THE INFLUENCE OF INVENTORY MANAGEMENT PRACTICES ON ORGANIZATIONAL FINANCIAL PERFORMANCE

CHAPTER ONE

OVERVIEW OF THE STUDY

Introduction: This chapter presents an introduction to the Influence of Inventory Management Practices on Organizational Financial Performance: The Case of The National Microfinance Bank Headquarters Dar es Salaam. It also casts some light on the financial performance of NMB. It provides background information to the NMB, its organization, structure and sheds light on the problem addressed by the study. The chapter goes on to present objectives of the study, the research questions that the study is answering together with its significance, scope, limitations, delimitations and it also shows how the study was organized.

​​​​​​​Background Information on the Problem

Inventory is one of the real assets. It is the lifeblood of any business by ensuring that organizations keep customer by improving responsiveness to orders made by customers and improved in-house services to other employees. Therefore, organizations need to be keen when managing inventories to ensure that its doesn’t suffer by tying up working capital or fail to retain customers due to shortage of products or failure to provide a required service. But how many companies balance between the two objectives?

The current competition in Business World has lead to the organization to be very keen in managing their inventories and the means associated with inventory management practices. The inventories generally comprise of finished goods, semi finished goods and raw materials that together need effectiveness and efficiency in managing which later will guarantee the profitability in the organization (Jessop, 1999).

Magad and Amos (1989) assert that the primary objective of inventory management is to improve customer service. This is done through protection against stock out due to demand variability in the market place. The inventories generally are very sensitive assets in any organization since they are required for the existence of the company. Among other aspects, the researcher is going to focus on the effectiveness of inventory management.

Inventory management requires significant inventory investment led to the question of how much to order and how often. The employees responsible for managing the inventories must have knowledge on economic order quantity (EOQ), re-order level, reorder quantity and all aspects of managing the inventories like the use of information technology (EDI and ERP). Despite that many organizations planned to implement inventory management practices with majority identifying that cost savings as their primary goal which finally improves financial performance and business performance at large. Business firms that have adopted or applied techniques in the inventory management practices have a significant impact / influence on returns, profitability and volume of sales. Firms that efficiently apply these practices have an excellent financial performance. The government of Tanzania shares ownership of National microfinance Bank with private investors. It aims at offering the best banking services to all sorts of customers from big to micro bankers.

In doing so NMB need to have efficient inventory management practices that normally have influence on financial performance. This is not the case at the moment, there are adverse conditions that water-down the major mission of NMB much of it being an outcome of inventory management practices, Such features as loss of stock due to theft and pilferages, remarkable differences between stock records and physical stock, availability of obsolete and obsolescence stores, greater complains from customer due to unfulfilled orders, disorganized store, damaged stock, lost of financial resources, low rate of return on equity and low return on sales really attract an insight search for the reasons of having inadequate inventory management system.

The researcher intends to investigate the influence of Inventory management practices on organizational financial performance, a case of National Microfinance Bank Headquarters Dar es Salaam, by analyzing the extent to which inventory management practices, strategic supplier partnership and how technology are being applied in this organization.

​​​​​​​Statement of the Problem

Inventories constitute the most significant part of current asset of large majority of companies. Because of that, a considerable amount of fund is committed in it by organizations. Therefore it is of great importance to manage inventories efficiently and effectively so as to avoid unnecessary tying up of capital. Inventory management practices involve the active participation of various departments such as purchasing, production, sales and finance department. Inventory level should not be left to chances, it should be carefully planned. (David Jessop and Alex Morrison, 1994).

According to Drury (2004) inventory costs include holding costs, ordering costs and shortage costs. Holding costs relate to costs of having physical items in stock. These include insurance, obsolescence and opportunity costs associated with having funds which could be elsewhere but are tied up in inventory. Selecting the right level of inventory involves balancing three groups of costs namely, ordering cost which takes into consideration the costs involved in the process of ordering materials such as - costs of placing an order and receiving inventory, determining how much is needed, preparing invoices, transport costs and the cost of inspecting goods; carrying cost which is the cost involved in the transfer of ordered materials from the supplier to the recipients warehouse; and the cost of not carrying sufficient inventory which constitutes resultant costs of not performing adequate inventory in the organization such as shortage costs which result when demand exceeds the supply of inventory on hand. The costs include opportunity costs of making a sale, loss of customer goodwill, late charges and similar costs.. Conceptually, the right level of inventory to carry is the level that will minimize these three groups of costs.

The basic managerial objectives of inventory management are twofold, first, to provide the right quantity of good standard raw material to the production department and finished product to customers at the right time when it is needed and second, to avoid over/under inventory levels. The problem arises on quantity to be ordered when and how often it should be ordered so as the organization always maintain the right level of raw material and finished product at minimum inventory total costs (Jessop, 1999).

Adverse conditions that water-down the major mission of NMB much of it being an outcome of inventory management systems. Such feature includes loss of stock due to theft and pilferages, remarkable differences between stock records and physical stock, inadequate records and, availability of obsolete and obsolescence stores, greater complains from customer due to unfulfilled orders, disorganize store, damaged stock, loss of financial resources really attract an insight search for the reasons of having inadequate inventory system.

Inventory management practices on organizational financial performance for business and service oriented firms around the global remains a major debatable problem that has not been solved for decades. Many business firms have suffered or complained of facing additional inventory management costs that resulted to the decline of return on Equity/ profit margin due to challenges associated with implementation of inventory management practices. NMB being one of the business firms is still struggling to effectively embrace the concept of inventory management practices as a strategy to reduce inventory management costs through balancing not keeping too much inventories/ too little inventories and finally realize increased profit margin.

It is evident that no known local study had been done on this phenomenon and it was against background that I, the researcher intend to investigate the influence of inventory management practices on organizational financial performance with specific reference to National Microfinance Bank headquarters Dar es Salaam.

​​​​​​​Research Questions

​​​​​​​General question

The general research question that the study endeavored to answer is - What are the factors that influence inventory management practices on organization financial performance? This question was further broken down into three specific questions.

​​​​​​​Specific questions

1. What are the factors that affect inventory management practices in organization?

2. What is the effect of inventory management practices on return on equity?

3. What is the effect of inventory management practices on return on sales?

​​​​​​​Research Objectives.

​​​​​​​General objectives

The main objective of the research was to investigate the influence of Inventory management practices on organizational financial performance.

​​​​​​​Specific objectives

1. To identify factors that affect inventory management practices in organization.

2. To determine the effect of inventory management practices on return on equity.

3. To determine the effect of inventory management practices on return on sales.

​​​​​​​Significance of the study.

The study was significant in different locations including the organization in which it will be performed. The output of this research is likely to be beneficial to the following groups:

​​​​​​​Respondent Organizational benefits

The suggestion and recommendations may be used by the organization itself in realizing the importance of using various mentioned techniques in inventory mangement practices effectively so that will enable the organization to work better and increase financial performance.

​​​​​​​Academic Areas benefits

The study was significant to academic areas (Universities, College and academic institutions) it enabled the researcher to have practical training by integrating theoretical training obtained in classroom with real working situation. Also the result of this research will provide the reference for other researcher who aims to do the same study. So it will add up in the data bank of the academic areas.

​​​​​​​Government/Policy Makers benefits

The study was significant to the government especially policy makers. It enables the government to construct and issue policies that will enable government institutions and private sectors to adopt inventory management practices that will increase organizational financial performance.

​​​​​​​Scope of the Study

The scope of the study was limited to the influence of inventory management practices on organizational financial performance and will be conducted at NMB HQ Dar es salaam.