…………………………………………..40
3.7 Study Variables……………………………………………………………..41
3.8 Data analysis and presentation………………………………………….41

3.9 Limitations of the study…………………………………………………..42
CHAPTER FOUR: ANALYSIS & RESULTS……………………………......41
CHAPTER FIVE: SUMMARY OF FINDINGS, CONCLUSIONS AND

RECOMMENDATIONS
5.1 Findings……………………………………………………………………...63
5.2 Conclusion…………………………………………………………………..65
5.3 Recommendations………………………………………………………….66
REFERNCES……………………………………………………………………68
APPENDIX………………………………………………………………………69
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INTRODUCTION
This chapter of the study presents the introduction, statement of the
problem, general objective, specific objectives, research questions, scope
of the study, significance of the study and definition of key terms.
1.1 INTRODUCTION
Inventory management is an extremely important function within most

businesses. The purpose of inventory management is to develop policies
that will achieve an optimal inventory investment. A company can maximize
its rate of return and minimize its liquidity and business risk by optimally
managing inventory. Inventory management involves comparison between
the costs associated with keeping inventory versus the benefits of holding
inventory. Successful inventory management minimize inventory, lowers
cost and improves profitability.
Higher inventory levels result in increased costs for storage, insurance,

spoilage and interest on borrowed funds needed to finance inventory
acquisition. As successful inventory management minimizes inventory,
lowers cost and improves profitability, managers should appraise the
adequacy of inventory levels, which depend on many factors, including
sales, liquidity, available inventory financing, production, supplier reliability,
delay in receiving new orders, and seasonality. An increase in inventory
lowers the possibility of lost sales from stock outs and the production
slowdowns caused by inadequate inventory.
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Inventories are vital to the successful functioning of manufacturing and
retailing organizations. Inventory may consist of raw materials, work-in-
progress, spare parts/consumables, and finished goods. It is not necessary
that an organization has all these inventory classes. But, whatever may be
the inventory items, they need efficient management as, generally, a
substantial share of its funds is invested in them.
Different departments within the same organization adopt different attitude
towards inventory. This is mainly because the particular functions
performed by a department influence the department’s motivation.
For example, the sales department of any organization believes that the
company should have available any item to have immediate sales for as
large a quantity as demanded, which requires large stocks to be
maintained. The production department would ask for stocks of materials
so that the production system runs uninterrupted. Similarly, the purchase
department wants to buy as much inventory as possible at the time of
purchase to take advantage of price discounts. On the other hand, the
finance department would always argue for a minimum investment in
stocks so that the funds could be used elsewhere for other better purposes.
1.2 PROBLEM STATEMENT

Problems of inventory management and control have been around for a
very long time. The primary concern of inventory management is to
maintain raw material and finished goods inventories at levels that are not
too low to cause lost of sales or costly production delays nor too high as to
tie up capital and space. Such a tie-up of capital can lead to excessive
12
borrowing, unnecessary interest expense, and inability to purchase other
more necessary items.
As the manufacturing industries increased gradually the problem arose
concerning inventories frauds, which are committed by employees.
Furthermore it can be possible that the inventories are neglected, that
causes losses or lack of cost evaluation. In addition it’s possible that the
inventory has become obsolete or un-useful because of mismanagement of
inventory as a result of not observing the expirations dates of the list.
1.3 General Objective

The broad objective of this study is to evaluate the effects of inventory
management on the organization’s performance and its profitability.
1.4 Specific Objectives

1. To examine the nature of relationship between inventory management
and organizational effectiveness.
2. To determine the effect of inventory management on organizational
productivity.
3. To evaluate the nature of correlation between inventory management
and organizational profitability.
1.5 Significance of the Study

First, the study was to benefit the managers of manufacturing companies
who were experiencing nowadays inventory management problem and
improve their understanding towards the role of inventory management on
company’s profitability.
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Secondly, the study is to add some knowledge to the already existing facts
about the role of inventory management and company’s profitability to
those researchers who are interested in inventory management in further
research.
Finally, this will lead to the generation of ideas for better understanding of
the inventory management and company’s profitability.
1.6 Operation Definitions

Inventory: - is the amount of goods, materials or parts carried out in stock
or store house for example, work in progress (W.I.P), raw materials, and
finished goods.
Inventory management: - according to Garry, J.Z, (1997) involves the

planning, ordering and scheduling of the materials used in the
manufacturing process. It exercises control over three types of inventories
i.e. raw materials, work in progress, and finished goods. Purchasing is
primary concerned with control over the raw materials inventory, which
includes; raw materials or semi-processed materials, fabricated parts and
MRO items (maintenance, repair and operations) .
Inventory control: - It is the activity which organizes the availability of

items to the customers. It coordinates the purchasing, manufacturing and
distribution functions to meet marketing needs. This role includes the
supply of current sales items, new products, consumables, spare parts,
obsolescent items and all other supplies.
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Profit: - generally is the making of gain in business activity for the benefit
of the owners of the business. It is also defined as returns received on a
business undertaking after all operating expenses have been met.
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LITERATURE REVIEW
This chapter focuses on the review of the related literature in line with the
study variables. The researcher mainly obtained the theoretical available
written data by different authors about the variables under the study and
the reviewed information is arranged as follows;
2.1 Inventory and inventory management
According to Russell and Taylor (2000) defines “inventory, is a set of items

kept by an organization to meet internal and external customer demand”
.According to Russell and Taylor (2000) defines”inventory management

system is the set of a policies and control that monitors levels of inventory
and determines”
According to Weygand, Kieso and Kimmel (2005), Inventory management

can be defined briefly as follows: “Acquiring an adequate supply and variety
of inventory to meet production and sales needs”. “Providing safety stocks
to meet unexpected demand or delays in inventory replenishment”.
“Investing in inventory wisely so that excessive capital is not tied up,
excessive space is not required or unnecessary borrowing and interest
expense is not required”.“Maintaining accurate and up-to-date records to
help identify and prevent shortages and to serve as a database for
decisions”.
The inventories in manufacturing can take three different forms as follows:

finished goods, work in process and direct materials. Finished Goods
defines completed product that are available for immediate sale to
customers. Work-in-Process, defined a products or services on which
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production is underway but is not yet complete. Raw Materials define any
materials purchased for use (Weygand, Kieso & Kimmel, 2005).
2.2 Inventory Policy for Inventory Management
According to Hedrick, Bames, & Davis, (2000) “Business have inventory in

