Many previous studies have been conducted by different researchers relating to inventory management in relation to company performance. In this section, various literatures will be reviewed with the aim of getting a clear and deeper understanding of the research topic. The aim of the section will be to see the various aspect of the business that can be affected in the case where inventory management is left unattended to. The section will as address the various measurement of inventory management that can have an influence on company performance as brought out by several studies.
2.1 THEORETICAL FRAMEWORK and CONCEPTUAL FRAMEWORK
According to Halachmi and Bouckart (2005) “the aim of inventory management is to maintain the quantities of stock held by a business at a level which optimizes some management criteria such as minimizing the costs incurred by the whole business enterprise for improved performance”.
Performance is a measure of the results achieved. Performance efficiency is the ratio between effort extended and results achieved, according to Malcolm, S. (2005). Performance can be measured by obtaining the magnitude of a quantity, such as length or mass, relative to a unit of measurement, such as a meter or a kilogram. Inventory management challenges can interfere with a company’s profits and customer service. They can cost a business more money and can lead to an excess of inventory overstock that is difficult to move. Most of these problems are usually due to poor inventory processes and out-of-date systems, Gourdin et al(2001).
2.1.1 IMPORTANCE OF INVENTORY MANAGEMENT
Inventory Management is a process performed by almost all companies and organizations as the absence of inventory management may lead to loss of sales and customers in times of high demand. It can therefore be said that failure to manage inventory effectively can have a significant impact on a company’s performance and growth. According Coyle et al (2003), he emphasizes on the importance of inventory on the balance sheet, as he states that, “Inventory is an asset on the balance sheet of companies has taken an increased significance because of the strategy of many firms to reduce their inventory in fixed assets that is plants, warehouses, office buildings, equipment and machinery. Another importance of inventory can be placed on its ability to guard against stock outs costs. This cost is incurred when a customer’s demands cannot be fulfilled because the inventory is completely depleted. It refers to the disrupted production when materials are unavailable. In many instances, demand rates and delivery times are subjected to variability. According to Gaither (1996),Stock outs can be due to higher than average demand rates and longer than the normal delivery times.He again identifies another importance of inventory as, to maintain flexibility in scheduling. Here, costs and complexities related to scheduling personnel and equipment sometimes make it desirable to produce at times and quantities that do not directly correspond to the current demand. The ability to produce goods for inventory instead of directly for customers gives managers greater flexibility in scheduling.
2.1.2 THE REASONS FOR STOCKING INVENTORY
There are various reasons as to why firms and companies keep inventories or rather stock certain products. Reasons for maintaining inventories:
A retailer stays in business when he/she has the product the customer wants on hand when the customer wants them. If not, the retailer will have to back order the product. If the customer can get the goods from some other source, he or she many chose to do so rather than wait than wait in order to allow the original customer to meet demand later (through back-order). Hence, in some instances a sale is lost forever if goods are not in stock.
2. Running Operations
In order to manufacture a product a manufacturer must have certain purchased items (raw materials component or subassemblies). Completing the production of finished goods can be prevented when a manufacturer is running out of only one item. Inventory between successive dependent operations also serves to decouple the dependency of the operations. A work-center often depends upon the previous operation to provide it with parts to work on. If work stops at awork-center, all subsequent centers will shut down for lack of work. Each machine can maintain its operation for a limited time, hopefully until operations resume at the original center if a supply of work-in-progress inventory is kept between each work-center (kuku, 2004).
3. Lead Time
Lead time is the time that elapses between when order is placed (either a production order issued to the factory floor or a purchase order) and actual time goods ordered are received. If an external firm or an internal department or plant (supplier) cannot supply the required goods on demand, then the client firm must keep an inventory of needed goods. The larger the quantity of goods the firm must carry in inventory depends on the longer the lead time.
Inventory can also be used as a hedge against price increases and inflation. Before a price increase goes into effect, salesmen routinely call purchasing agents. According to kuku (2004), this gives the buyer a chance to purchase material in excess of current need at a price that is lower than it would be if the buyer waited until after the price increase occurs.
5. Quantity Discount
Purchase of large quantities of goods often times attracts a price discount to the firms. This also frequently results in inventory in excess of what is currently needed to meet demand. However, the decision to buy in large quantities is justifiable if the discount is sufficient to offset the extra holding cost incurred as a result of the excess inventory.
6. Flexibility Of Inventory Service
Flexibility of inventory service provides an organization with the ability to keep inventory services to an agreed service level in a predictable fashion with acceptable risk and cost. This capability can be tested and valued by customers. Managing inventory to ensure high customer service level is critical in the supply chain.
According to Lieberman et al (2002), however, to maintain assets is very costly. Reflecting the level of availability of inventory to the customers is in three categories namely, raw material inventory, work-in-progress inventory and finished goods inventory. Excess in each side is