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MAKERERE UNIVERSITY
COLLEGE OF EDUCATION AND EXTERNAL STUDIESSCHOOL OF DISTANCE AND LIFELONG LEARNING
DEPARTMENT OF OPEN AND DISTANCE LEARNING
INVENTORY MANAGEMENT AND FINANCIAL PERFORMANCE MANUFACTURING INDUSTRIES:A CASE OF UGANDA CLAYS LIMITED
ACAYE PHILIP KILAMA
06/U/9333/EXT
A RESEARCH REPORT SUBMITTED TO COLLEGE OF EDUCATION AND
EXTERNAL STUDIES, SCHOOL OF DISTANCE AND LIFELONG
LEARNING, DEPARTMENT OF OPEN AND DISATANCE
LEARNING IN PARTIAL FULFILLMENT OF THE
REQUIREMENTS FOR THE AWARD OF
THE DEGREE OF BACHELOR OF
COMMERCE OF MAKERERE
UNIVERSITY
MAY, 2011
ii
DECLARATIONI, Acaye Philip Kilama declare that this work is original and has never been submitted to any
other institution for award of any degree where the work of others has been used, reference has
been made there of.
Signed…………………………………… Date:………………………
ACAYE PHILIP KILAMA
06/U/9333/EXT
(CANDIDATE)
i
APPROVALI thereby certify that I supervised the candidate and his report is ready for examination
Signed by……………………………….. Date……………………….
MR BYARUGABA PONTIUS
(SUPERVISOR)
ii
DEDICATIONTo my dear parents Mr. Kilama Wilson Olal(deceased), my mother Mrs. Kilama Mary Adong,
my brother Aliker Walter Kilama, my wife Akello Solina, my children; Joel and Jude, my sisters;
Jenniffer, Agnes, Susan, Betty and Irene; and all relatives and friends who bore my absence
while I was at the university. I also appreciate the great support they gave me while at the
university and home preparing and working on this report.
iii
ACKNOWLEDGEMENTI wish to thank in a special way, the Almighty Father for availing me the grace and opportunity
to study up to this level, for the encouragement, gift of life and the strength to carry out this
research as it is absolutely difficult and time consuming.
My thanks go to the Management and the entire Staff of Uganda Clays Limited for the assistance
they rendered to me including sparing a lot of their time answering my questionnaire.
My appreciation and acknowledgement goes to my family for all the support and encouragement
they rendered to me while at Makerere University.
I, also, in a special way, thank my supervisor Mr. Byarugaba Pontius for his professional
supervision and encouragement.
I am grateful to Bongomin Moris, Okwir Denis and Kikwiyakare Walter for the professional
advice and editing of this research report.
My special thanks also go to the management and staff of Makerere University for giving me the
opportunity to carryout this research study and allocating me to Mr. Byarugaba Pontius for
supervision.
I am greatly indebted to management and staff of Gulu District Local Government for allowing
me to go for further studies and my fellow students for their patience.
Lastly, my appreciation goes to my course mates, and friends for all their moral and academic
support rendered.
iv
LISTS OF ABBREVIATIONSUCL Uganda Clays Limited
ACCA Association of Chartered Certified Accountant
EOQ Economic Order Quantity
JIT Just In Time
DPS Dividends Per Share
EPS Earning Per Share
PBT Profit Before Tax
ROE Return on Equity
ROA Return on Assets
UIA Uganda Investment Authority
SPSS Statistical Package for Social Sceinces
v
TABLE OF CONTENTSDECLARATION..............................................................................................................................iAPPROVAL....................................................................................................................................iiDEDICATION...............................................................................................................................iiiACKNOWLEDGEMENT..............................................................................................................ivLISTS OF ABBREVIATIONS.......................................................................................................vTABLE OF CONTENTS...............................................................................................................viABSTRACT....................................................................................................................................x
CHAPTER ONE............................................................................................................................11.0 INTRODUCTION...................................................................................................................11.2 Statement of the Problem...........................................................................................................41.3 Purpose of the Study..................................................................................................................51.4 Objectives of the Study..............................................................................................................51.5 Research Questions....................................................................................................................51.6 Scope of the Study.....................................................................................................................61.6.1 Geographical Scope................................................................................................................61.6.2 Subject Scope..........................................................................................................................61.6.3 Time Scope.............................................................................................................................61.7 Justification/Significance of the Study......................................................................................6
CHAPTER TWO...........................................................................................................................72.0 LITERATURE REVIEW.......................................................................................................72.1 Introduction................................................................................................................................72.2 Types of Inventory.....................................................................................................................72.3. Inventory Models......................................................................................................................82.3.1 Order Cycle Methods of Inventory.........................................................................................82.3.2. Pareto (80/20) Distribution...................................................................................................82.3.3. Economic Order Quantity......................................................................................................82.4 Balancing Inventory and Costs..................................................................................................92.4.1 Holding Costs.........................................................................................................................92.4.2. Stock out Costs.....................................................................................................................102.4.3 Set-Up Costs.........................................................................................................................102.4.4. Purchasing Cost...................................................................................................................11
vi
2.4.4.2 Other lot-sizing techniques................................................................................................142.5. Inventory Management...........................................................................................................152.5.1. Two bin systems...................................................................................................................162.5.2 ABC analysis.........................................................................................................................172.5.4 Theory of constraints (TOC).................................................................................................182.5.5 Materials Requirements Planning (MRP) system.................................................................182.6 Why Firms Hold Inventory......................................................................................................192.7 Determination of Inventory Level...........................................................................................192.8 Financial performance of an organization...............................................................................212.9 Performance Indicators............................................................................................................232.10 Relationship between inventory management and financial performance............................24
CHAPTER THREE.....................................................................................................................273.0 RESEARCH METHODOLOGY.........................................................................................273.1 Overview..................................................................................................................................273.2 Research Design......................................................................................................................273.3 The Study Population..............................................................................................................273.4 Sample Area.............................................................................................................................283.5 Sampling procedures/Techniques............................................................................................283.6 Sources of Data and Collection Methods................................................................................283.7 Procedures of Collection Data.................................................................................................283.8 Data Collection Instruments....................................................................................................283.8.1 Interviews.............................................................................................................................293.8.2 Questionnaires......................................................................................................................293.8.3 Documentary Reviews..........................................................................................................293.9 Data Analysis...........................................................................................................................293.10 Limitation of the study...........................................................................................................29
CHAPTER FOUR.......................................................................................................................30DATA PRESENTATION, ANALYSIS AND INTERPRETATION OF THE FINDINGS..304.0 Introduction..............................................................................................................................304.1 Background Information on Respondents...............................................................................304.1.1 Findings on the sample sex...................................................................................................304.1.2 Findings on the qualifications of respondents......................................................................31
vii
4.1.3 Findings on Age of Respondents..........................................................................................31Table..............................................................................................................................................314.1.4: Findings on how long the respondents have worked for the company..............................324.2 Inventory Management System Employed by Uganda Clays Limited...................................334.2.1 Response on the inventory management system employed by Uganda Clays Limited.......334.2.2 Response on maintenance of stock levels.............................................................................334.2.3 Response on maintenance of inventory levels for each item................................................344.2.4 Responses on proper records of inventory............................................................................344.2.5 Responses on existence of stock taking................................................................................354.2.6 Responses on whether stock taking figures agree with the record figures...........................354.2.7 Responses on how often stocktaking is carried out..............................................................364.3 Findings on the Profitability Levels of the Industry................................................................364.3.1 Responses on the trend of profitability.................................................................................364.4 Findings on the Relationship between Inventory Management and Profitability...................374.4.1 Responses on the level of inventory management system in Uganda Clays Limited..........374.4.2 Responses on the level of profitability in Uganda Clays Limited........................................374.4.3 Responses on whether inventory management significantly affected the financial performance of Uganda Clays Limited..........................................................................................384.4.4 Correlation between inventory management and financial performance (profitability)......38
CHAPTER FIVE.........................................................................................................................40SUMMARY, CONCLUSION AND RECOMMENDATIONS..............................................405.0 Introduction..............................................................................................................................405.1 Summary of Findings..............................................................................................................405.1.1 Summary of the Findings on Inventory Management System in Uganda Clays Limited....405.1.3 The Summary of Findings on the Relationship between Inventory Management System and Financial Performance (Profitability)............................................................................................415.2 Conclusion...............................................................................................................................415.3 Recommendations....................................................................................................................42References......................................................................................................................................44Appendices....................................................................................................................................46Appendix A: Questionnaire...........................................................................................................46Appendix B: Letter of Introduction...............................................................................................51
viii
List of tables
Table 1: Major Shareholders in Uganda Clays Limited..................................................................3
Table 2: Showing Trend of Profits In Uganda Clays Limited(in ‘000 Shs)....................................4
Table 3: Inventory in metric tones...................................................................................................5
Table 4: Income Statement............................................................................................................22
Table 7: Sex of respondents...........................................................................................................30
Table 8: Qualification of respondents............................................................................................31
4.1.3 Findings on Age of RespondentsTable 9: Age of respondents.............................................31
Table 10: Period of service in the company..................................................................................32
Table 11: Responses on Inventory management systems..............................................................33
Table 12: Response on whether stock levels are maintained........................................................33
Table 13::Stock maintenance for each item...................................................................................34
Table 14: Proper records of inventory...........................................................................................34
Table 15: Existence of stock taking...............................................................................................35
Table 16: Agreement between stock taking figures and record figures........................................35
Table 17: Frequency of stock taking.............................................................................................36
Table 18: Profitability trend...........................................................................................................36
Table 19: Profit Margin of Uganda Clays Limited (2002-2006 in ‘000 Shs)...............................37
Table 20: Quality of Inventory management system and profitability..........................................37
Table 21: Profitability in UCL.......................................................................................................37
Table 22: Effects of inventory management on performance of UCL..........................................38
Table 23: Correlation table showing the significance of the relationship between inventory
management and financial performance........................................................................................38
ix
ABSTRACTThe research study was aimed at establishing the effects of inventory management in
manufacturing industries, a case study of Uganda Clays Limited. The study was meant ; to
evaluate the inventory management system in Uganda Clays limited, to establish the profitability
level in Uganda Clays Limited, and to establish the relationship between inventory management
and financial performance of Uganda Clays Limited.