the form of raw material, goods in the process of being manufactured and
finished goods that are yet to be sold. Businesses have different policies in
terms of managing these inventories”.
According to Hedrick et al (2000) “Managing inventory well is an aspect

that contributes to a business' success and profitability. Different inventory
policies involve various tradeoffs, so companies should focus on their core
goals when it comes to managing inventories. The U.S. Small Business
Administration says that while an inventory manager should aim to keep
the level of inventory low, this should not be done at the risk of sacrificing
customer service”.
2.3 Physical inventory control
According to Essortment (2000) “Physical inventory control is a phrase that

describes the receiving, movement, stocking and overall physical control of
inventories”.
According to Essortment (2000) “Physical inventory control is essential to

any business's profit. Effectively regulating inventory includes managing the
cost of inventory as well as managing inventory purchases. Placing a few
controls and system checks in place will allow you to increase profit
margins”.
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The cost per inventory item is crucial to the successful implementation of
inventory control. Without realizing it, inventory costs can increase slowly
over time. Review your current inventory costs per item and compare them
to six months ago, one year ago and two years ago. Make sure there is a
plausible explanation for any increases (Essortment, 2000).
Removing inventory that is not selling well from your shelves allows the
business to stock more profitable items. If a customer requests a specific
item that you no longer carry, you can offer to special order the item.
Stocking inventory that sells quickly yields high turnover and therefore high
profits (Essortment, 2000).
2.4 Basic communication forms or Documentation
According to Schenk (2007) “In general, a document is a record or the

capturing of some event or thing so that the information will not be lost.
Usually, a document is written, but a document can also be made with
pictures and sound. A document usually adheres to some convention
based on similar or previous documents or specified requirements.
Examples of documents are sales invoices, wills and deeds, newspaper
issues, individual newspaper stories, oral history recordings, executive
orders, and product specifications”.
A document is a form of information. A document can be put into an

electronic form and stored in a computer as one or more files. Often a
single document becomes a single file. An entire document or individual
parts may be treated as individual data items. As files or data, a document
may be part of a database (Schenk, 2007).
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A record system involves making profit but also the safety and preservation
of documents that are vital to your financial well being. Loan papers,
automobile titles and the like immediately come to mind. Though they must
be stored separately they are still considered part of your record keeping
system. Everyone should make the purchase of fireproof safety storage
box and place all of their important financial documents within this box. This
will ensure they are protected in the case of an emergency or a natural
disaster. A record system should also do more than simply record. Ideally,
a good documentation system should be able to project itself into the future
or the past and give an ideal picture of your financial situation at that point
in time and also affect the profit of the company (Schenk, 2007).
2.5 According to Schenk (2007) the basic communication forms used

in perpetual inventory control are:
I. Purchase Requisition, “This form is prepared by inventory control

when new quantities of material should be ordered”.
II. Shop order, “This form is prepared by inventory control when
quantities of material need to be made by the shop for stock”.
III. Receiving reports, “These are the records of material received by
the stock room”.
IV. Stores requisition, “This form authorizes the issuance of any class
of inventory material from a controlled storage to the shop”. This
requisition may be prepared by the production planner (as we well
discuss under production control) or by foremen, supervisor, or other
authorized personnel.
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There are other documents which is useful to manufacturing companies
like as follows:-
V. Material requisitions slip, Weygand, Kieso and Kimmel (2005)

defines material requisition slip “a document authorizing the issuance
of raw materials from the storeroom to manufacturing”.
VI. Job cost sheet, According to Weygand, Kieso and Kimmel (2005)
job cost sheet is defined as “a form used to record the costs
chargeable to a job and to determine the total and unit cost of the
completed job”
2.6 The inventory management system methods
Manufacturers handle inventory through the operation of their business.

Manufacturers manage the inventory of raw material, work in process and
finished goods. The business must choose the inventory method used to
manage the inventory quantities and cost basis. The inventory
management system methods are two and they are: the perpetual
inventory system and the periodic inventory system (Weygand, Kieso &
Kimmel 2005).
2.7 The perpetual inventory system
Perpetual inventory systems are designed to maintain a running count of

the items in inventory. Although a number of different perpetual inventory
systems exist, they have a common element. they all keep continuous tally
of each item added to or subtracted from the firm’s stock or the basic
perpetual inventory systems uses a perpetual inventory sheets, that
includes fundamental product information such as the items name, stock
number, description , economic order quantity and re-order point. Properly
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managing inventory can be a key factor in increased operational efficiency
and profitability. (Weygand, Kieso & Kimmel 2005)
2.8 The periodic inventory system
Under the periodic inventory system no up to data record of inventory is

maintained due to the year and actual physical count of the goods
remaining on hand is required at the end of the period, in periodic inventory
system, ending inventory and cost of goods sold are in determined at the
end of the accounting period based on physical count. (Weygand, Kieso &
Kimmel (2005)
According to McIntosh's (2009), “Perpetual inventory systems record cost

of goods sold and keep inventory at its current balance throughout the
year. Therefore, there is no need to do a year-end inventory adjustment
unless the perpetual records disagree with the inventory count. In addition,
a separate cost of goods sold calculation is un-necessary since cost of
goods sold is recorded whenever inventory is sold”.
The inventory account in a periodic inventory system keeps its beginning

balance until the end of period adjustment to the physical inventory count.
Therefore, a separate cost of goods sold calculation is required
(McIntosh’s, 2009).
According to McIntosh's (2009), “In manufacturing inventory management,

companies should attempt to implement a perpetual inventory system that
includes a reconciliation process. A perpetual inventory system updates the
company’s accounting books every time someone order materials,
allocates inventory to production process or sells finished goods this
improves profit. Though more timely to set up and control, perpetual
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inventory allows for more detailed information. Inventory reconciliations —
counting all physical inventory goods and matching them to the accounting
books — are necessary to ensure accurate numbers are always available.
Inventory counts can be done quarterly or annually to limit the operational
downtime for this administrative process”.
2.9 Common inventory management problems
According to Brinlee (2000) there are a number of problems that can cause
havoc with inventory management. Some happen more frequently than
others. Here are some of the more common problems with inventory
systems. According to Brinlee (2000) there are twelve common inventory
management problems as follows:-
I. Unqualified employees in charge of inventory. Too many

