MAKERERE
UNIVERSITY
TOPIC: INVENTORY MANAGEMENT SYSTEMS AND PROFITABILITY OF
SMALL AND MEDIUM SCALE ENTERPRISES (SME’s) IN KAMPALA
A Case Study of Kikuubo Trading Street
BY
NAKINTU CAROLINE
REG.NO. 07/U/12220/EXT
SUPERVISOR
DR.KAMUKAMA NIXON
A RESEARCH REPORT SUBMITTED TO THE COLLEGE OF BUSINESS AND
MANAGEMENT SCIENCES IN PARTIAL FULFILLMENT FOR THE AWARD OF
BACHELOR OF COMMERCE DEGREE,
MAKERERE UNIVERSITY,
KAMPALA.
JUNE 2011
1
DECLARATION
I Nakintu Caroline, hereby declare that this is my own original work and has never been
submitted in part or full to any university or institution of higher learning at anytime for the
award of a Diploma or Degree.
Sign…………………………..
NAKINTU CAROLINE
(Student)
Date…………………………
i
APPROVAL
I certify that this piece of work has been carried out at Makerere University under the topic,
Inventory Management systems and Profitability under my supervision and it’s ready for
submission.
Signature………………….
Date……………………..
Dr. KAMUKAMA NIXON.
ii
DEDICATION
This book is dedicated to my Late Dad Mr. Kasibante Grace Steven and my mum Mrs. Kasibante
Nanziri Annette, my brothers JJamba Godfrey, JuliusCeaser Ssemanda, Bbukka Washington and
my sister Diana whose support and devotion have never failed me.
iii
ACKNOWLEDGEMENT
It is my desire and gift to acknowledge and thank God for my life. Thanks be to God.
My greatest acknowledgement goes to my parents Mr. and Mrs. Kasibante Grace, all my brothers
for the material, moral and financial assistance they offered to me while pursuing my Bachelor’s
degree at Makerere University.
I also acknowledge my supervisor Dr. Kamukama Nixon of Makerere University for his support
and guidance during the course of carrying out the research study
I am grateful to all his substantive comments, suggestions and the general supervision of the
research. His valuable time, guidance and effort at every stage have been very useful to me.
Special thanks go to my grandfather Engineer Ssempa James and family for the support, care, and
help they extended to me and helping me undertake this course. I also thank my grandfather Mr.
Makumbi .A and Dr Isaac Mugwano for all the care and advice he extended.
Lastly much gratitude goes to my friends Abdu, G.Fred, Sylvia, Paul, and Charity, Faisal, Diana,
and Stella, Jacob, Ronald, my discussion group mates chairman Mugoya Charles, Abram,
Norbert, Maya, Allan, Julius, Sam, Vuziga, and Ms. Hope for typing my work.
iv
TABLE OF CONTENTS
DECLARATION……………………………………………………………………………………………………………….i
APPROVAL……………………………………………………………………………………….ii
DEDICATION…………………………………………………………………………………….iii
ACKNOWLEDGEMENT………………………………………………………………………...iv
TABLE OF CONTENTS………………………………………………………………………..…v
LIST OF TABLES…………………………………………………………………………..……vii
ABSTRACT……………………………………………………………………………………..viii
CHAPTER ONE ....................................................................................................................... 1
1.0 Background to the Study. ..................................................................................................................... 1
1.1 Statement of the Problem .................................................................................................................... 2
1.2 Purpose of the Study ............................................................................................................................. 3
1.3 Objectives of the Study ......................................................................................................................... 3
1.4 Research Questions ............................................................................................................................... 3
1.5 Scope of the Study ................................................................................................................................. 4
1.5.1 Study Scope ......................................................................................................................................... 4
1.5.2 Geographical Scope............................................................................................................................ 4
1.6 Significance of the Study ...................................................................................................................... 4
CHAPTER TWO .................................................................................................................... 5
LITERATURE REVIEW .................................................................................................................................... 5
2.1 Concept of Inventory Management System ...................................................................................... 5
2.1.1 Components of an Effective Inventory Management System: .................................................... 6
2.2 Profitability ............................................................................................................................................. 8
2.2.1 Profitability Measures: ...................................................................................................................... 9
2.2.2 Profit Planning. ................................................................................................................................. 10
2.2.3 Essentials Profit Planning ................................................................................................................ 10
2.2.4 Other Factors Affecting Profitability of Small Scale Enterprises. .............................................. 11
2.3 Relationship between Inventory Management System and Profitability ................................... 11
CHAPTER THREE .................................................................................................................. 14
METHODOLOGY.......................................................................................................................................... 14
v
3.1 Research Design ................................................................................................................................... 14