The researcher used random sampling. Staff within Uganda Clays Limited constituted the study
population. Thirty respondents were sampled. Primary data was collected by use of
questionnaires. Secondary data was from existing literature and data was analyzed using
percentage scores and frequencies, the correlation analysis of the relationship between inventory
management and financial performance was done using SPSS and Pearson’s Correlation
coefficient was used.
The findings revealed that the relationship between inventory management and the level of
financial performance has been fairly good, and on a raising trend. However, inventory is the key
current asset with a substantial portion in the form of work in progress and spares and
consumables, which are not as liquid as cash and receivables. The company is working on
increasing its liquidity levels by streamlining its processes to ensure better and effective
inventory management.
The researcher recommends that, proper records of inventory of each item must be maintained
and ensure that rate of inventory turn over increased. There is need for interdepartmental
coordination between Marketing and Production to avoid having much inventory at year end.
x
CHAPTER ONE
1.0 INTRODUCTIONIn the late 1980s, most manufacturing industries relied on Agricultural products for raw materials
and machinery, and as a result the problems plaguing the agricultural sector hampered both
production and marketing in manufacturing. Processing industries for cotton, coffee, sugar and
food crops were dominant , but Uganda also produced textiles, tobacco, beverages, wood and
paper products, construction materials and chemicals.
In the late 1980’s, the government began to return some nationalized manufacturing firms to the
private sector in order to encourage private investment and increase on the effective and efficient
performance of these firms. The primary aim was to promote self sufficiency in consumer goods
and strengthen linkages between agriculture and industry. By 1989, the government estimated
manufacturing output to be only about one third of the post independent peak levels achieved in
1970 and 1971.
Only eleven out of eighty two manufacturing establishments surveyed by the Ministry Of
Planning and Economic Development were operating at more than 35% capacity. Overall,
industrial output increased between January 1986 and June 1989 and the contribution from
manufacturing increased from only 5% to more than 11% during the same period.
The manufacturing sector in Uganda comprises of Agricultural, manufacturing plants, food
processing, construction materials which include; steel products, clay works and others.
The companies involved in the manufacturing sector include but not limited to; East African
Steel Corporation, the two cement producing plants at Tororo and Hima, Uganda Clays limited
which is the subject of this research.
1
1.1 Background of the study
Inventories are materials and supplies that a business or institution carries or holds either for sale
or to provide inputs or supplies to the production process (Arnold 1998).
Inventories exist in three different types; finished goods, work in progress and raw material that
are used to facilitate business operations.
When too much of inventory is kept, it raises the operation costs through storage cost, damages
and so on. On the other hand, losses are likely to occur if too little inventory is kept due to an
interruption in operations. Therefore, a good operations manager is one who will easily strike a
balance of how much inventory of each type should be kept in order to gain a greater efficiency
in production or operations. This therefore makes inventory management inevitable as it takes a
large portion of the operation manager’s job.
Performance of an organization relates to how well or badly an organization is doing in relation
to the given or selected variables. The variables could be sales turnover, environmental factors,
inventory management system, government policies like taxes and others.
Uganda Clays Limited was established in 1950 as a private limited company. The company’s
ownership has changed hands overtime
In 1969, Westomat Construction and Engineering Corporation (WCEC) took over the company
due to its performance. Having failed to maintain a certain standard, they in turn sold 75% of the
company to National Housing and Construction Corporation (NHCC) in 1977.
In 1999 NHCC was 100% owned by the Government of Uganda (GoU). It is this 75% stake in
the company which government divested at the end of 1999. WCEC had sold their stake to
White Tower Corporation in 1996, and remained the principal share holders until they sold their
2
stake to Kenya Clays Products Limited in August 2002. Kenya Clays divested their holding in
2006 to various institutional investors trading under Barclays Bank Uganda Nominee accounts.
All the above changes in ownership were as a result of its continuous decline in performance.
As of June 2009, the ten (10) major shareholders in the company are as listed in the table below;
Table 1: Major Shareholders in Uganda Clays LimitedRank Name of Owner %age Ownership
1st National Social Security Fund 32.52
2nd National Insurance Corporation 18.86
3rd Uganda Communication Employees Pension Fund 4.16
4th Central Bank of Kenya 2.66
5th Kenya Power and Lighting Company 2.25
6th Bank of Uganda 2.09
7th Stanbic Bank Uganda Pension Fund 1.81
8th Kenya Airways Staff Provident Fund 1.67
9th Uganda Development Bank 1.13
10th 2311 Other Shareholders 32.85
TOTAL 100
The company has operated for over 55 years and is the country’s leading manufacturer of quality
baked clay building products. Using Italian made heavy clay processing machinery; the company
manufactures a variety of building materials from clay excavated using surface mining
techniques.
These materials form part of the inventory which include; roofing tiles, bricks, interlocking and
corner blocks, portioning blocks, decorative gilles, ventilators, floor tiles, pipes and cable covers.
Of the company’s products, roofing tiles and bricks account for the largest portion of the
inventory. Thus the nature of its business has made it face a lot of competition in the wake of the
influx of other companies that deal in either the same kind of business or products that can be
substituted for clay products.
3
Despite the changes in management nothing has been done to address inventory management
problem and declining profitability.
Table 2: Showing Trend of Profits In Uganda Clays Limited(in ‘000 Shs)YEAR 2007 2006 2005 2004
Revenues 4,901,318 8,984,104 7,915,007 7,594,886
Costs 2,528,914 5,525,020 4,597,607 4,024,619
Gross Profit 2,372,404 3,459,084 3,317,400 3,570,267
Source: Uganda Clays Ltd Management report, 2008
1.2 Statement of the ProblemIn modern businesses, it is inevitable for organization to function without inventories that is why
many firms recognize the need to have a developed and comprehensive inventory management
system in order to minimize inventory cost and maximize profitability.