companies put people in charge of their inventory distribution who
either don’t have enough experience, are neglectful in their job, or
don’t have adequate training. No matter what kind of system is used,
companies need to pay closer attention in overseeing their inventory
management and making sure employees receive proper training.
II. Using a measure of performance for their business that is too
narrow. All too often companies will evaluate how well their business
is doing. The processes they use are not wide enough and do not
encompass all the aspects and factors in the company. Many areas
get overlooked and can lead to either inventory shortages or
inventory stockpiling.
III. A flawed or unrealistic business plan for a business for the
future. To predict how well a company may do in the future, you have
22
to collect enough data and accurately analyze it. The downfall of
many companies starting out is that they give an unrealistic
assessment of a company’s growth. This affects inventory
management because if a company predicts more growth than they
actually experience, it can lead to an overstock of inventory. The
opposite is true if forecasters do not predict enough growth and are
left with not enough inventories.
IV. Not identifying shortages ahead of time. It happens all the time.
A business needs a number of products or materials but discover that
they do not have enough in stock and must re-order. Waiting for the
shipment to come in can slow down the supply chain process. Not
having enough products in stock to meet customer demand can lead
to bad customer relations. A supervisor in charge of inventory
management should look over their inventory on a regular basis to
make sure enough products are in stock.
V. Bottlenecks and weak points can interfere with on-time product
delivery. This means that if too many orders come in for outgoing
shipments and do not get handled in an efficient manner, they can
build up, or ‘bottleneck’. This slows down deliveries. The same is true
for any weak points in an inventory management system. Weak
points slow down the system and can stop it altogether.
VI. Falling victim to the “bullwhip effect”. This is an over-reaction by a
company to changes in the market. As the demand of a market
changes, a company may panic and order an overstock of inventory,
thinking the new market conditions will move the inventory. Instead,
the market stabilizes and the business is now left with a surplus of
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products that just sit in the warehouse, taking up space and not
making money.
VII. Too much distressed stock in inventory. Distressed stock is
products or materials in inventory that has or will soon pass the point
where it can be sold at the normal price before it expires. This
happens all the time in grocery stores. As a particular food product
nears its expiration date, the business will discount the item in order
to move it quickly before it expires.
VIII. Excessive inventory in stock and unable to move it quickly
enough. This is probably the most common problem for most
businesses. Cash-flow comes from moving inventory. If a company
buys an amount of product for their inventory and they do not move it,
the company ends up losing money.
IX. Computer assessment of inventory items for sale is inaccurate.
Nothing is more frustrating than going to a business that says it has a
product but it turns out that they do not. The quantities are off and the
actual items are not available. Too many people assume that the
computer records are infallible. But the records have to be entered by
a person and if the person responsible does not keep accurate
records, it can turn into a real headache. Inaccurate inventory records
can easily result in loss of money and strained customer service.
X. Computer inventory systems are too complicated. There are
many inventory software programs available for business use. The
problem is that many of these programs are not user-friendly.
Computer software developers do not take into account that most of
the people who will actually be using these systems are not tech
24
savvy. A company does not always have the time and money to
invest in training of personnel to use software effectively.
XI. Items in-stock gets misplaced. Even if the computer accurately
shows the item as in stock, it may have been misplaced somewhere
at the warehouse, or in the wrong location within a store. This can
lead to a decrease in profits due to lost sales and higher inventory
costs because the item must be re-ordered. Plus, the company must
spend the time for employees to track down the misplaced item.
XII. Not keeping up with the rising price of raw materials. This falls
more into the accounting end of inventory management. By not
keeping current with the rising price of raw materials, a company will
lose profits because they are not adjusting the price of their finished
products. Finished items in inventory must be relative to the cost of
raw goods.
2.10 Inventory Management System maintains supply and demand
Inventory management systems help a firm in managing the flow of raw

materials, semi-finished, finished products, and provide the staff to co-
ordinate various activities for effective inventory management (Patel, 2009).
2.11 There are three basic reasons for keeping an inventory:
I. It saves time
II. Acts as buffer to meet uncertainties in demand, supply and
movements of goods
III. Balances supply and demand of product
Inventory management systems do not make decisions directly, but help

employees to make decisions. A good inventory management system
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would also provide help in forecasting the demand and supply apart from
ensuring that the confusing paper work is done away with. It makes sure
that information about warehouses, and links to suppliers of raw materials
as well as customers, retailers and wholesalers is readily available for use
(Patel, 2009).
2.12 Advantages of Inventory Management System:
 Competitive Pricing
 High data security
 Advanced technology
 Custom Reporting
 Quick turn-around processing time
 Online Inventory and Control Reporting
Rebate Processing has gained significant experience in the effective

inventory management domain by working closely with manufacturers,
retailers and service providers across diverse industries. Our inventory
management solutions increase efficiencies, and reduce costs, permitting
clients to invest more of their time and budgets in their core business
activities (Patel, 2009).
2.13 Economic Order Quantity
Definition of EOQ
Economic Order Quantity is defined as the optimal quantity of orders that

minimizes total variable costs required to order and hold inventory (William,
2005).
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Managing your inventory properly is an important means of controlling your
costs and, thereby, improving the profitability of your firm. The Economic
Order Quantity (EOQ) model, which helps determine the optimal amount of
inventory to produce or purchase at a given time. (William, 2005).
When deciding how much inventory to purchase or manufacture, you are

dealing with two types of inventory costs: (i) Order/Setup Costs, and (ii)
Carrying Costs. When purchasing inventory, Order/Setup costs represent
all of the costs involved in placing that order. When manufacturing
inventory, Order/Setup Costs represent the cost of setting up your
production line in order to produce the inventory.
Carrying Costs represent, all of the costs involved in holding inventory