3.2 Study Population.................................................................................................................................. 14
3.3 Sampling Size ........................................................................................................................................ 14
3.4 Sampling Method ................................................................................................................................ 15
3.5 Source and Type of Data..................................................................................................................... 15
3.6. Data Collection Methods: .................................................................................................................. 16
3.7 Data Processing, Analysis and Presentation .................................................................................... 16
3.8 Limitations to the Study...................................................................................................................... 17
CHAPTER FOUR ................................................................................................................... 18
ANALYSIS AND PRESENTATION OF FINDINGS ........................................................................................ 18
4.1 Response on Demographic Characteristics of the Respondents. ................................................. 18
4.2 Findings on whether small and medium scale enterprises in Kikuubo have appropriate inventory
management system .......................................................................................................................... 20
4.3 Findings on the profitability levels of small and medium scale businesses in Kikuubo. ........... 24
4.4 Findings on the relationship between inventory management and profitability of small and medium
scale enterprises. ................................................................................................................................ 26
CHAPTER FIVE ..................................................................................................................... 29
SUMMARY, CONCLUSION AND RECOMMENDATIONS ......................................................................... 29
5.1 Summary of Findings ........................................................................................................................... 29
5.1.1 Findings on inventory management techniques of small and medium scale enterprises in
kikuubo trading
area………….………………………………………………………………………..…...29
5.1.2 Findings on the profitability of small and medium scale enterprises in Kikuubo ................... 30
5.1.3 Findings on Relationship between Inventory Management and Profitability ........................ 30
5.2 Conclusion............................................................................................................................................. 30
5.3 Recommendations............................................................................................................................... 31
REFERENCES ........................................................................................................................ 33
APPENDICES ........................................................................................................................ 35
APPENDIX 1: QUESTIONNAIRE ............................................................................................. 35
APPENDIX II: LETTER FROM THE CASE STUDY ....................................................................... 38
APPENDIX III: INTRODUCTORY LETTER ................................................................................. 39
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LIST OF TABLES
Table1: Trend of profitability of SMEs in Kikuubo between 2008-2010. .........................................3
Table2: Showing Sample Size Considered ..................................................................................... 15
Table 3: Gender of respondents......................................................................................................18
Table4: Age of the respondents……………………………………...…………………………...18
Table 5: Response on how long respondents have worked in the business………………………19
Table 6: Response on Education level of respondents…………...……………………………….19
Table 7: Response on whether the business has an effective inventory management system……20
Table 8: Response on whether the business keeps inventory…………………………….………20
Table 9: Response on whether there is regular stock taking……………………………….……..21
Table 10: Response on whether all orders are authorized by relevant authorities………………..21
Table 11: Response on whether situations of excessive stock exist…………………………...…22
Table 12: Response on whether deliveries are often made in time………………………………22
Table13: Response on whether there is segregation of duties…………………………….……...23
Table 14: Response on whether goods are inspected when received and before being stored…...23
Table 15: Response on techniques used to manage inventory………………………………..…..24
Table 16: Response on whether the firm consistently makes profits……………………………..24
Table 17: Response on whether actual profits made are the budgeted………………………...…25
Table 18: Response on whether there are measures in place to determine profits……………….25
Table19: Response on whether there is high stock out and ordering costs……………………….26
Table 20: Response on whether the business experiences high carrying costs…………………..26
Table 21: Response on whether the business has lost sales due to late deliveries………………..27
Table22: Response on whether inventory related costs affect profitability………………………27
Table23: Relationship between inventory management and profitability…………………….….28
vii
ABSTRACT
The study was carried out under the topic “Inventory Management Systems and Profitability”.
The objectives of the study were to establish the different inventory management techniques used
by small and medium scale enterprises in Kikuubo and to establish the relationship between
inventory management and profitability within Small and Medium scale Enterprises in Kikuubo.