The inability to manage inventory in a proper way has led Uganda clays limited to face a
problem of declining profitability in their operations and this has led to fluctuations in profits
(Management report, 2008) Uganda Clays limited. If the problem of poor inventory management
is not solved, profitability levels will continue declining and the company may run out of
business given the fact that there is an increasing number of similar industries producing same
products and those producing substitute products.
Table 3: Inventory in metric tones2006 2005 2004 2003 2002
4
Year Opening 100,000 200,000 200,000 100,000 100,000
Produce 250,000 100,000 100,000 200,000 100,000
Demand 500,000 200,000 100,000 100,000 100,000
Year-end inventory 300,000 100,000 200,000 200,000 100,000
Source, primary data 2008
1.3 Purpose of the Study The purpose of the study was to establish the relationship between inventory management and
financial performance of Uganda Clays Limited.
1.4 Objectives of the StudyThe objectives of study were;
1.4.1 To evaluate the inventory management system in Uganda Clays limited
1.4.2 To establish the profitability level in Uganda Clays Limited
1.4.3 Establish the relationship between inventory management and financial performance of
Uganda Clays Limited
1.5 Research QuestionsThe study was meant to answer the following research questions;;
1.5.1 What is the inventory management system of Uganda Clays Limited?
1.5.2 What is the profitability level in Uganda Clays Limited?
1.5.3 Is there any relationship between inventory management system and the financial
performance of Uganda Clays Limited?
1.6 Scope of the StudyThe coverage of this research included the following;
5
1.6.1 Geographical Scope The study was conducted in Uganda clays Limited
1.6.2 Subject ScopeThe study was limited to Inventory management and financial performance of Uganda Clays
Limited
1.6.3 Time ScopeThe study covered data on Uganda Clays Limited inventory management processes and its
effects on financial performance for a period of four years(2007-2010).
1.7 Justification/Significance of the Study1.7.1 The study is to ascertain the effect of inventory management on the financial performance
of the business, a case of Uganda Clays Limited.
1.7.2 The study will benefit researchers especially those who have an interest of broadening their
knowledge in inventory management and performance
1.7.3 It is a pre-requisite for partial fulfillment for the award of a degree of Bachelor of
Commerce of Makerere University.
1.7.4 The research will benefit Uganda Clays Limited by providing a basis upon which action
could be taken to improve their efficiency in inventory management and financial performance
1.7.5 Benefit to other clay industries which will get baseline information about the effect of
defective inventory management and its net effect on profitability levels.
6
CHAPTER TWO
2.0 LITERATURE REVIEW
2.1 INTRODUCTIONThis chapter analyzed the relevant literature on inventory management as studied by other
scholars and it has been discussed in relation to the research objectives.
Inventory is defined as any resources used to satisfy a current future need(Render and Stair
1985). Inventory can also be defined as items available for sale in the ordinary course of
business, which a company has in its possession and holds legal title to(Larry, Flattery and
O’cconor 1984).
Inventory exists in three forms; raw materials, work in progress and finished goods.
This chapter deals with why firms hold inventory, inventory management definition and
objectives, techniques to be used in inventory management, inventory models and systems and
the costs to be associated with inventory management, inventory centre methods
2.2 Types of InventoryAccording to Meheshwan and Gupta (1994), Inventory is goods held for eventual sale by a firm
while Pandey (1995) says that inventory is the stock of the product a company is manufacturing
for sale and the components that make up a product.
Pandey (1995) goes a head to say that raw materials are the basic inputs that are converted into
finished goods through the manufacturing process.
Work in progress is semi-finished products. They are the products that have been partially
finished (Pandey, 1995)
Finished goods inventory refers to those units that are complete and ready for sale. It provides a
link between production and consumption of goods.
7
2.3. Inventory ModelsThese are models that enable the organizations set order quantities (Drury, 1992). They are also
aimed at minimizing Inventory costs. These models include; economic order quantity, order
cycle method, Pareto (80/20) distribution models.
2.3.1 Order Cycle Methods of InventoryUnder this particular method, inventory on hand is reviewed periodically (say every 12 months).
For these items that are of low cost, a technique called 90-60-30 days can be used so that when
inventory falls to 60 days, supply of fresh order is placed from 30 days supply so as to boast
stocks to 90 days supply (ACCA,1996).
2.3.2. Pareto (80/20) DistributionThis is an approach to stores management that emphasizes that more expensive items be
controlled closely. It is based on the understanding that 80% of the stocks are accounted for by
only 10% of the stores items (ACCA,1996).
2.3.3. Economic Order QuantityThis is the quantity at which carrying costs and ordering costs are minimum and equal (Lucey,
1994). According to Kakuru (1998), this is also the most commonly used approach to inventory
management. In production planning, the major issue is usually how much production to
schedule. The amount to order called order quantity usually causes problems to firms.
Therefore, the Economic Order Quantity helps firms to determine the optimum level of inventory
held at one time (Pandey,1995). When the level of inventory (Optimum) does not lead to sales
disruptions, this is an indicator that the firm is performing efficiently as customers are promptly
served and there exists no excess inventory in stock for the firm to incur inventory holding costs.
8
However, the Economic Order Quantity (EOQ) model has got its disadvantages, as its
applicability in developing countries is not certain.
There is a constant change in demand for products due to factors like prices, quantity, and
income. This makes demand not to be known with certainty.
Ordering and carrying costs are never constant. The fact is that they keep on changing all the
time.
There are other factors that affect the efficiency of the purchasing department and supplies lead
time keep on changing.
2.4 Balancing Inventory and CostsAs stated earlier, inventory management is an attempt to maintain an adequate supply of goods
while minimizing inventory costs. We saw a variety of reasons companies hold inventory and
these reasons dictate what is deemed to be an adequate supply of inventory.
There are three types of costs that together constitute total inventory costs: holding costs, stock
out costs, set-up costs, and purchasing costs.
2.4.1 Holding Costs Holding costs, also called carrying costs, are the costs that result from maintaining the inventory.
Inventory in excess of current demand frequently means that its holder must provide a place for
its storage when not in use. This could range from a small storage area near the production line
to a huge warehouse or distribution center. A storage facility requires personnel to move the
inventory when needed and to keep track of what is stored and where it is stored. If the inventory
is heavy or bulky, forklifts may be necessary to move it around.
Storage facilities also require heating, cooling, lighting, and water. The firm must pay taxes on
the inventory, and opportunity costs occur from the lost use of the funds that were spent on the
9
inventory. Also, obsolescence, pilferage (theft), and shrinkage are problems. All of these things
add cost to holding or carrying inventory.
If the firm can determine the cost of holding one unit of inventory for one year ( H ) it can
determine its annual holding cost by multiplying the cost of holding one unit by the average
inventory held for a one-year period. Average inventory can be computed by dividing the
amount of goods that are ordered every time an order is placed ( Q ) by two. Thus, average
inventory is expressed as Q /2. Annual holding cost, then, can be expressed as H ( Q /2)
2.4.2. Stock out CostsThese are costs associated with having inadequate or no stock. Stock out costs are an essential
factor in inventory control and are difficult to estimate. If a firm runs out of stock, this leads to a
loss in the short- term and damage of its good will in the long run. The inadequate inventory
level will basically mean stock outs and this could ultimately lead to the closure of the firm as
profits are lost continuously (Render and Stairn,1994). The avoidance of stock out costs is the
basic reason stocks are held in the first place (Lucey,1996) because inventories constitute a large
part of a firm’s current assets, proper management of inventories has to be emphasized.
.
2.4.3 Set-Up Costs Set-up costs are the costs incurred from getting a machine ready to produce the desired good. In
a manufacturing setting this would require the use of a skilled technician (a cost) who
disassembles the tooling that is currently in use on the machine. The disassembled tooling is then
taken to a tool room or tool shop for maintenance or possible repair (another cost). The
10
technician then takes the currently needed tooling from the tool room (where it has been
maintained; another cost) and brings it to the machine in question.