(e.g., interest costs on funds invested in inventory, insurance, breakage
and storage costs) until the inventory are sold:
Inventory Costs = Order or Setup Costs + Carrying Costs
The EOQ Formula
The basic Economic Order Quantity (EOQ) formula is as follows:
27
The EOQ Formula gives you the optimal amount of units that should be
ordered or manufactured at a given time ( William ,2005).
2.14 Profitability
The second variable of this study is Profitability. Profit is simply the excess
of revenue over expenses. Expenses can be simply broken down into
many categories and the most well known ones are CGS (cost of goods
sold), salaries and wages, allowances, tax, overheads, direct costs and
indirect costs and etc, while revenue is from sales of goods, service fees
and any other earnings (Schenk ,2007).
According to Schenk (2007) defined profit; “the economic definition of profit

is the difference between revenue and the opportunity cost of all resources
used to produce the items sold”. The ultimate objective of all manufacturing
controls is to realize a profit through the operation of the business. A more
restricted objective of the control of material is to satisfy the customer by
meeting the schedule for deliveries. Failure of deliver order on time is one
principal cause of loss of business and customers. Effective control of the
material throughout the manufacturing cycle reduces the chance of this
problem arising. Inventories are thus a necessary part of the contemporary
manufacturing environment, and they must be managed if profit is to
accrue.
Maintaining an adequate inventory management to meet all of your

customer requirements would be easy if you had unlimited money available
to buy and produce the inventory. In most manufacturing companies,
capital for inventories is limited and inventory levels must be held within
these limits. Excessive inventory investments, whether in raw materials,
28
work-in-process, or finished goods, can tie up capital that may be sorely
needed for other purposes (Schenk, 2007).
According to Hofstrand (2009) “Profitability is the primary goal of all

business ventures. Without profitability the business will not survive in the
long run”. So measuring current and past profitability and projecting future
profitability is very important. Every company strives to improve profitability.
Profitability is measured with income and expenses. Income is money

generated from the activities of the business. For example, if crops and
livestock are produced and sold, income is generated. However, money
coming into the business from activities like borrowing money does not
create income. This is simply a cash transaction between the business and
the lender to generate cash for operating the business or buying assets
(Hofstrand, 2009) .
Expenses are the cost of resources used up or consumed by the activities

of the business. For example, seed corn is an expense of a farm business
because it is used up in the production process. A resource such as a
machine whose useful life is more than one year is used up over a period
of years. Repayment of a loan is not an expense; it is merely a cash
transfer between the business and the lender (Hofstrand, 2009).
Profitability is measured with an “income statement”. This is essentially a

listing of income and expenses during a period of time (usually a year) for
the entire business. Decision Tool Income Statement - Short Form, is used
to do a simple income statement analysis. An Income Statement is
traditionally used to measure profitability of the business for the past
accounting period. However, a “pro forma income statement” measures
29
projected profitability of the business for the upcoming accounting period. A
budget may be used when you want to project profitability for a particular
project or a portion of a business (Hofstrand, 2009).
2.15 Reasons for Computing Profitability
Whether you are recording profitability for the past period or projecting
profitability for the coming period, measuring profitability is the most
important measure of the success of the business. A business that is not
profitable cannot survive. Conversely, a business that is highly profitable
has the ability to reward its owners with a large return on their investment
(Hofstrand, 2009).
Increasing profitability is one of the most important tasks of the business

managers. Managers constantly look for ways to change the business to
improve profitability. These potential changes can be analyzed with a pro
forma income statement or a Partial Budget. Partial budgeting allows you to
assess the impact on profitability of a small or incremental change in the
business before it is implemented (Hofstrand, 2009).
2.16 How to analyze profitability:
Profitability can be analyzed through ratio analysis.
Ratio analysis expresses the mathematical relationship between one

quantity and another. The relation is expressed in terms of either a
percentage, a rate or a simple proportion (Weygand, Kieso and Kimmel,
2005).
30
However, ratios that are used to analyze the profitability of the firm are as
follows:
1. Profitability Ratios
2. Efficiency Ratios
Thought, ratios encompasses many different types of rations but in

profitability analyzes, we will use these above mentioned ratios.
Profitability ratios:
Profitability ratios measures the income or operating success of an

enterprise for a given period of time (Weygand, Kieso and Kimmel, 2005).
There are many kinds of profitability ratios. The most well-known ones are
as follows:
Profit margin- profit margin (rate of return on sales ) measures the

percentage of each sales dollar, on average, that represents profit. It is
computed as follows:
Return on Asset- it measures the return on all the firm’s assets. It is

computed as follows:
31
Return on equity- it measures the return on the shareholder’s equity. The
formula is:
Efficiency Ratio
Financial ratios that are typically use to analyze how well a company uses
its assets and liabilities internally. Efficiency Ratios can calculate the
turnover of receivables, the repayment of liabilities, the quantity and usage
of equity and the general use of inventory and machinery.
There are number of types of ratios in this ratio but the most well-known
ones are as follows:
Inventory turnover ratio: A ratio showing how many times a company's

inventory is sold and replaced over a period.
32
Asset turnover ratio: This ratio is useful to determine the amount of sales
that are generated from each dollar of assets. It is calculated by dividing
sales in dollars by assets in dollars.
2.17 The relationship between inventory management and profitability
Changing the inventory mindset of employees and creating a system of

benchmarking and accountability is not done overnight. Properly managing
inventories is a battle businesses have long fought. Successful companies
have found that employees committed to change combined with great
customer service and optimum inventory levels, lead to great profits
(William, 2005).
A truly effective inventory management system will minimize the

complexities involved in planning, executing and controlling a supply chain
network which is critical to business success. The opportunities available
by improving a company’s inventory management can significantly improve
bottom line business performance (William, 2005).
From a financial perspective, inventory management is no small matter.

Oftentimes, inventory is the largest asset item on a manufacturer’s or
distributor’s balance sheet. As a result, there is a lot of management
emphasis on keeping inventories down so they do not consume too much
33
cash. The objectives of inventory reduction and minimization are more
easily accomplished with modern inventory management processes that
are working effectively (William, 2005).
Inventory control is essential to any business's profit. Effectively regulating

inventory includes managing the cost of inventory as well as managing
inventory purchases. Placing a few controls and system checks in place will
allow you to increase profit margins (William, 2005).
Inventory management is the key to profitability in any business. A

company that manages the inventory well would make more profit for the
same product than their competitor who does not know how to manage the
inventory. There are many factors that are overlooked even in inventory
management. If those factors are also taken care of then the profit will be
more for any business. (Stevenson, 2002).
Inventory management is about bringing the right material, to the right

place, at the right time, in the right quantity for the production of the product
(Stevenson, 2002).
Good management of inventory enables companies to improve their

customer service, and profitability. 'Best Practice in Inventory Management'
outlines the basic techniques, how and where to apply them, and provides
advice to ensure they work to produce the desired effect in practice. This
shows how inventory management techniques can be used in a wide
variety of situations, particularly in stores where the inventory can be
anything from fast moving products to slow moving spares (Tony 1998).
Inventory management is important for the successful operation of most