The researcher reviewed various existing literature on inventory management and profitability to
equip him with the core principles about inventory management and profitability.
The study employed both analytical and descriptive design based on results from, questionnaires
and interactive interview carried out during the process of collecting data. A sample of 50
respondents was used stratified Random sampling method was to be used to collect data from
respondents.
From the findings of the study Small and Medium Enterprises in Kikuubo use three forms of
inventory management techniques to control inventory.
These include Economic order quantity, just in the system and the ABC system. However goods
are lost when received from suppliers during offloading and also from stores, there is no stock
taking, inventory purchased is not recorded. The result also showed that there was decline in
profits of most business for the past three years. And there was a positive relationship of 0.45
between inventory management and profitability.
Management should use just in time technique of inventory management to manage their
inventory for it minimizes costs.
The researcher also recommended management to make inventory management across functional
responsibility.
viii
CHAPTER ONE
1.0 Background to the Study.
Inventory management is defined as the process of maintaining optimum levels of inventory
investments, through, controlling costs related to stock on hand, work in progress and finished
goods (IM Pandey, 1995).
According to Saleemi (1993) inventory management refers to various techniques used to insure
that the right quantity of an item is used at the right time and place. And according to him the
objective of inventory management is to maintain a minimum investment in inventories to
maximize profitability. The task of the business is to consider the costs, returns and risk factors
while establishing the inventory control systems that may home negative effects on the enterprise
profits (Walgembach, et al., 1982).
Small scale business enterprises are enterprises that employ a limited number of employees with
a reason to minimize costs of operations, have small capital structure and annual scales turnover
of less than 50 million shilling (Ekpoyong and Nyong, 1992), their main objective is to maximize
profit and they thus vary from industry to industry in terms of capital employed, locators and
nature of goods they deal in.
Most small scale enterprises in Uganda have not survived to celebrate their first birthday, due to
their low levels of profitability. Although they have been recognized in the recent years as the
most important employment generation factor in Africa (Lettice, 2000), according to Calvin
(2000) most small scale businesses are myopic and have that continues to perform poorly.
Different scholars define profits in different ways organization is the excess of income over
expenditure at a particular period of time usually a year.
Economists define profits as the ability of a firm or business to maximize revenues and minimize
its costs (Lipsy, 1983). Profitability refers to how well a firm is doing it can also be a company’s
ability to generate revenues in excess of costs incurred in producing those revenues.
1
According to Stanford (1991) the most important thing is justification for profit.
It also a measure of business success though comparing profits made with the amount invested
(www/tutor2u.net/economics/revisionotes.htm) profitability is affected by lack of inventory
management, quality control, and customer care.
Since inventories constitute a large portion of the organization’s budget, there is need to have a
proper inventory control system to ensure profitability of the company as a result minimizing
costs associated with inventory (Lucy, 1996).
Most small scale and medium for expenses in Kampala are closing and new ones open up every
year and the possible cause of their fall is to low profit margin. Kikuubo is a trading street in
Kampala with a number of small scale business set ups and businesses here have suffered the
same problems as many others in Kampala, Businesses here include General merchandise,
Garments and clothing, retail shops dealing in stationary, Grocery stores and others. There are
about 6 employees in each business and the owners working as the manager.
The inventory arrangement system in place includes: occasional stock taking, store keeper order
for the stock, warehouse activities are properly documented, presence of staff with clearly
defined job description, authorization of purchase requisitions.
1.1 Statement of the Problem
In almost all organizational settings there is a direct correlation between inventory management
and overall business performance (Walgembach, 1982)
Small scale businesses in Uganda are privately owned with a major objective of maximizing
profits which have kept declining. For example for the case of Kikuubo, many business have
made attempts to increase their profitability through focusing on increasing their sales, dealing in
a variety of products, reduced expenditure, putting up inventory management policies to control
costs related to inventory, still their profitability has not improved as expected. This can be seen
in the three identified small scale and medium enterprise selected from Kikuubo which had
reducing profit levels as reflected in their profit and loss accounts for the periods 2005-2010.
2
Table1: Trend of profitability of SMEs in Kikuubo between 2008-2010.