There the technician has to assemble the tooling on the machine in the manner required for the
good to be produced (this is known as a "set-up"). Then the technician has to calibrate the
machine and probably will run a number of parts, that will have to be scrapped (a cost), in order
to get the machine correctly calibrated and running. All the while the machine has been idle and
not producing any parts (opportunity cost). As one can see, there is considerable cost involved in
set-up.
If the firm purchases part or raw material, then an order cost, rather than a set-up cost, is
incurred. Ordering costs include the purchasing agent's salary and travel/entertainment budget,
administrative and secretarial support, office space, copiers and office supplies, forms and
documents, long-distance telephone bills, and computer systems and support. Also, some firms
include the cost of shipping the purchased goods in the order cost.
If the firm can determine the cost of one set-up ( S ) or one order, it can determine its annual
setup/order cost by multiplying the cost of one set-up by the number of set-ups made or orders
placed annually. Suppose a firm has an annual demand ( D ) of 1,000 units. If the firm orders 100
units ( Q ) every time it places and order, the firm will obviously place 10 orders per year ( D / Q
). Hence, annual set-up/order cost can be expressed as S ( D / Q ).
2.4.4. Purchasing Cost Purchasing cost is simply the cost of the purchased item itself. If the firm purchases a part that
goes into its finished product, the firm can determine its annual purchasing cost by multiplying
11
the cost of one purchased unit (P) by the number of finished products demanded in a year (D).
Hence, purchasing cost is expressed as PD.
Now total inventory cost can be expressed as:
Total = Holding cost + Set-up/Order cost + Purchasing cost
or
Total = H (Q /2) + S (D / Q) + PD
If holding costs and set-up costs were plotted as lines on a graph, the point at which they
intersect (that is, the point at which they are equal) would indicate the lowest total inventory cost.
Therefore, if we want to minimize total inventory cost, every time we place an order, we should
order the quantity (Q) that corresponds to the point where the two values are equal. If we set the
two costs equal and solve for Q we get:
H (Q/2)=S(D/Q)
Q = 2 DS / H
The quantity Q is known as the Economic Order Quantity (EOQ). In order to minimize total
inventory cost, the firm will order Q every time it places an order. For example, a firm with an
annual demand of 12,000 units (at a purchase price of Shs 25 each), annual holding cost of Shs
10 per unit and an order cost of Shs 150 per order (with orders placed once a month) could save
Shs 800 annually by utilizing the EOQ. First, we determine the total costs without using the EOQ
method:
Q = Shs 10(1000/2) + Shs 150(12,000/1000) + Shs 25(12,000) = Shs 306,800
Then we calculate EOQ:
EOQ = 2(12,000)(Shs 150)/Shs 10= 600
And we calculate total costs at the EOQ of 600:
12
Q = Shs 10(600/2) + Shs 150(12,000/600) + Shs 25(12,000) = Shs 306,000
Finally, we subtract the total cost of Q from Q to determine the savings:
Shs 306,800 − 306,000 = Shs 800
Notice that if you remove purchasing cost from the equation, the savings is still Shs 800. We
might assume this means that purchasing cost is not relevant to our order decision and can be
eliminated from the equation. It must be noted that this is true only as long as no quantity
discount exists. If a quantity discount is available, the firm must determine whether the savings
of the quantity discount are sufficient to offset the loss of the savings resulting from the use of
the EOQ.
2.4.4.1 Assumptions of Economic Order Quantity(EOQ)
There are a number of assumptions that must be made with the use of the EOQ. These include
situations like when;
Only one product is involved.
Deterministic demand (demand is known with certainty).
Constant demand (demand is stable through-out the year).
No quantity discounts
Constant costs (no price increases or inflation).
While these assumptions would seem to make EOQ irrelevant for use in a realistic situation, it is
relevant for items that have independent demand. This means that the demand for the item is not
derived from the demand for something else (usually a parent item for which the unit in question
is a component). For example, the demand for steering wheels would be derived from the
demand for automobiles (dependent demand) but the demand for purses is not derived from
anything else; purses have independent demand.
13
2.4.4.2 Other lot-sizing techniques There are a number of other lot-sizing techniques available in addition to EOQ. These include
the fixed-order quantity, fixed-order-interval model, the single-period model, and part-period
balancing.
Fixed-order quantity model
EOQ is an example of the fixed-order-quantity model since the same quantity is ordered every
time an order is placed. A firm might also use a fixed-order quantity when it is captive to
packaging situations. If you were to walk into an office supply store and ask to buy 22 paper
clips, chances are you would walk out with 100 paper clips. You were captive to the packaging
requirements of paper clips, i.e., they come 100 to a box and you cannot purchase a partial box.
It works the same way for other purchasing situations. A supplier may package their goods in
certain quantities so that their customers must buy that quantity or a multiple of that quantity.
Fixed-order-interval model
The fixed-order-interval model is used when orders have to be placed at fixed time intervals such
as weekly, biweekly, or monthly. The lot size is dependent upon how much inventory is needed
from the time of order until the next order must be placed (order cycle). This system requires
periodic checks of inventory levels and is used by many retail firms such as drug stores and
small grocery stores.
Single-period mode.
The single-period model is used in ordering perishables, such as food and flowers, and items
with a limited life, such as newspapers. Unsold or unused goods are not typically carried over
14
from one period to another and there may even be some disposal costs involved. This model tries
to balance the cost of lost customer goodwill and opportunity cost that is incurred from not
having enough inventories, with the cost of having excess inventory left at the end of a period.
Part-period balancing
Part-period balancing attempts to select the number of periods covered by the inventory order
that will make total carrying costs as close as possible to the set-up/order cost.
When a proper lot size has been determined, utilizing one of the above techniques, the reorder
point, or point at which an order should be placed, can be determined by the rate of demand and
the lead time. If safety stock is necessary it would be added to the reorder point quantity.
Reorder point =Expected demand during lead time + Safety stock
Thus, an inventory item with a demand of 100 per month, a two-month lead time and a desired
safety stock of two weeks would have reorder point of 250. In other words, an order would be
placed whenever the inventory level for that good reached 250 units.
Reorder point = 100/month × 2 months + 2 weeks' safety stock = 250
2.5. Inventory Management Inventory management refers to the process of managing the stocks of finished products, semi-
finished products and raw materials by a firm. Inventory management, if done properly, can
bring down costs and increase the revenue of a firm.
How much one should invest in inventory management? The answer to this question depends on
the volume and value of inventory as a percentage of the total assets of a firm. The importance of
inventory management varies according to industries. For example, an automobile dealer has
15
very high inventories, sometimes as high as 50 per cent of the total assets, whereas in the hotel
industry it may be as low as 2 to 5 per cent.
The process of inventory management is a continuous one and there are various kinds of
solutions available. It is advisable to employ specialized staff for inventory management.
The inventory management process begins as soon as one has started production and ordered raw
materials, semi-finished products or any other thing from a supplier. If you are a retailer, then
this process begins as soon you have placed your first order with the wholesaler.
Once orders have been placed, there is generally a short period of time available to a firm to put
an inventory management plan in place before the supplies are delivered. Inventory management
helps a firm to decide in advance where these supplies should be stored. If a firm is getting
supplies of small-sized goods, it may not be much of a problem to store them, but in the case of
large goods, one has to be careful so that the warehousing space is optimally utilized.
From invoices to purchase orders, there is lot of paperwork and documentation involved in
inventory management. Several software programs are available in market, which help in
inventory management.
Inventory management systems are used to determine when to place orders and in what
quantities, these management systems have an objective of minimizing investment in inventory
without necessarily impairing production (Gitman ,1997)
2.5.1. Two bin systemsThis where every stored item is put in its own bin and if the first bin is emptied, an order is
placed for re-supply meaning that where the second bin will be containing sufficient quantities to
last until fresh delivery is made (ACCA, 1996)
16
2.5.2 ABC analysisUnder this system, items of inventory are classified to identify which items should receive the
most effort in controlling. ABC analysis measures the significance of each item in terms of
value. Items with the highest value are classified as “A” items and have the highest control; “B”
items represent relatively low value of the business and one under simple management. They
represent 15% of the value of the business and 50% of stock. C items represent relatively low
value and simple control (Pandey, 1995). Under the ABC analysis, there is more concentration
on important items and less control on less important items (Pandey 1995)
Before the ABC analysis is implemented, the following steps will be involved;
Clarify the items of inventory, determining the expected use in units and price per unit.