business and their supply chain. Poor inventory management hampers
34
operations, diminishes customer satisfaction and increase operating costs.
Inventories may represent a significant portion of total assets; a reduction
of inventories can result in a significant increase in ROI. The overall
objective of inventory management is to achieve satisfactory levels of
customer service while keeping inventory costs within reasonable bounds
(Stevenson, 2002).
35
METHODOLOGY
Introduction
This chapter presents the research methodology which include; Research
design , study area, study population, sample size, sampling procedure,
study variables, instruments of data collection, data processing,
administration of instruments, sources of data and data analysis,
limitations of the study.
3.1 Research Design
The study used descriptive research design. This kind of research design
aims at generating information after the incident has occurred. The
research design looked at the reasons why the situation behaves the way it
was. The design exploited quantitative approaches. Quantitative
approaches involved use of descriptive statistics generated with frequency
charts, and bar graphs.
This approach was adopted to enable the researcher get and analyze
relevant information concerning people’s opinions about the impact of
inventory management on company’s performance.
3.2 Study Area
The area of the study was Borjan (Pvt) Ltd which is located at Lahore and
Starlet Shoes (Pvt) Ltd which is located at Sheikhupura. Both Starlet and
Borjan are the largest selling shoes brands in Pakistan and the largest
shoes retail network in the country as well, both companies has come a
long way.
36
But Starlet has its own factory; where they manufacture all of their goods
on production plant, its business is widely spread not only in Pakistan but
also in other countries like Afghanistan, England, India etc. its business
mainly depend on its export.
While Borjan has not its own factory, it manufactures its goods from
different vendors and sells on its outlets.
3.3 Research Population
The population of all employees of both companies was estimated about

one hundred each but the target population of this study was fifty (50), forty
(40) of them were from employees and ten (10) of them were managers
who were from all of the different departments, the study population
included respondents from Human resource, Administration, Procurement,
Marketing, production and Finance, Warehouse departments of the
company.
3.4 Sample Size
The sample was fifty both managers and staff. The data was collected from
the selected sample of 50 respondents out of the estimated one hundred
employees that comprised both managers and employees.
In this study the sample of the study was reached the Sloven’s formula
which is n = N / (1 + (N*e^2)),
Where: n = samples size,
N = total population,
e = margin of error, 5% = 0.05
37
This Para Chart shows how to calculate the sample size.
n = N / (1 + (N*e^2)),
n = 100 / (1 + (100*5%^2)),
n = 100 / (1 + (100*0.0025)),
n = 100 / (1 + (0.25)),
n = 100 / (1.25),
n = 80
3.5 Sampling Procedure
This study was employed both purposive sampling technique and stratified
sampling techniques. In the purposive sampling techniques the researcher
used his own judgment or common sense regarding the participants from
whom information was collected. Purposive sampling technique is a
technique that the researcher uses his or her own judgment or common
sense regarding the participant from whom information was collected
(Amin, 2005). Purposive sampling was used to select the administrators.
On the other hand in this study stratified sampling technique was used. In
stratified sampling the population is divided in to sub populations such that
elements within each sub-population are homogenous. Simple random
samples are then selected independently from each subpopulation (Amin,
2005).
3.6 Data collection and instruments
The study employed single technique during the process of data collection
and which is questionnaire;
38
Self administered questionnaire; The questionnaire tool was inform of both
open ended and closed ended in nature and this was self administered
where the researcher was allowed to fill the questionnaire in the study field
as per respondents’ responses. The tool was used to collect information
from respondents other than clients of the company. The questionnaire
method of data collection was used because of being cheap and that the
method collects responses with minimum errors and high level of
confidentiality.
3.7 Study Variables
The study was guided by the following two variables; Inventory

management as an independent variable and performance as a dependant
variable. Inventory management was measured by the techniques used in
the process of managing inventory such as; ABC-Analysis model
technique, Two Bin System technique, Just in Time Purchasing Emerges
technique, Materials requirements planning (MRP) technique, Material
requirement points technique, Determining order quantities and inventory
levels technique, Inventory recording technique among others in addition to
the skills of labor involved in the management of inventory. However during
the study, performance was commonly measured by profitability, sales
volume, and productivity of the company.
3.8 Data analysis and presentation.

The collected data was edited as this involved sorting of the collected
information in order to get information that is relevant to the study variables.
At this stage all the responses were looked through by the researcher while
39
giving codes to the answered options. Data was then be entered into the
computer and analyzed by the use of Microsoft Excel program that was
used to develop frequency tables and Bar graphs and accordingly makes a
summary of findings, conclusions and recommendations.
3.9 Limitations of the study
Being the first research, the researcher lacked enough experience and skills
during the process of his research. Most business people don’t like to make
open their company information and that it was obstacle to the researcher. The
study was also faced with a problem of not finding all respondents in the time of
the study due to them being too busy with the organization work. The
researcher however made appropriate time table with the top company
managers that suited all the respondents during the process of data collection
for reliable and valid information. All these obstacles were solved through hard
work and convincing the target population that this research is pure academic
and their information was kept confidentially.
40
ANALYSIS & RESULTS
1. Are you aware about inventory management system?
Frequency Table: 1
Starlet
Frequency Percentage%
Yes 38 76
No 9 18
Don’t Know/ Can’t Say 3 6
Total 50 100
`Borjan
Yes 35 70
No 11 22
Total 50 100
Bar Chart: 1
40
35
30
25 Yes
20 No
Don't Know
15
10
5
0
Borjan Starlet
41
Interpretation
The awareness level among company officials regarding existence,

functioning and applicability of inventory management system in Starlet is
high that is 76% while 70% in Borjan, while the people who are not aware
about inventory management system in starlet are 18% and in Borjan are
22% and the remaining respondents don’t give any information in this
regard.
2. Do you know that your company has an inventory management

system?
Frequency Chart: 2
Starlet
Yes 40 80
No 7 14
Total 50 100
Borjan
Yes 33 66
No 10 20
Total 50 100
Bar Chart: 2
42
80
70
60
50
Yes
40 No
Don't Know
30
20
10
0
Starlet Borjan
Interpretation
According to the study starlet company’s officials are much aware about
their company having an inventory management system which is 80%
while Borjan’s officials also aware but less than starlet’s officials which is
66%, and the people who don’t know about their company having an
inventory management system are 14% in Starlet and 20% in Borjan, and
the remaining respondents don’t give any answer.
3. Do you agree that there should be an inventory management system