Name of business
Name of Business
F & D Traders
Fair Price Traders
Net Profits per year
2008
2009
2010
57,682,250
40,356,48
21,220,050
52,258,000
52,200,500
38,000,600
36,100,800
20,500,650
18,125,000
Wakiso Enterprise
Source: Financial reports of the businesses
1.2 Purpose of the Study
The study aims at establishing the relationship between inventory control and profitability of
small and medium scale enterprise in Kikuubo.
1.3 Objectives of the Study

To assess the effectiveness of inventory management system used by small and medium
scale enterprises in Kikuubo.

To establish the relationship between inventory management system and profitability.

To establish the level of profitability of SMEs in Kikuubo.
1.4 Research Questions

Do Small and Medium Enterprises in Kikuubo have an effective inventory management
system?

What is the relationship between inventory management and profitability?

What is the level of profitability of small and medium scale enterprises in Kikuubo?
3
1.5 Scope of the Study
1.5.1 Study Scope
The study is to focus on the current inventory management system in place and profitability of
small and medium scale enterprises in Kikuubo.
1.5.2 Geographical Scope
The study is to be conducted on small and medium scale enterprises along Kikuubo trading area a
street in Kampala.
1.6 Significance of the Study

The study will help the owners and managers of small and medium scale enterprises in
Kikuubo to identify loopholes in their inventory management system.

The research will help the researcher to improve his or her understanding of inventory
management in relation to profitability.

The study will help in building on the existing literature about inventory management and
profitability.

The study will help the researcher to be awarded a degree of bachelor of commerce.
4
CHAPTER TWO
LITERATURE REVIEW
Literature review involves getting information from already written literature. These resources
may include recognized text books, magazines, workshop paper materials, periodicals and
journals among other like internet.
2.1 Concept of Inventory Management System
Inventory is a term used to indicate the merchandise held for sale in the normal course of
business and materials in the process of production or held for production (Warren Reeve & Fes,
1994).
However Render & Stair (1994) says inventories are any resource used to satisfy a current or
future need.
While Van Horne (1995) says that inventory is defined as a link between production and sale of a
product defined as stock of a product a firm is manufacturing for sale and the components that
makeup the product.
According to Pandey (1995) an inventory management system is a process of maintaining
optimum levels of investment in inventory, through controlling costs associated with stock on
hand, work in progress, and finished goods.
Inventory in a management involves having in place material control systems, proper and
systematic recording of inventory and storage of right amount of inventory (Drury, 1995).
Inventory management also includes various techniques used to ensure that the right quantity of
an item is used at the right time and place (Saleemi 1993). According to him the objective of
having an effective inventory management system include:To maintain a large size of inventory for efficient and smooth production and sales operations.
5
To maintain a minimum investment in inventory to maximize profitability.
Inventory management ensures inventory of adequate quantities, goods quality and four prices
are produced, stored properly and issued with minimum amount of capital tied up (Jordan H.
Henry, 1997)
2.1.1 Components of an Effective Inventory Management System:
According to Baluwnywa (1998), inventory refers to physical assets of an organization which are
stocked by an organization either for further processing or for final sale.
Amey and Egginton (1993) suggested three general factors for holding inventory and those
include the transaction motive, precautionary and speculative motives.
Requirement for an effective inventory management system include;
As stated by Lucey and Drury (1995) for an effective inventory management system to operate, a
number of pre-requisites should be in place, and these include the following:-Proper control of
inventory through fixing of minimum, maximum and re-order levels so as to avoid stock outs
(shortages) or over stocking of stock. There must be adequate documentation and authorization
for material transactions. Proper inspection of materials to check their quality, quantity and
specification.
The following include the detailed inventory management aspects which are geared towards
enhancing its efficiency in details.
Inventory recording system and Stock valuation.
It is important to have accurate inventory records which help an organization to plan for
uncertainties. The accuracy must at least be 95% for critical or high market value items (Jordan,
1997). He added that, it is important to maintain the cycle counting system.
Inventory recording is undertaken to reduce the error relating to inventory accountability and
accuracy.