Determine the total value of each item by multiplying the expected units by its unit price
Rank items according to value giving first rank to those with highest value.
Compute the ratios (percentage) of numbers of units of each item to the total units of all items
and the ratio of total value of each item to total value of items.
Combine items on the basis of their relative value to form three categories AB and C (Pandey,
1997).
2.5.3. Just-In -Time system
This is a new approach in inventory control that was developed by the Japanese. The aim of just
in time is to have particular items of inventory, particularly raw materials delivered hours before
they are required. There is no need of holding stock and their needs to be close liaison between
the supplier and the producer.
According to Lucey(1994), Just In Time aims at producing the required items of high quality at
the exact time they are required.
17
Eugene and Brigham (1997), also emphasizes that inventory is costly to the firms there is always
pressure to reduce inventory holding in a firm.
2.5.4 Theory of constraints (TOC) Theory of constraints (TOC) is a philosophy which emphasizes that all management actions
should center on the firm's constraints. While it agrees with JIT that inventory should be at the
lowest level possible in most instances, it advocates that there be some buffer inventory around
any capacity constraint (e.g., the slowest machine) and before finished goods.
2.5.5 Materials Requirements Planning (MRP) system.This system uses Economic Order Quantity concepts and a computer to compare production
needs with available inventory levels and determine what to order, when to order and what
priorities to assign to ordering materials. The computer basing on production needs, available
inventory and the time it takes a product to pass through various stages of production,
determines when orders should be placed and in what quantities.
Material requirements planning forces the firm to plan accordingly and its objective is to lower
the firm’s investment in inventory without affecting production (Gitman, 1997), while keeping
inventory costs at the minimum, because the escalation of costs of inventory is an indicator of
poor inventory management.
18
2.6 Why Firms Hold Inventory Inventories constitute the most significant part of current assets of large number of firms and
considerable amount of funds is required to be committed to them. The reasons as to why
inventory is held include, Transactions, precautionary and speculative motives (Drury,1992).
The transaction motive; This is aimed at facilitating smooth sales operations. Inventory of
finished goods is held because a firm cannot produce whenever goods are needed.
Precautionary motive; This involves holding inventory to guard against unforeseen or
unpredictable changes in demand and supply forces in the market. Because procurement of
materials may be delayed by such factors as transport, strikes, stocks of raw materials or finished
goods should be maintained to be used in periods of short supply.
Speculative motive; Stocks are held in either excess or shortages to take advantage of price
fluctuation. A firm may over stock raw materials in anticipation of rise of prices of raw
materials.
2.7 Determination of Inventory Level
As seen from above, firms have different reasons as to why they hold inventory. Effective
inventory management is essential in the operation of any business (Bassin, 1990).Hakansson
and Persson (2004) identified three different trends in the development of logistics solutions
within an industry; one trend is concerned with the increased integration of logistics activities
beyond organization boundaries with an aim to reduce cost items such as capital costs for
inventory and handling costs of flows. Inventory as an asset on the balance sheet of companies
has taken on increased importance because many companies are applying the strategy of
reducing their investment in fixed assets like plants, warehouses, equipment and machinery, and
so on, which even highlights the significance of reducing inventory (Coyle et al., 2003). Changes
19
in inventory levels affect Return On Assets (ROA), which is an important financial parameter
both from internal and external perspectives. Reducing inventory usually improves ROA, and
vice versa if inventory goes up without offsetting increases in revenue (Coyle et al 2003).
The aim of inventory management is to hold inventories at the lowest possible cost, given the
objectives to ensure uninterrupted supplies for ongoing operations. When making decisions on
inventory management, one has to find a compromise between the different cost components
such as the cost of supplying inventory, inventory holding costs and costs resulting from
insufficient inventories (Hugo, Badenhorst –Weiss and Van Rooyen 2002).
According to Wild (2002), inventory control is an activity which organizes the availability of
items to the customers. It coordinates the purchasing, manufacturing and distribution functions to
meet the marketing needs. This role includes the supply of current items, new products,
consumables, spare parts, obsolescent items and all other supplies. Inventory management
enables a company to support the customer service, logistic or manufacturing activities in
situations where purchasing or manufacturing of the items is not able to satisfy the demand. Lack
of satisfaction could arise either because of the speed of purchasing or manufacturing is too
protracted, or because quantities cannot be provided without stocks .Clodfelter (2003) adds that a
good inventory control system offers the following benefits:
(a) It maintains a proper relationship between sales and inventory. Without inventory control
procedures in place, the store or department can become overstocked or under stocked.
(b) Inventory control systems provide a business with information needed to take markdowns by
identifying slow-selling merchandise. Discovering such items early in the season will allow a
business to reduce prices or make a change in marketing strategy before consumer demand
completely disappears.
20
(c) Merchandise control systems allow buyers to identify best sellers early enough in the season
so that re-orders can be placed to increase total sales for the store or department.
(d) Merchandise shortages and shrinkages can be identified using inventory control systems.
Excessive shrinkages will indicate that more effective merchandising controls need to be
implemented to reduce employee theft or shoplifting.
2.8 Financial performance of an organization
For organization management to be good, it must be achieving the targets that it sets. Therefore
financial performance is measured to know whether targets have been achieved, measuring
performance also is a useful means of control, and is a useful means if targets are to be attained
(Lockyer, Muhitemann, and Oakland, 1998)
21
Table 4: Income Statement
Year ended 31 December
2006 2005 2004 2003 2002
Ushs.’000 Ushs. ‘000 Ushs. ‘000 Ushs. ‘000 Ushs.’000
Sales 9,984,104 7,915,007 7,594,886 6,310,625 5,039,075
Cost of sales (2,528,914) (5,525,020) (4,597,607) (3,542,063) (2,864,560)
Gross profit 4,459,084 3,317,400 3,570,267 2,768,562 2,174,515
Other operating
Income/expenses 25,804 30,763 23,690 (12,443) 26,473
Distribution costs (265,438) (188,402) (125,019) (139,643) (83,860)
Admin expenses (432,197) (280,984) (396,525) (452,101) (302,828)
Other operating
Exp (1,801,301) (1,214,536) (1,351,004) (1,25,663) (705,690)
Operating profit 1,985,952 1,664,241 1,721,409 909,712 1,108,610
Finance cost (217,762) (334,605) (180,261) (28,353) (16,119)
PBT 1,768,190 1,329,636 1,541,148 881,359 1,092,491
Income tax exp. (461,034) (376,809) (583,558) (413,171) (462,593)
Net profit 1,307,156 952,827 957,590 468,188 629,898
DPS(Ushs.) 40 80 1,000 500 1,000
EPS (Ushs.) 261 191 192 94 126
Source:Uganda Clays Limited Auditor’s Report 2008
22
2.9 Performance IndicatorsUCL’s overall liquidity position has been fairly good, and on a raising trend averaging at 0.96
over the period. However, inventory is the key current asset with substantial portion in the form
of work in progress and spares and consumables, which are not as liquid as cash and receivables.
Subsequently, UCL’s cash and quick ratios average out at approximately 0.52. The company is
working on increasing its liquidity levels by streamlining its processes to ensure better and
effective inventory management. The above statement is evidenced by the table below;
Table 5: Financial Ratio Analysis 2002 2003 2004 2005 2006
Operating performance
Turnover growth rate 35.23% 25.23% 20.35% 4.21% 26.14%
Profitability
Gross profit margin 43.15% 43.87% 47.01% 41.91% 44.66%
Operating profit margin 22.00% 14.42% 22.67% 21.03% 19.89%
Net profit margin 12.50% 7.42% 12.61% 12.04% 13.09%
ROE 11.59% 8.51% 13.72% 12.40% 12.26%
ROA 6.46% 3.77% 7.06% 7.11% 6.82%
Operating efficiency
Inventory turnover 5 4 4 5 5
Liquidity
Current ratio 0.95 0.68 0.84 1.34 1.02
Quick ratio 0.48 0.30 0.43 0.71 0.66
Solvency
Interest coverage ratio 56 24 10 5 9
Debt service coverage ratio 2 1 1 1 1
23
The inventory management system in an organization is measured periodically using standards
performance indicators. These indicators measure the effectiveness of inventory management.