in place in any organization/company?
Frequency Chart: 3
43
Starlet
Agree 37 74
Disagree 5 10
Total 50 100
Borjan
Agree 34 68
Disagree 6 12
Total 50 100
Bar Chart: 3
80
70
60
50 Agree
40 Disagree
Don't Know
30
20
10
0
Starlet Borjan
Interpretation
44
According to the study, people who agree that every company should have
system or mechanism in place for managing their inventory are 74% in
Starlet and 68% in Borjan, and the people who disagree with this are 10%
in Starlet and 12% in Borjan and the remaining respondents don’t give any
answer.
4. For what reasons do you feel that there should be an inventory

management system?
Frequency Chart: 4
Starlet
Smooth Operation 13 26
Save Time 11 22
Transparency 15 30
Other Reason 8 16
Total 50 100
Borjan
Smooth Operation 31
15.5
Save Time 14 28
Transparency 11.5 21
Other Reason 6 12
Total 50 100
Bar Chart: 4
45
35
30
25
Smooth Operation
20 Save Time
15 Transperancy
Other Reasons
10
Don't Know
5
0
Starlet Borjan
Interpretation
The people who feel that there should be an inventory management system
for smooth operation are 26% in Starlet and 31% in Borjan, and people
who feel it for saving time are 22% in Starlet and 28% in Borjan, and
people who feel it’s need for transparency are 30% in Starlet and 21% in
Borjan, and people who feel there are some other reasons are 16% in
Starlet and 12% in Borjan, and the remaining respondents don’t give any
answer.
5. Do you think is there a significant relationship between inventory

management, and company’s profitability?
Frequency Chart: 5
46
Starlet
Strongly Agree 10 20
Agree 24 48
Disagree 6 12
Strongly Disagree 4 8
Total 50 100
Borjan
Strongly Agree 8 16
Agree 19 38
Disagree 11 22
Total 50 100
Bar Chart: 5
50
45
40
35
Strongly Agree
30 Agree
25 Disagree
20 Strongly Disagree
15 Don't Know
10
5
0
Starlet Borjan
Interpretation
47
20% in Starlet and 16% in Borjan strongly agreed that there should be a
significant relationship between inventory management, and company’s
profitability, while 48% in Starlet and 38% in Borjan are agreed, and 12% in
Starlet and 22% in Borjan are disagreed with this, and 8% in Starlet and
14% in Borjan are strongly disagreed and the remaining respondents don’t
give any answer.
6. Do you agree that the inventory management system in your

company has fulfilled the needs for which it was evolved?
Frequency Chart: 6
Starlet
Strongly Agree 9 18
Agree 26 52
Disagree 6 12
Total 50 100
Borjan
Strongly Agree 7 14
Agree 19 38
Disagree 14 28
Total 50 100
Bar Chart: 6
48
60
50
40 Strongly Agree
Agree
30 Disagree
Strongly Disagree
20
Don't Know
10
0
Starlet Borjan
Interpretation
18% in Starlet and 14% in Borjan strongly agreed that the inventory
management system in our company has fulfilled the needs for which it
was evolved, while 52% in Starlet and 38% in Borjan are agreed, and 12%
in Starlet and 28% in Borjan are disagreed with this, and 8% in Starlet and
12% in Borjan are strongly disagreed with this and the remaining
respondents don’t give any answer.
7. What according to you is the major benefit of going for an inventory

management system by your company?
49
Frequency Chart: 7
Starlet
Storage Easier 8 20
Improve Sales 24 48
Reduce Cost 14 24
Other Benefits 3 6
Total 50 100
Borjan
Storage Easier 18 36
Improve Sales 13 26
Reduce Cost 9 18
Other Benefits 5 10
Total 50 100
Bar Chart: 7
50
50
45
40
35
Storage Easier
30 Improve Sales
25 Reduce Cost
20 Other Benefits
15 Don't Know
10
5
0
Starlet Borjan
Interpretation
The percentage of people who feel it is beneficial for easiest storage are
20% in Starlet and 36% in Borjan, and people who feel it to improve sales
are 48% in Starlet and 26% in Borjan, and people who feel it’s need to
reduce cost are 24% in Starlet and 18% in Borjan, and people who feel
there are some other benefits are 6% in Starlet and 10% in Borjan, and the
remaining respondents don’t give any answer.
8. Do you have skilled professionals in your company for inventory

management system?
51
Frequency Chart: 8
Starlet
Yes 31 62
No 11 22
Total 50 100
Borjan
Yes 24 48
No 15 30
Total 50 100
Bar Chart: 8
70
60
50
Yes
40
No
30 Don't Know
20
10
0
Starlet Borjan
Interpretation
52
62% in Starlet and 48% in Borjan say yes that they have the skilled
professionals in their companies, while 22% in Starlet and 30% in Borjan
disagree with it, and the remaining respondents don’t give any answer.
9. What category of professionals is managing your company inventory?
Frequency Chart: 9
Starlet
Skilled & Trained 22 44
Only Skilled 13 26
Only Trained 10 20
Non Skilled & Non 3 6
Trained
Others 2 4
Total 50 100
Borjan
Skilled & Trained 16 32
Only Skilled 8 16
Only Trained 10 24
Non Skilled & Non 10 20
Trained
Others 6 8
Total 50 100
Bar Chart: 9
53
45
40
35
30 Skilled & Trained
Only Skilled
25
Only Trained
20 Non Skilled & Non
15 Trained
Others
10
5
0
Starlet Borjan
Interpretation
44% in Starlet and 32% in Borjan respondents says that both skilled and
trained professionals are managing our company’s inventory, while 26% in
Starlet and 16% in Borjan respondents says that only skilled professionals
are managing, while 20% in Starlet and 24% in Borjan respondents says
that only trained professionals are managing, while 6% in Starlet and 20%
in Borjan respondents says that not skilled and non trained people are
managing.
10. Is your company using the most effective method to calculate

your safety stock levels?
54
Starlet
Yes 36 72
No 11 22
Total 50 100
Borjan
Yes 32 64
No 14 28
Total 50 100
Frequency Chart: 10
Bar Chart: 10
80
70
60
50 Yes
40 No
30 Don't Know
20
10
0
Starlet Borjan
Interpretation
72% in Starlet and 64% in Borjan respondents feels that their company
using most effective method to calculate safety stock levels, while 22% in
55
Starlet and 28% in Borjan respondents disagreed with this regard, and the
11. Do you agree that your company gives more emphasis on