6
It should be noted that the value of stock held by an organization has an implication on the
operating profits and tax liability (Bazalilaki, 1997)
First in First out system (FIFO)
This is where goods, that were first stored are the first to be issued out of the warehouse or store,
thus is seen more logical because materials are issued in the order in which they were purchased
and they leave the warehouse in a chronological order according to their age. Therefore closing
stock value is not understated.
Last in First Out (LIFO)
This is the opposite of the first in first out approach to inventory management, it involves letting
out first good, that entered the warehouse last, the batches of good or units purchased are issued
first. Therefore it affects accompany facing unstable prices (inflation) as closing stock will be
made of old items and they will be priced using new prices.
Inventory level control models:
There are a number of models that can be used to determine the level of inventory to be kept by
an organization (Drury, 1992).
However, all these model aim at maintaining a level that will minimize costs at the same time
allowing a firm to meet production requirements and customer demands and some of these
models include:
Economic order Quantity
The Economic order quantity is the quantity that must be purchased to ensure that inventory
holding costs are kept at minimum (ACCA, 1996).
Pandey (1995) also asserts that ordering costs always decline and handling costs increase when
the quality ordered is increased.
7
According to him EOQ is a point where ordering costs are equal to handling costs at the
minimum level of total cost.
ABC Analysis
As noted by Nair (1990), ABC analysis is a system giving attention to matters according to the
degree of their importance instead of giving equal attention to all matters. Under this model items
will be divided into 3 categories.
A, B, C,
“A” items will be of high value
“B” will be medium values items
“C” will be low value items
Just in Time system: (JIT)
It’s a system where inventory of goods to be used or sold are just in time for that purpose
(Baluwnywa 1998). Drury (1995), goods are purchased so that delivery immediately precedes
their use. Holding costs are therefore, eroded and possibilities of improving the profitability of
the organization are high.
Stock taking
This is the process of determining the quantity of each kind of inventory owned by the enterprises
and listing the description and quantity. Various stock taking methods include; continuous stock
taking where items are regularly counted and monitored. It’s done where materials are of high
value.
Periodic stock taking where monitoring and counting of stock is done at the end of the period.
2.2 Profitability
According to Stanford (1999) the accountants define profit as the difference between total
revenue and total costs.
8
However, economists view profitability as the ability of a firm or business to maximize its
revenue and minimize costs (Lipsy, 1983).
It is also a measure of business success, though company profits made with the amount invested
(WWW.tutor2u.net/Economics/revisionnotes.htm)
Campsey (1999) explains that the ability of a business to earn profits depends on the
effectiveness and efficiency of its operation as well as the resources available to it.
Profitability focuses primarily on the relationship between operating results as reported in the
financial statement and the resources available to the business as reported in the balance sheets.
Horne (2000), argues that frequently maximization of profit is regarded as the proper objective of
the firm but its not as an inclusive goal as that of maximizing shareholders value. Van Horne
(2000), has a different view from Campsey (1999) and explains that a firm could raise profit by
using stocks and using the proceeds to invest in treasury bills, his argument was based on big
organizations that raise capital through shares and debentures.
2.2.1 Profitability Measures:
Bescos and Mendoza, (2000) noted measures of profitability and they included Earnings before
interest and Tax margin, Earning before interest and Tax to A asset percentage, Effective Tax
percentage, gross profit margin percentage and Return on Equity percentage as stated below:
Earnings before interest and tax to Asset percentage: it’s a ratio of the net income plus interest
plus tax all divided by total assets. This ratio is correspondingly excellent measure of asset
utilization efficiency.
Earnings before interest and tax margin (EBIT) percentage: This is the ratio of Earning (before
interest and tax) to scales. It’s a measure of profitability on sales most useful compared against
other business in the same industry.
9
Gross profit margin: This is measured as sales minus cost of sales, divided by sales.Net profit
margin percentage: This is net income (before extraordinary gains or losses) as a percentage of
sales.
Return on Equity percentage: This is the return on equity expressed in percentage (http: power
investor.Com/profitability-measures htm).
2.2.2 Profit Planning.
A profits plan as a short term financial plan .It is an action plan to guide managers in achieving
the objectives of a firm (Pandey, 2002). A profit plan is a comprehensive and coordinated plan:
exposed in financial terms for the operations and resources of an enterprise for some specific
period in future.