Service level is one of the performance indicators. It is the percentage of items ordered or
requested that is filled from stock by the supplier or warehouse. From public point of view the
higher the service levels, the better, as long as inventory costs do not rise to unsupportable levels
(Balunywa, 1995).
Customer service level is the criterion that is being increasingly used. It is the proportion of
demand-met ex-stock per annum. Service levels to customers are the extent to which either
finished stock can be supplied to them ‘off the shelf’ or the company is able to accept a certain
level of stock outs for defined periods of time (Balunywa,, 1992)
Another performance indicator of inventory management is the average percentage of time out
stock. This takes into account the number of times the organization runs out of stock of identified
items in a year (UIA, 1998). In order to guard against stock out, the firm should keep a buffer
stock.
Determining the safety (buffer) stock level; need to be done cautiously, such that the benefits
and costs arising out of keeping a safety stock is compromised, and does not defeat the overall
objective of an organization.
2.10 Relationship between inventory management and financial performanceThe relationship between inventory management system and the financial performance of an
organization mainly manifests itself through the material requirements planning which is the
system of planning and scheduling the time- phased material requirements for production
operations (Adam and Ebert 1992) improved customer services and other advantages come at a
24
cost however. They also require a realistic master production schedule to specify when various
end items will be completed. Finally and perhaps most important, they require a certain
discipline, then a commitment by schedules and employees to make the system work.
Material requirement planning provides the following;
Inventory reduction; it determines how many of the components are needed and when, in order
to meet the master schedule. It enables the manager to procure those components, as needed,
thereby avoiding costs of excessive inventory.
Reduction in production and delivery lead times; by coordinating inventory procurement, and
production decisions, material requirements planning helps to avoid delays in production
Realistic commitments; by using material requirements planning production can give marketing
timely information about likely times to prospective customers.
Increased efficiency; Material requirements planning provide close coordination among various
work centers as product progress through them. Material requirements planning is especially
useful in complex operations where new customer order are arriving for a variety of products and
were shop orders for various components are in different stages of completion. These numerous
transaction is accommodated through periodic system. Updating with accurate shop status data;
material requirement planning such as pegging, cycle counting and time remarks helps to
stabilize a dynamic production environment by tracking which components are affected by
change, ensuring that the availability of material coincides with planned requirements and
freezing the short-term production plan so that imminent shop schedules are more predictable
(Adam and Ebert, 1992).
25
Just In Time; Is both a philosophy and set of methods for manufacturing, and emphases waste
reduction, total quality control and devotion to the customers. Just in time is a manufacturing
whose goal is to optimize processes and procedures by continuously pursuing waste reduction
(Adam and Ebert, 1992). Just in time requires not only changes in the way a company handle its
inventory but also change in its culture.
Any step in the manufacturing process product for the customer is wasteful transport, storage,
work in progress inventories, finished goods inventories, excessive paper processing and many
other activities that don’t add value to the product. Wasteful tasks increase costs and reduce
competitiveness. The objectives of just in time is to reduce set up costs to the point that
economic order quantity (EOQ) = 1 unit. If EOQ=1, the immediate benefits are that in progress
inventories are reduced and flexibility to change over production from one product to another is
improved. However reduction in production of sized triggers which of events involving
motivation and focus on just in time and on scrap and quality control.
Just in time purchasing suggests an emphasis on timing, which is true, but it does not suggest the
broad philosophical under pinning of the system. Just in time purchasing calls for close
relationships with few long-term suppliers, geographically close suppliers lose specifications and
contracts, and frequent deliveries of small, exact quantities. Time underlying philosophy of just
in time is continuous pursuit of waste reduction. Using just in time requires extra ordinary
discipline because just in time works but under stable, reliable operating conditions.
26
CHAPTER THREE
3.0 RESEARCH METHODOLOGY
3.1 OverviewIn this chapter, the researcher described how the research was conducted right from proposal
writing, preparation of data collection tools and there purposes, identification of the sample area,
sample respondents, details of the respondents and sampling strategy to be used, and finally the
procedure of collecting data.
3.2 Research DesignThe research design used was cross section research design since the time given was not
sufficient due to the semester system program, in evaluating the relationship between inventory
management and financial performance of Uganda clays Ltd. The information was collected by
use of both quantitative and qualitative approaches using primary data and available literature
concerning the variable.
3.3 The Study PopulationThe sample of thirty respondents was selected. Five were got from the senior staffs of Uganda
clay limited, ten from the line managers and fifteen from the operational (Junior) staff as
indicated in the table below:
Table 6: Sample populationCategory of People Population Sample
Senior Employees 5 5
Line managers 10 10
Operational(Junior) staffs 20 15
TOTAL 35 30
Source: Krejcie and Morgan 1970 Table of Sample size determination
27
3.4 Sample AreaThis included a sample of senior staffs and junior staffs who were chosen from the one hundred
twenty two staffs of Uganda clays Limited.
3.5 Sampling procedures/TechniquesRandom sampling was used to select management and staff because of its advantages; for
instance all the staff selected got an equal chance of being selected, at the convenient and the
limited time available.
3.6 Sources of Data and Collection MethodsPrimary data was collected for purposes of drawing valid conclusions. This data was obtained
using questionnaires and interview guide.
Secondary data was collected for the purpose of drawing valid conclusions. These sources
included reviewing journals, text books and internal records of Uganda Clays Limited.
3.7 Procedures of Collection DataThe researcher took the following steps to collect the required data:
Got permission from Makerere University
Got permission from the Managing Director in-charge of research in Uganda Clays
Limited
Carried out data collection by directly administering the instruments to respective
respondent.
3.8 Data Collection InstrumentsData from the field were collected using the following instruments
28
3.8.1 InterviewsThese were administered to top management including the Finance officers, store keepers, sales
and marketing personnel and other casual employees. The interview guide used was both close
and open ended.
3.8.2 QuestionnairesThe researcher was assisted by the supervisor in preparing the questionnaires. This was used for
collecting data from other sample members in the sample.
3.8.3 Documentary ReviewsSamples of files were requested, particularly relating to inventory management and financial
performance including Audited reports of Uganda Clays Limited.
3.9 Data AnalysisThe data collected were sorted, organized, edited and coded to improve its accuracy and
relevancy; and later presented in frequency tables and percentage frequencies for ease of analysis
and then finally draw inferences on the general population. The frequency tables together with
correlation table for the relationship between he variables of the study were computed using
Statistical Package for Social Sciences( SPSS, Version 15)
3.10 Limitation of the study.I encountered the following problems during the study;
Financial constraints since am self sponsored. This was because the researcher is both a
parent and a student who was also paying school fees for children at school.
Difficulty in accessing the required information
There was also time limitation for carrying out research since the researcher is also a
working class and badly needed at his work place.
29
CHAPTER FOUR
DATA PRESENTATION, ANALYSIS AND INTERPRETATION OF THE FINDINGS
4.0 IntroductionThis chapter presents the findings on effect of inventory management system on the financial
performance of Uganda Clays Limited. The findings were from both primary and secondary
sources. The data collected was edited, coded, tabulated, analyzed and presented according to the
findings of the study.
Specifically, the study objectives involved the following:
i. To evaluate the inventory management system in Uganda Clays limited
ii. To establish the profitability level in Uganda Clays Limited
iii. To establish the relationship between inventory management and financial performance
of Uganda Clays Limited
4.1 Background Information on RespondentsUsing the questionnaires, the researcher was able to get socio-economic information about the
respondents in terms of sex, age and their respective educational levels as follows;
4.1.1 Findings on the sample sexTable 7: Sex of respondentsSex Frequency(Number) Percentage (%)
Male 22 73
Female 08 27
Total 30 100
Source primary Data, 2011
30
According to sample table 7, 73% of the respondents comprised of males while 27% were
female. The findings revealed that the imbalance between male and female employees, implying
that Uganda Clays Limited employs more male than female workers.