software than skilled manpower with regard to inventory
management?
Starlet
Strongly Agree 7 14
Agree 18 36
Disagree 12 24
Total 50 100
Borjan
Strongly Agree 10 20
Agree 25 50
Disagree 8 16
Total 50 100
Frequency Chart: 11
Bar Chart: 11
56
50
45
40
35
Strongly Agree
30 Agree
25 Disagree
20 Strongly Disagree
15 Don't Know
10
5
0
Starlet Borjan
Interpretation
14% in Starlet and 20% in Borjan strongly agreed that their company gives
more emphasis on software than skilled manpower with regard to inventory
management, while 36% in Starlet and 50% in Borjan are agreed with that,
and 24% in Starlet and 16% in Borjan are disagreed with this, and 20% in
Starlet and 8% in Borjan are strongly disagreed with this and the remaining
12. Do you think that the software used by your company is

according to the design and needs of the system?
Frequency Chart: 12
57
Starlet
Yes 40 80
No 8 16
Total 50 100
Borjan
Yes 33 66
No 13 26
Total 50 100
Bar Chart: 12
80
70
60
50
Yes
40 No
Don't Know
30
20
10
0
Starlet Borjan
Interpretation
80% in Starlet and 66% in Borjan respondents thinks that the software
used by their company is according to the design and needs of the system,
while 16% in Starlet and 26% in Borjan respondents disagreed with this
regard, and the remaining respondents don’t give any answer.
58
13. What’s the primary challenge of your company regarding
inventory management?
Frequency Chart: 13
Starlet
Lack of Trained 17 34
Professionals
Maintenance Cost 13 26
Changing 15 30
Requirements
Other Problems 3 6
Total 50 100
Borjan
Lack of Trained 44
Professionals 22
Maintenance Cost 10 20
Changing 13 26
Requirements
Other Problems 2 4
Total 50 100
59
Bar Chart: 13
45
40
35
30 Lack of Trained
Professionals
25 Maintenace Cost
20 Changing Requirments
15 Other Prolems
Don't Know
10
5
0
Starlet Borjan
Interpretation
34% in Starlet and 44% in Borjan respondents thinks that lack of trained
professionals is the primary challenge for their companies, while according
to 26% in Starlet and 20% in Borjan cost maintenance is the primary
challenge, 30% in Starlet and 26% in Borjan respondents thinks that
changing requirements of customers is also a primary challenge, and the
60
14. What is the future of inventory management system in your
company?
Frequency Chart: 14
Starlet
Will Continue as a 32 64
Successful Mechanism
May Change According 12 24

to Time
Shall Collapse 4 8
Total 50 100
Borjan
Will Continue as a 42
21
May Change According 18 36
to Time
Shall Collapse 7 14
Total 50 100
61
Bar Chart: 14
70
60
50 Will Continue as a
40
Changing According to
30 Time
Shall Collapse
20 Don't Know
10
0
Starlet Borjan
Interpretation
64% in Starlet and 42% in Borjan respondents feel that in future it Will
Continue as a Successful Mechanism, while 24% in Starlet and 36% in
Borjan respondents feel that it will change according to time in future, and
8% in Starlet and 14% in Borjan think that it will collapse, and the remaining
62
SUMMARY OF FINDINGS, CONCLUSIONS AND
RECOMMENDATIONS
This chapter contains summary of the study findings, conclusions,

recommendations and suggestions for further studies. The summary of the
study findings, conclusions and recommendations were done in accordance
to study objectives as follows.
5.1 Findings
The research that has been conducted on Starlet and Borjan

companies has the following findings:
i. The awareness level among Starlet’s officials is high as compare to

Borjan’s officials; they know what is inventory management system
and its importance.
ii. Starlet’s respondents strongly feel that inventory management
system should place in manufacturing companies for smooth
operation and to become a successful organization.
iii. According to study find that Borjan have smooth operation and they
save their time by using inventory management system while Starlet
have transparency in their operations.
iv. Starlet’s respondents are well known with its importance that if the
company has a good inventory management system then operating
cost will be reduced, delivery will be on time, customers will be
satisfied and because of this company’s profitability will increase.
63
v. According to the study find that inventory management system has
made stock storage easier in Borjan which reduces the storing cost
and sales has improved in Starlet.
vi. Starlet’s inventory management system is better than Borjan
because of their skilled and trained professionals which they are
performing well their job.
vii. As we know that percentage level of skilled & trained employees in
Starlet is high than Borjan, so the Starlet giving more emphasis on
skilled manpower than software regarding inventory management
system.
viii. According to frequency chart Starlet is facing the primary challenge
of changing requirements of customers and maintenance cost more
than the Borjan while the Borjan primary challenge is lack of trained
professionals.
ix. Respondents of both companies are positive and they strongly agree
that it will continue as a successful mechanism or it can also change
according to time but some of them also say that it will collapse.
64
5.2 Conclusion
Inventory Management is very vital to the success and growth of

organizations. The entire profitability of an organization is tied to the
volume of products sold which has a direct relationship with the quality of
the product. Management does a lot to present a good organization to the
public in terms of quality production.
Good inventory management in any manufacturing organization saves the

organization from poor quality production, disappointment of seasoned
customers, loss of profit and good social responsibility. This is done by
ensuring timely delivery of raw materials to the factory and distribution of
finished goods, in order of production to the warehouse. If inventory
management is not adequately maintained, production cannot meet the
aspirations of customers which are loss of revenue to the organization.
Right from procurement to the time of processing, quality of raw material is
the chief determinant of the productive efficiency of any manufacturing
concern.
During a survey I found that both companies have good inventory

management system but with some lacks. But overall Starlet inventory
management system was better because of its skilled professionals, their
planning, using of ERP system.
65
5.3 Recommendations
i. When I visited the Starlet I realized that the warehouse layout is a

