The Influence Of Inventory Management Practices On Organizational Financial Performance

The Influence Of Inventory Management Practices On Organizational Financial Performance
Abstract
A large majority of organizations worldwide commit large amounts of funds to inventory management which constitutes most significant part of their current assets. The organizations strive, through their departments of – purchasing, production, sales and finance, to manage inventories efficiently and effectively so as to avoid unnecessary tying of capital. The aim of inventory management is to minimize costs of ordering, carrying and not carrying sufficient inventory.
Poor inventory effects include – remarkable differences between stock records and physical stock, inadequate records and recording, availability of obsolete and obsolescence stores, greater complaints from customers due to unfulfilled orders, disorganized stores, damaged stocks and loss of financial resources. This study assessed the influence of Inventory Management Practices on Organizational Financial at the National Microfinance Bank Headquarters Dar es Salaam.
The study conducted a survey of the National Microfinance Bank at the NMB Headquarters. The questionnaire targeted a selected sample of the NMB staff. Pursuant to that, the study strived to answer three questions – i) What are the factors that affect inventory management practices in organization?; ii) What is the effect of inventory management practices on return on equity?; and iii) What is the effect of inventory management practices on return on sales?
The study found out that, among crucial factors affecting inventory management practices in NMB were – skills and knowledge among staff; involvement of management in procurement planning; and existence of procurement policies which are adhered to by staff in the implementation of inventory management processes. The study also revealed corresponding growth in sales and profits in 2013 which resulted in constant growth of business with big value generated by NMB through its ROE and ROS. The results have led to shareholders earning TZS 34 billion in form of dividends while GoT received TZS 79.6 billion as income taxes, PAYE, SDL etc; NMB paid staff salaries and emoluments at TZS 99.7 billion; and spent TZS 1.05 billion in sponsorships, Public Relations donations etc. to other stakeholders and the public.
Chapter One
Overview of the Study
1.0 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.
1.1 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, re-order 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.
1.2 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, disorganized 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.
1.3 Research Questions.
1.3.1 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.
1.3.2 Specific Questions
- What are the factors that affect inventory management practices in organization?
- What is the effect of inventory management practices on return on equity?
- What is the effect of inventory management practices on return on sales?
1.4 Research Objectives.
1.4.1 General Objectives
The main objective of the research was to investigate the influence of Inventory management practices on organizational financial performance.
1.4.2 Specific Objectives
- To identify factors that affect inventory management practices in organization.
- To determine the effect of inventory management practices on return on equity.
- To determine the effect of inventory management practices on return on sales.
1.5 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:
1.5.1 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 management practices effectively so that will enable the organization to work better and increase financial performance.
1.5.2 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.
1.5.3 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.
1.6 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.
Chapter Five
Summary, Conclusions and Recommendations
This chapter presents a summary of the study, its conclusions and recommendations. It covers the objective of the study, how it was carried out, its conclusions and the recommendations for feeding into inventory management practice, policy review and future research on the inventory management subject in the banking sector.
5.1 Summary of Findings
This study was conducted in 2014 as part of the Master of Science degree in Procurement and Supply Chain Management (MSc-PSCM) at Mzumbe University, Dar es Salaam Campus College. The study came out to address the problem of adverse conditions that affect business organizations as a result of weak inventory management systems. The negative outcomes of such weak systems include, inter alia, – loss of stock due to theft and pilferage; remarkable differences between stock records and physical stock; inadequate records and recording; generation of obsolete and obsolescence stores; abounding complaints from customers due to unfulfilled orders; disorganized stores; damaged stock; and loss of financial resources. The study was conducted at the NMB Headquarters in Dar es Salaam.
Inventory management practices on organizational financial performance for business and service oriented firms around the globe remains a major debated 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 ROE/ profit margin due to challenges associated with implementation of inventory management practices. The NMB was selected for the study because it is one of the rapidly growing businesses in the banking sector in Tanzania with a network of over 153 branches countrywide. Figure 5.1 below illustrates that NMB has been a growing business with success in shareholders’ ROE, return on assets, cost to income ratio, capital adequacy ratio and a high dividend per share.
The main objective of the research was to investigate the influence of Inventory management practices on organizational financial performance. Specific objectives included:- to identify factors that affect inventory management practices in organization; to determine the effect of inventory management practices on return on equity; and to determine the effect of inventory management practices on return on sales. Pursuant to the objectives, the study came out to answer the following three research questions – i) What are the factors that affect inventory management practices in organization?; ii) What is the effect of inventory management practices on return on equity?; and iii) What is the effect of inventory management practices on return on sales?.
5.2 Conclusions
The conclusion of the study is presented based on the three objectives of the study namely; To identify factors that affect inventory management practices in organization; To determine the effect of inventory management practices on return on equity; and To determine the effect of inventory management practices on return on sales.