4.1.2 Findings on the qualifications of respondentsTable 8: Qualification of respondentsQualification Frequency(f) Percentage (%)
Degree holders 12 40
Diploma 13 43
Completed Secondary level 05 17
Total 30 100
Source primary data, 2011
From the table 8, it was established that 40% of respondents were degree holders, 43% had
diploma while 17% had completed secondary level. The findings revealed that Uganda Clays
Limited employs mostly graduates and Diploma Holders because they are believed to be
hardworking, innovative and creative as compared to the secondary level leavers.
4.1.3 Findings on Age of Respondents Table 9: Age of respondentsAge bracket (years) Frequency Percentage (%)
18-25 03 10
26-30 17 57
31-35 07 23
36-40 01 03
41-45 02 07
46-55 00 00
Total 30 100
Source; Primary Data 2011
31
According to table 9, 57% 0f the respondents were in the range of 26-30 years of age, 23% in the
range of 31-35 years of age, 10% in the age bracket of 18-25 years, 7% in the range of 41-45 and
3% in the age bracket of 36-40 years of age.
From the above, the findings indicate that the majority of those employed belong to the energetic
youth who suit the nature of work being carried out at UCL.
Despite the dominance of the respondents at the age bracket of 26-30, we also have 3
respondents at the age above 35 years implying that they contribute to the sound judgments and
therefore able to articulate facts regarding inventory management and the financial performance.
4.1.4: Findings on how long the respondents have worked for the companyTable 10: Period of service in the companyPeriod of service in years Frequency Percentage (%)
Below 2 02 07
2-4 05 17
5-7 19 63
8-10 03 10
11-13 01 03
Above 13 00 00
Total 30 100
Source; primary data 2011
4.2 Inventory Management System Employed by Uganda Clays Limited
4.2.1 Response on the inventory management system employed by Uganda Clays LimitedTable 11: Responses on Inventory management systems.
32
Response Frequency Percentage
Computerized 24 80
Manual 06 20
Total 30 100
Source; primary data, 2011
From the table 11, 80% of the respondents indicated that the inventory management system was
manual and 20% of the respondents said it was both manual and computerized.
The findings revealed that the inventory management system used by Uganda Clays Limited is
not up to date with modern technology and what a fairly strong system should be.
4.2.2 Response on maintenance of stock levelsTable 12: Response on whether stock levels are maintained.Responses Frequency Percentages
Yes 19 63
No 11 37
Total 30 100
Source: primary data, 2011
From table 12, 63% of the respondents indicated that stock levels were maintained, 37% said that
it was not maintained.
From the above findings, it revealed that management of stock in Uganda Clays Limited was, to
some extent inappropriate.
4.2.3 Response on maintenance of inventory levels for each itemTable 13: Stock maintenance for each itemResponses Frequency Percentage (%)
Yes 09 30
No 21 70
33
Total 30 100
Source; primary data 2011
From the table 13, 30% of the respondents indicated that the company kept records for each item
and 70% said no records were kept for each item.
From the above findings, it reveals that there is no record being kept for each item in isolation.
4.2.4 Responses on proper records of inventory Table 14: Proper records of inventoryResponses Frequency Percentage (%)
Yes 15 50
No 15 50
Total 30 100
Source, primary data 2011
From table 14, 50% of the respondents consented that there was proper records of inventory
being kept and 50% said there was no proper records being Kept. From the above findings, it
reveals that the sampled population was not certain of whether records of inventory are being
maintained.
4.2.5 Responses on existence of stock takingTable 15: Existence of stock takingResponse Frequency Percentage
Yes 26 87
No 04 13
34
Total 30 100
Source; primary data, 2011
From the table 15, 87% of the respondents indicated that stock taking was carried out and 13%
did not oblige.
4.2.6 Responses on whether stock taking figures agree with the record figuresTable 16: Agreement between stock taking figures and record figuresResponse Frequency Percentage
Agree 15 50
Strongly Agree 08 27
Disagree 05 17
Strongly Disagree 02 06
Total 30 100
Source; primary data 2011
From table 16, 50% of the respondents agreed that the stock taking figures tallied/balanced with
record figures, 27% strongly agreed, 17% disagreed while 06% strongly disagreed.
From the above findings, the researcher established that stock taking figures were not compatible
with those of the records, since most of the respondents disagreed with the reconciliation of
records and physical stock.
4.2.7 Responses on how often stocktaking is carried outTable 17: Frequency of stock takingResponse Frequency Percentage (%)
Daily 00 00
Weekly 00 00
Monthly 06 20
Annually 24 80
35
TOTAL 30 100
Source; primary data 2011
Table 17 shows that 20% of the respondents indicated that stock taking was done monthly,
while majority indicated that it was done annually.
4.3 Findings on the Profitability Levels of the IndustryThe researcher administered many questions to establish the level of profitability in Uganda
Clays Limited. The analyses of the responses are as below;
4.3.1 Responses on the trend of profitabilityTable 18: Profitability trendResponses Frequency Percentage
Increasing 09 30
Declining 21 70
Constant 00 00
Total 30 100
Source; primary data, 2011
From table 18, 70% of respondents said the trend of profitability was decreasing, 30% said it was
increasing and nobody indicated that it was constant. The researcher therefore established that
the profitability level of Uganda Clays Limited was decreasing from time to time. The following
data obtained from the past records of the company could support this;
Table 19: Profit Margin of Uganda Clays Limited (2002-2006 in ‘000 Shs)YEAR 2006 2005 2004 2003 2002
Revenues 9,984,104 7,915,007 7,594,886 6,310,625 5,039,075
Costs (5,525,020) (4,597,607) (4,024,619) (3,542,063) (2,864,560)
Gross Profit 4,459,084 3,317,400 3,570,267 2,768,562 2,174,515
Source: Uganda Clays Limited financial report
36
4.4 Findings on the Relationship between Inventory Management and Profitability
4.4.1 Responses on the level of inventory management system in Uganda Clays LimitedTable 20: Quality of Inventory management system and profitabilityResponses Frequencies Percentages
Very Good 10 33
Good 15 50
Poor 05 17
Total 30 100
Source; primary data, 2011
Table 20 shows that the majority (50%) of the respondents believed that the level of inventory
management in Uganda Clays Limited was good, 33% said it was very good whereas 17%
believed it was poor.
4.4.2 Responses on the level of profitability in Uganda Clays Limited Table 21: Profitability in UCLResponses Frequencies Percentages
Very Good 05 17
Good 10 33
Poor 15 50
Total 30 100
Source; primary data, 2011
Table 21 shows that , 50% of the respondents said that the profitability level was poor, 33% said
it was good whereas 17% mentioned very good.
4.4.3 Responses on whether inventory management significantly affected the financial performance of Uganda Clays LimitedTable 22: Effects of inventory management on performance of UCLResponses Frequency Percentage
Yes 23 77
No 01 3
Not sure 06 20
Total 30 100
37
Source; primary data, 2011
The above table shows the observed frequencies on whether inventory management system in
Uganda Clays Limited significantly affected their financial performance.
4.4.4 Correlation between inventory management and financial performance (profitability)Table 23: Correlation table showing the significance of the relationship between inventory management and financial performance
Inventory management Financial
performanceInventory Management
Pearson Correlation 1 .803**
Sig. (2-tailed) .000 N 30 30Financial performance
Pearson Correlation .803** 1
Sig. (2-tailed) .000 N 30 30
** Correlation is significant at the 0.01 level (2-tailed).
The relationship between inventory management and financial performance was statistically
tested. A strong positive relationship (r=.803*, p<0.01) was established. Since .803 is close to 1,
a very high positive relationship, significant at 0.01 level existed between inventory management
and financial performance.