Objectives of Profit Planning
The major purposes of profit planning according to (Talemwa.R, 1987).
To communicate expectations to all concerned with the management of the firm so that they are
understood, supported and implemented.
To state the expectation in clear and formal terms to avoid confusion and facilitate their
attainability.
To coordinate the activities and efforts in such a way that the use of resources is maximized.
To provide means of measuring and controlling the performance of individuals and units and
supply on information on the basis of which the necessary corrective action can be taken.
2.2.3 Essentials Profit Planning
Successful and sound planning and budgeting system is based upon certain pre-requisites. These
pre-requisites represent management attitude, organization structure and management approaches
necessary for effective and efficient application of the budgeting system.
10
The following are some of the important essentials of fundamentals of successful profit planning
or budgeting top management support, clear and realized assignment of authority and
responsibility, creation of responsibility centers, effective communication, Budget education,
flexibility (Vanhorn, 1995).
2.2.4 Other Factors Affecting Profitability of Small Scale Enterprises.
A part from poor inventory management there are factors that affect profitability of small scale
enterprises, which are noted by (Zechariah, 1996) and these include:Managerial problems where managers of small scale enterprises, lack the skills and expertise to
run their businesses. This is coupled with the ineffective internal control over the limited
financial resources.
High costs of capital obtained from financial institutions such as the high interest rate charged on
the loan funds which erodes the little earnings made by small scale enterprises (Brigham E. F.
and Gaspensiki, 1997).
2.3 Relationship between Inventory Management System and Profitability
The relationship between inventory management and profitability can be seen from the cost point
of view. Since profits equal to total revenue less total costs, (Jordan H. Henry, 1997). Here total
costs is summation of all costs that a firm incurs in its operation of which inventory management
is included.
Therefore, the effect of inventory management will be looked at by considering different
associated costs of inventory management and how they affect profitability. (Aguti, J. N. 2000).
Stock-out Costs
These occur due to being without stock in the firm (Pandey, 1995) Examples of these costs
includes:
11
(i)
Redundancy costs: certain costs are fixed with or without production taking place, such
costs include; rent, heat, lighting, air conditioning. So if stoppages in production occur
these costs will continue being incurred. These will therefore affect profitability in that
production will be low and costs will be high.
(ii)
Loss in future sales:
Customer may decide to go elsewhere if an organization continually faces problems of
stock outs. This means loss of customers and loss of future sales yet the firm continues
paying fixed expenses and low sales mean low profit for the organization.
(iii) Extra costs associated with urgent and often small quantity replenishment orders: Due to
urgency of some materials as a result of stock out, a firm will be forced to order for small
quantity to fill the gap .This however means foregoing larger quantity purchase discount
(Ssebina B.C, 1990).
Ordering Costs
These are costs of obtaining inventory from suppliers. Ordering costs include: clerical and
administrative costs of purchasing, accounting and goods receiving transport costs (Lucey, 1996).
If inventory management is not effectively handled, it will increase on the ordering costs and
therefore reduce profits of the firm.
Holding Costs
As observed by Drury (1995), there are costs of holding inventory in an organization and such
costs consist of: Interest on capital invested in stock, storage charges that is to say; rent, lighting
and heating, equipment maintenance and running costs, material handling costs and Audit, stock
taking and stock recording.
Such costs increase on the total costs of the firm and hence reducing on the profit of the firm.
Conclusion
12
It should therefore be noted that inventories is a representative of investment and therefore they
should be kept at an absolute minimum as they have an influence on the firm’s profitability.
Inventory management is also an important area of financial control which is often neglected not
knowing that a small percentage saving on inventory cost will present millions of shillings on
sales.
13
CHAPTER THREE
METHODOLOGY
This section describes the methods that were used for data collection and techniques that were
used in the analysis of data. This covers the research design, study population, sampling
technique, data type and sources, data collection methods, data presentation and analysis.
3.1 Research Design
The study was descriptive where the inventory management systems in place were described in
detail, it was also cross sectional and explanatory in nature and both qualitative and quantitative
data collected to get an in depth understanding of inventory management systems and
profitability.
Cross sectional design was considered appropriate because of time constraints and also cross
sectional studies has the advantage of taking some phenomena at a time and analyze the section
carefully to derive generalities to the total population.