problem area for the Starlet Shoes as to their business model. To
resolve the ambiguities and issues related to the traditional
warehouse I recommend that Starlet should look for at least two
docking points. One should be for receiving the goods from the
suppliers and other for dispatching and distributing the products from
the central warehouse.
ii. It was noted that the activities at Borjan warehouse is very time
consuming. It takes a lot of time to handle and place the inventory in
the designated places in the warehouse. So I believe that if Borjan
will go for the Vendor Managed Inventory then it will reduce the cost
of handling, cost of labor at the warehouse, cost of holding the
inventory, risks associated with the inventory handling etc. Borjan can
arrange the setup in a way that all the vendors after completing the
finished order keep it at their own warehouse and dispatch it to the
warehouse prior to the requirement of the regional outlet.
iii. It was noted that the percentage level of skilled persons was low in
Borjan, so I recommend that Borjan should trained their employees
because training is essential for providing the understanding and
knowledge. Inventory personnel need specific job skills which enable
them to gain the full benefits of their systems and contribute to
operating effectiveness.
iv. Both companies should use Point-of-Sale, or POS, systems take the
guess work out of managing inventory. Computerized records allow
66
inventory on hand. POS systems increase profitability because each
item is electronically tracked.
v. I recommend that both companies should control their SLOB—slow
moving and obsolete items, focus on their more profitable fast moving
items. Every day that these items are not used or sold, they occupy
space, utilize labor and resources, and run the risk of obsolescence.
vi. Each and every product does not have the same supply and demand
variability pattern, therefore I recommend that they must be focus on
those 20% that statistically make up 80% of the volume and manage
that inventory really well, so they maximize sales and profits.
67
REFERENCES
Finch, B. (2007). Interactive models for operations and supply chain
management. USA: Mc Graw Hill.
Finch, J.B. (2003). Operation Now.com Process, value and profit.

McGraw Hill
Morris ,E. (2007). Inventory Management.USA: McGraw Hill.
Patel, R. (2009).Inventory management system maintains good

relationship between supply and demand. Retrieved October 1,
2010 from http:www.outsouursing rebateprocessing.com
Best-Practice-in-Inventory-Management-- Tony Wild 1997
68
APPENDIX
Company Name
Name: Designation
Gender Male Female Age
Questionnaire
1. Are you aware about inventory management system?

 Yes
 No
 Don’t know
2. Do you know that your company has an inventory management

system?
 Yes
 No
 Don’t know
3. Do you agree that there should be an inventory management system

in place in any organization/ company?
 Agree
 Disagree
 Don’t know
4. For what reasons do you feel that there should be an inventory

management system?
69
 To smooth operational requirement
 To save time
 To maintain accountability and transparency
 Other reasons
 Don’t Know
5. Do you think is there a significant relationship between inventory

management, and company’s profitability?
 Yes
 No
 Don’t know
6. Do you agree that the inventory management system in your

company has fulfilled the needs for which it was evolved?
 Strongly agree
 Agree
 Disagree
 Strongly disagree
 Don’t know
7. What according to you is the major benefit of going for an inventory

management system by your company?
 It has made strong and retrieval of material easier
 Improved sales effectiveness
 Reduced operational cost
 Other benefits
8. Do you have skilled professionals in your company for inventory

management system?
 Yes
 No
 Don’t know
9. What category of professionals is managing your company inventory?

 Skilled and trained
70
 Only skilled but not trained
 Not skilled but trained professionals
 Non skilled and not trained professionals
10. Is your company using the most effective method to calculate

your safety stock levels?
 Yes
 No
 Don’t know
11. Do you agree that your company gives more emphasis on

software than skilled manpower with regard to inventory
management?
 Strongly agree
 Agree
 Disagree
 Strongly disagree
 Don’t know
12. Do you think that the software used by your company is

according to the design and needs of the system?
 Yes
 No
 Don’t know
13. What’s the primary challenge of your company regarding

inventory management?
 Lack of trained professionals
 Maintenance cost
 Changing requirements of customers
 Other problems
71
14. What is the future of inventory management system in your
company?
 Will continue as a successful mechanism
 May change according to time
 Shall collapse
 Don’t know
72

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Role of Inventory Management on

Master in Business Administration (MBA)

National College of Business Administration

Dissertation submitted to the

National College of Business Administration

Miss Saima Hassan

By: Faizan Pervaiz

National College of Business Administration

This work is dedicated to the Almighty ALLAH in Appreciation of His

It is beyond my comprehension to count the bounties and blessings of Allah

There lies the excellently supporting and superbly assisting hand of my

CHAPTER ONE: INTRODUCTION

1.2 Problem Statement………………………………………………………..12

1.3 General Objectives…………………………………………………….....13

1.4 Specific Objectives…………………………………………………….....13

1.5 Significance of the Study………………………………………………….13

2.2 Inventory Policy for Inventory Management……………………………..18

2.3 Physical inventory control………………………………………………….18

2.4 Basic communication forms or Documentation…………………………19

2.5 Basic communication forms used in perpetual inventory control……...20

2.6 The inventory management system methods……….…………………..21

2.7 The perpetual inventory system…………………………..………………21

2.8 The periodic inventory system……………………………………….……22

2.9 Common inventory management problems……………………………..23

2.10 Inventory Management System maintains supply and demand…..…27

2.11 There are three basic reasons for keeping an inventory……………..27

2.12 Advantages of Inventory Management System……………………….28

2.13 Economic Order Quantity………………………………………………..28

2.16 How to analyze profitability: ……………………………………………..32

2.17 Relationship between inventory management and profitability………35

CHAPTER THREE: METHODOLOGY

3.1 Research Design…………………………………………………………...38

3.2 Study Area…………………………………………………………………..38

3.3 Research Population……………………………………………………….39

3.4 Sample Size………………………………………………………………...39

3.5 Sampling Procedure……………………………………………………….40

3.6 Data collection and instruments…………………………………………..40

3.7 Study Variables……………………………………………………………..41

3.8 Data analysis and presentation………………………………………….41

CHAPTER FOUR: ANALYSIS & RESULTS……………………………......41

CHAPTER FIVE: SUMMARY OF FINDINGS, CONCLUSIONS AND

Inventory management is an extremely important function within most

Higher inventory levels result in increased costs for storage, insurance,

1.2 PROBLEM STATEMENT

1.3 General Objective

1.4 Specific Objectives

1.5 Significance of the Study

1.6 Operation Definitions

Inventory management: - according to Garry, J.Z, (1997) involves the

Inventory control: - It is the activity which organizes the availability of

2.1 Inventory and inventory management

According to Russell and Taylor (2000) defines “inventory, is a set of items

.According to Russell and Taylor (2000) defines”inventory management

According to Weygand, Kieso and Kimmel (2005), Inventory management

The inventories in manufacturing can take three different forms as follows:

2.2 Inventory Policy for Inventory Management

According to Hedrick, Bames, & Davis, (2000) “Business have inventory in

According to Hedrick et al (2000) “Managing inventory well is an aspect