5.2.1 Factors that Affect Inventory Management Practices in Organization
The study concludes that inventory planners at NMB have the required knowledge and skills (77.5%). This observation is consistent with the findings in the staff profile where all respondents (100%) were found to be holding degree qualifications or above. Also, the finding is consistent with the understanding that Inventory operations management is a process- oriented operation. Every task and action required to be carried out by operatives will affect the inventory as the knowledge of what one is required to do and the effects of the action should be known to the operative who are on the shop floor. Among crucial factors affecting inventory management practices in NMB were skills and knowledge among staff; involvement of management in procurement planning; and existence of procurement policies which are adhered to by staff in the implementation of inventory management
processes.
The management at NMB participates adequately in the inventory management process from inventory planning, supervision, monitoring and assessment. It was also learnt that there is close co-ordination between the finance department, procurement, supply chain, logistics and other sections of the administration. The efficiency of Inventory management are largely dependent upon the skills and knowledge of the inventory planners, the focus and involvement of the management and the management policies coupled with the inventory management system. At the NMB the inventory operation management is not under the control of the inventory management team but it is the responsibility of the entire management.
Information communication has been a crucial factor to support the effectiveness of inventory management in NMB. With over 3,000 staff at headquarter and in its 153 branches country wide, the NMB is the largest bank in Tanzania, both in terms of its customer base and branch network. Also, other factors contributing to the influence of inventory management included – staff adherence to inventory policies; and use inventory management rules, which again is a factor of managerial involvement in the inventory management process.
At NMB operational policies, rules and procedures have made significant contribution to the inventory management function. It has to be remembered that a major factor that affects inventory control policies is product lead time; the time from receipt of an order to the time of delivery. Some industries and products have extraordinary long lead times. e.g. short lead time reduce the amount of inventory and long lead time product the retailer has to warehouse more inventory and by having the increased amount of inventory the workload associated with managing the inventory, such as cycle counting, yearly physical inventory and general warehouse maintenance. Also, it is important to note that, the formulation of inventory management policies in the organization helps to guide the organization’s inventory management processes.
5.2.2 Effect of Inventory Management Practices on Return on Equity
On the effect of inventory management practices on ROE, respondents rated the use of computerized systems (e.g. EDI, EPOS & ERP) as the highest at 70% followed by the use of stock levels technique rated at 65%. The study concludes that use of computerized systems might have been rated high as a result of most staff being anxious to cope with new technological inventions. However, in practical terms, the use of systems like EDI requires well developed skills which sometimes become a challenge to most organizations.
Since the majority of respondents (over 90%) were found to be of high level of education with degrees and above, it is most likely that they take opportunity to practice their knowledge and skills in such areas. However, in the case of NMB, it has an ongoing branch refurbishment programme which, among other things, is also designed to develop staff competences and upgrading working space and equipment.
Although computerized systems (eg EDI) have been branded to be carriers of new technology, they have to be taken-up carefully ensuring appropriateness, resource optimization and feasibility. It has to be noted that some of these systems are time consuming and might require large amounts of data in order to operate. The various inventory management systems have their positive aspects as well as challenges. Hence, prior to choice, the practitioners have to assess the situation at hand.
The study also concludes that NMB has achieved remarkable improvement in business growth in terms of ROS and ROE. Since the ROE measures the rate of return on the ownership interest (Shareholders’ Equity) of the common stock owners, it measures a firm’s efficiency at generating profits from every unit of shareholders’ equity. It also shows how well a company uses investment funds to generate earnings growth. The benefit comes from the earnings reinvested in the company at a high ROE rate, which in turn gives the company a high growth rate. The benefit can also come as a dividend on common shares or as a combination of dividends and reinvestment in the company. ROE is presumably irrelevant if the earnings are not reinvested.
At NMB accordingly, total revenues grew by about 18% to TZS 422.2 billion. On the expense side, total expenses growth rate at 13% remained well below the revenue growth rate of 18%, which translated in a cost to income ratio of 53%. Staff costs represented about 44% of total expenses. Overall, the bank’s Profit After Tax (PAT) increased by a respectable 37% to TZS 133.9 billion. The bank’s key efficiency ratios remained stable or improved viz. the cost-to-income ratio which improved from 53% to 55%, and the loan-to-deposit ratio which improved from 59% to 63%, though remaining well below the regulatory maximum of 80%. The bank’s return on equity improved from 27% to 29% while the core capital of the bank grew to TZS
421.8 billion, resulting in a capital adequacy ratio of 22% (before appropriation of profits), also well above the increased regulatory minimum of 12%.
The above results could, in part, be attributed to the inventory management practices at NMB which have leveraged the financial performance to be able to generate profits and contribute to growth in advances, total income, deposits and loan deposit ratio. Generally, the bank has been rapidly growing in terms of ROE and ROS. This status is evidenced by the 2013 NMB Annual Report which testifies that, the big value generated by NMB through its ROE and ROS in year 2013 was distributed to the NMB’s shareholders and allocated between NMB’s key stakeholders.
5.2.3 Effect of Inventory Management Practices on Return on Sales
The study concludes that the use of computerized systems (e.g. EDI, EPOS & ERP) followed by the use of stock levels technique have been affecting inventory management practices on ROS. This rating might have been rated high as a result of most staff being anxious to cope with new technological inventions. However, in practical terms, the use of systems like EDI requires well developed skills which sometimes become a challenge to most organizations. However, in the case of NMB, it has an ongoing branch refurbishment programme which, among other things, is also designed to develop staff competences and upgrading working space and equipment.