To further establish the significance of the contribution of inventory management to financial
performance, the coefficient of determination (r2) was computed. Since r=0.803, r2=0.644. This
implies that effective inventory management contributed 64% on the levels of financial
performance of Uganda Clays limited while 36% was contributed by other factors. The
implication of the above relationship is that effective proper inventory management procedures
positively influences and financial performance and therefore reminds the management of
38
Uganda Clays Limited of the need to effectively streamline local Inventory management
procedures and strategies so as to boost the levels of financial performance.
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.0 IntroductionThe purpose of this study was to examine the effects of inventory management system on the
financial performance of an organization. In this chapter, the researcher presents a summary of
the findings draws conclusions and makes recommendations in line with the study objectives
39
5.1 Summary of Findings
5.1.1 Summary of the Findings on Inventory Management System in Uganda Clays Limited
The findings of the study revealed that the inventory management system in Uganda Clays
Limited was not effective and not up to date with modern technology. This was reflected in the
fact that Uganda Clays Limited did not follow proper stock management policies such as
maintaining the required stock levels, stock taking, establishing economic re-order quantities,
and etc. Besides, it was established that Uganda Clays Limited uses 80% computerized methods
of stock management and 55% of its staff were qualified and generally had skills in inventory
management.
5.1.2 Summary of Findings on the Profitability Level in Uganda Clays Limited.
From the findings, it was revealed that profitability in Uganda Clays Limited was generally poor
and declining year by year. This was supported by Uganda Clay’s Limited management report,
2009, which indicated an annual average fall in profitability of 23%.
5.1.3 The Summary of Findings on the Relationship between Inventory Management System and Financial Performance (Profitability)
The study established that the Inventory management system was positively related to financial
performance of Uganda Clays Limited. The significance of the relationship implied that
management of Uganda Clays Limited out to place much emphasis in streamlining inventory
management as a means of achieving the desired levels of financial performance.
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5.2 Conclusion
Uganda Clays Limited had successes in areas of: completeness of routine inventory
transportation, working with each customer to develop an inventory delivery schedule that was
acceptable, customers’ inventory levels are being kept to the optimum, customer service levels of
the company inventory distribution organization structure being appreciated by the customers
that management needs to address which were rated as being high
Uganda Clays Limited faced declining levels of profitability. This could have been due to
increase in the number of firms producing similar products, break down of machinery,
administrative weaknesses and improper management of the inventory system leading to
loopholes in serving the customers hence a drop in sales turnover.
The study established a high positive relationship between inventory management and financial
performance. The optimal management of inventories is a primary objective for all the firms
manufacturing make to stock finished goods. As a matter of fact, inventories have important
implications for both the financial and the economic performance of the company; therefore it is
widely acknowledged that an optimal inventory management policy allows companies to achieve
higher productivity levels.
5.3 Recommendations
Management of Uganda Clays Limited should ensure that inventory levels are being kept to the
optimum in addition to re-aligning the inventory management and distribution organization
structure.
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There is need for management of Uganda Clays Limited to strictly observe the inventory
availability policy relating to safety stock, order cycle, and order quantities.
The inventory level of an organization depends on its policy and position in the market; and this
emanates from the marketing, production sales department on which decisions on how much to
produce depend. Therefore, there is need for management of Uganda Clays Limited to ensure
that the activities of these departments be harmonized.
Uganda Clays Limited should engage in strategies that discourage or drive away competitors
through cut-throat competitive strategies by reducing prices lower as compared to its competitors
or market skimming, looking for virgin markets in other regions where such products have not
reached, branding and packaging and providing other services to the consumers of your products
closer to them.
Uganda Clays Limited should strengthen its Research and Development (R&D) Department in
order to work towards modification of their products. This can only be done by investing much
in thus department to ensure innovativeness and creativity
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References
1. Barley peter,1989; Successful stock control by manual system, grower press
2. Kakuru E, 2000; Financial management, Makerere University press, Kampala
3. Lucey T, 1996: Costing DP Publications.
4. Meigs and Meigs,1989: Principles of Auditing 8th edition B Irwin Homewood
5. Pandey I M,1993; Financial management 7th edition Vikas publishing house
6. Colin Drury, 1992; Management and Cost Accounting, ELBs, imprint
43
7. David Jobber and Geoff Lancaster, 2000; sales management 5th edition financial
times/prentice hall of London
8. Uganda Investment Authority (UIA) magazine 2008
9. ACCA Study Text,2007 Kaplan Edition
10. Donnelly Gibson, 1990; Financial and Management Accounting, prentice hall of London
11. Kamal Gupa, 1997 Contemporary Auditing third edition hill publishing house
12. Uganda Clays Limited, Rights Issue, 2008
13. Bassin, R. (2004). Business Logistics / Supply chain management. Planning, organizing
and controlling the supply chain, 5th edition. Pearson –Prentice Hall USA.
14. Clodfelter, R.(2003). Retail buying from basics of fashion. 2nd Edition. USA
15. Coyle, J. J., Bardi, E. J., & Langley Jr, C. J.( 2003) The management of business
logistics. A supply chain perspective. 7th edition. South –Western. Thomson –Learning.
Canada.
16. Hugo, W. M. J., Baden Horst-Weiss,J. A., & Van Rooyen, D. C. (2002). Purchasing and
Supply management. 4th edition. Pretoria: J. L Van Schailk Publishers.
17. Hakansson L J & Persson, L P. (1999). Operations Management. Strategy and Analysis.
5th Edition. Addison –Wesley. USA.
18. Wild, T.(2002).Best Practice in Inventory Management. 2nd edition.Butterworth-
Heinemann.UK.
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Appendices
Appendix A: QuestionnaireI kindly request you to fill in this questionnaire as assistance towards accomplishing my research
project, being one of the prerequisites for the award of a Bachelors degree of Commerce. I
guarantee that the information provided in here shall purposely for academic and shall be treated
with strict confidentiality.
Your assistance will highly be appreciated
PERSONAL DATA
Position held in the organization……………………………………………….
Education level
Degree Diploma
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UACE UCE
Others (Specify)
Age
18- 25 years 26-30 years
31- 35 years 36- 40 years
41- 45years 46- 55 years
4. How long have you served in the organization?
Below 2 years 2 – 4 years
5 – 7 years 8 – 10 years
11 – 13 years Above 13 years
B. INVENTORY MANAGEMENT SYSTEM IN UGANDA CLAYS LIMITED
5. What inventory management system does your firm maintain? (Please tick in the box)
Computerized Manu Manual Both
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6. Does your company maintain inventory levels for each item? (Tick in the box)
Yes No No
7. Does your company keep inventory records? (Tick in the box)
Yes No No
8. Does the company carry out stocktaking?
Yes
No
Others (Specify) ……………………………………………………………………….
9. Do physical stock taking figures agree with those of your records system
Strongly agree Agree
Disagree Strongly disagree
10. How often do you carry out stocktaking?
Daily Weekly
Monthly Annually
When need arises
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C. INFORMATION ON THE PROFITABILITY LEVELS IN UGANDA CLAYS
LIMITED
11. What is the level/trend of profitability in your organization?
(a) Increasing
(b) Declining
(c) Constant
12. To what extent are you satisfied with the level of profitability?
(a) Very good
(b) Good
(c) Poor
13 State the level of profitability in the company?
Years Profit/Loss
…………………………………………………...
…………………………………………………….
…………………………………………………….
D. INFORMATION ON THE RELATIONSHIP BETWEEN INVENTORY
MANAGEMENT AND PERFORMANCE
14. How do you rate the level of inventory management in your company?
(a) Very good
(b) Good
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(c) Poor
15. How do you rate the level of profitability in your company?
(a) Very good
(b) Good
(c) Poor
16. In your view, how do you compare inventory management system with profitability?
Inventory Management
Performance Very good Good Poor
Very good
Good
Poor
17. In your own analysis, have you noticed any impact the inventory management system has
had on the general financial performance of Uganda Clays Limited?
Yes
No
Others (Specify) ……………………………………………………………………….
18. If yes, how do you rate the impact?
Severe
Moderate
No impact
Thank you very much for your responses in this Academic research, God Bless You
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Appendix B: Letter of Introduction
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