The Use of an economic order quantity technique; and use of the ABC analysis techniques were rated moderately at 62.5%. Use of Lean inventory system (e.g. JIT & MRP) and strategic supplier partnership (e.g. VMI) were both rated lowest at 60%. In both cases it is indicative that since the majority of respondents (over 90%) were found to be of high level of education with degrees and above, it is most likely that they take opportunity to practice their knowledge and skills in such areas.
The findings of this study show that inventory management practices used by NMB have been having a positive effect on the financial performance of the organization, ie contributing to the growth of ROE and ROS. With a background of being established out of a break-up of another mammoth bank, one would have predicted persistent poor performance, especially with regard to the complex areas of procurement and supply chain management in a banking atmosphere. For instance, for a big bank with a network of over 153 branches spread out country wide, and with over 3,000 staff, it would be bound to face multiple inventory management challenges and other procurement related risks. Inventory management systems need to be assessed for suitability to the industry for appropriateness and reliability.
However, on its part, NMB by 2013, had recorded total revenues growth by about 18% to TZS 422.2 billion. On the expense side, total expenses growth rate at 13% remained well below the revenue growth rate of 18%, which translated in a cost to income ratio of 53%. Staff costs represented about 44% of total expenses.
5.3 Recommendations:
Based on the study findings, their analysis and conclusions this report makes the following recommendations to respective institutions. The recommendations are presented based on the three objectives of the study namely, To identify factors that affect inventory management practices in organization; To determine the effect of inventory management practices on return on equity; and To determine the effect of inventory management practices on return on sales.
5.3.1 On Factors Affecting Inventory Management Practices
Among crucial factors affecting inventory management practices in NMB were skills and knowledge among staff; involvement of management in procurement planning; and existence of procurement policies which are adhered to by staff in the implementation of inventory management processes. The management at NMB participates adequately in the inventory management process from inventory planning, supervision, monitoring and assessment. It was also learnt that there is close co-ordination between the finance department, procurement, supply chain, logistics and other sections of the administration.
The efficiency of Inventory management are largely dependent upon the skills and knowledge of the inventory planners, the focus and involvement of the management and the management policies coupled with the inventory management system. Therefore, management have to ensure that staff in the organization are exposed to skills and knowledge on inventory management
Furthermore, management have to ensure that they participate in inventory planning process in the organization in order to avoid the risk of the organization to face challenges of – loss of stock due to theft and pilferage; remarkable differences between stock records and physical stock; inadequate records and recording; generation of obsolete and obsolescence stores etc.
Organizations should have inventory management policies in place in the organization to guide the organization’s inventory management processes and conduct.
5.3.2 Effect of Inventory Management Practices on ROE
Following the conclusion that the use of computerized systems might have been rated high as a result of most staff being anxious to cope with new technological inventions, it is also true that, in practical terms, the use of systems like EDI requires
well developed skills which sometimes become a challenge to most organizations. Since the majority of respondents (over 90%) were found to be of high level of education with degrees and above, it is most likely that they take opportunity to practice their knowledge and skills in such areas. Also noted was the fact that, in the case of NMB, it has an ongoing branch refurbishment programme which, among other things, is also designed to develop staff competences and upgrading working space and equipment.
Although computerized systems (eg EDI) have been branded to be carriers of new technology, they have to be taken-up carefully ensuring appropriateness, resource optimization and feasibility. It has to be noted that some of these systems are time consuming and might require large amounts of data in order to operate. The various inventory management systems have their positive aspects as well as challenges. Hence, prior to choice, the practitioners have to assess the situation at hand.
Management should ensure that prior to adoption of any computerized inventory management systems, they are assessed for appropriateness, resource optimization and feasibility. It should be noted that some of these systems are time consuming, skill demanding and might require large amounts of data in order to operate.
5.3.3 Effect of Inventory Management Practices on Return on Sales
As the study found out that the use of an economic order quantity technique; and use of the ABC analysis techniques and the use of Lean inventory system (e.g. JIT & MRP) and strategic supplier partnership (e.g. VMI) were rated moderately (at 62.5%. and at 60%) it was found to also be a result of inventory practitioners trying to keep abreast with contemporary technologies in the field of inventory management not taking into account aspects of relevance and effectiveness to the tasks needs and requirements.
It is therefore recommended that management has to ensure that industry-specific requirements of some of the inventory management systems (as for the case of JIT) and the obtaining situation are considered before the adoption of the technology.
Further, organizations should ensure that the practitioners have to assess the situation at hand prior to the choice of the system or approach. Before adopting any inventory management system, practitioners should assess it for suitability to the industry, for appropriateness and reliability.
Recommendation for Future Studies
This study recommends that other scholars should look conduct studies to identify the various inventory management systems and their suitability to various industrial or sector demands. This implies that there are more knowledge gaps in this area.


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