3.2 Study Population
The population under study comprises of business owners, managers storekeeper and shop
attendants, from 20 businesses in Kikuubo and a total number of respondents of 60 people.
3.3 Sampling Size
From the study population, a sample size of 50 respondents was chosen from 15 businesses, this
was considered both manageable and representative of the study.
14
Table2: Showing Sample Size Considered
Business category
No. of firms
No of respondents
General merchandise
3
10
Stationary Retail shop
4
15
Garments and Clothing
3
10
Groceries
3
10
Restaurants
2
5
Total
15
50
3.4 Sampling Method
These were grouped in strata using stratified random sampling, with strata of small scale business
owner, managers, store keepers and shop attendants and simple random sampling was conducted
in each strata.
3.5 Source and Type of Data
Primary Data
The researcher collected data using questionnaires, which were sent to the respondents in the
chosen SMEs in Kikuubo concerning how they manage their inventory. Data was collected from
50 respondents, the researcher used point like scale ranging from strongly agree, agree, not sure,
disagree and strongly disagree with 1,2,3,4,5, scale respectively and a box on each where the
respondents will be required to tick their appropriate choice. The questionnaire was designed to
capture, concise and precise responses. This was achieved by use of an introduction letter from
Makerere Institute of Adult and Continuing Education, faculty of economics and management for
identification purposes.
Secondary Data
The researcher collected data from sources like news papers, UMA trade fair magazines,
workshop research papers and other research materials.
As these helped the researcher to appreciate the link between theory (literature) and practice.
15
3.6. Data Collection Methods:
Questionnaire: The researcher used self administered questionnaires to collect data from the field,
this served convenient for the researcher.
Interview: This is a face to face interview where by the researcher arranged the interview
questions related to inventory management system and profitability of SMEs.
Procedure:
The researcher began with getting a letter of introduction from Makerere university institution of
Adult and continuing education that was to be attached to the questionnaires. This was intended
to minimize on the resistance of some respondents who would refuse to release information to the
researcher. And these questionnaires were distributed to the respondents and there after picked
from them after filling them. The correctly filled questionnaires were sorted and considered
adequate data qualifying for analysis by the researcher.
3.7 Data Processing, Analysis and Presentation
Data Processing
After collecting data, the researcher organized the well filled questionnaires and processed data
with the aid of Microsoft word by typing the work on a computer.
Data Analysis
Data was collected; results compiled, sorted, edited, classified and analyzed using, frequency
distribution table, percentages and regression analysis for better analysis.
Data Presentation
Data was presented in tabular form with frequencies and percentages for simple classification of
response.
16
The inferential statistics was derived by using Statistical Package for Social Scientists (SPSS)
computer program and the relationship between the two variables was derived through
correlation analysis.
3.8 Limitations to the Study
There was a limitation of lack of proper records and even non existence of some due to the fact
that most SMEs do not keep or do not have records. However the researcher tried to get the
necessary information for the study.
Also some respondents could not release some information because they expected to get no
return for their information.
Another limitation was getting wrong information due to excitement of respondents.
There was also financial constraint to facilitate the study. However the researcher adjusted the
budget to fit in the resources available.
17
CHAPTER FOUR
ANALYSIS AND PRESENTATION OF FINDINGS
This chapter covers the analysis and presentation of findings. It provides typical analysis of the
effect of inventory management systems and profitability. The data presented and analyzed was
collected .from traders of small and medium scale enterprises in Kikuubo trading area, hence
primary source information. Tables, figures, frequency and percentages were used to present the
findings. The findings have been presented and discussed in accordance with the objectives of the
study.
4.1 Response on Demographic Characteristics of the Respondents.
Table 3: Gender of respondents
Male
Female
Total
Frequency
29
21
50
Percent
58.0
42.0
100.0
Valid Percent
58.0
42.0
100.0
Cumulative
Percent
58.0
100.0
Source: Primary data
From the above table it’s evident that male respondents were more than the female because most
of the workers and business owners in the approached businesses were male.
Table4: Age of the respondents
Below20years
20-30years
Above30years
Total
Frequency
6
20
24
50
Percent
12.0
40.0
48.0
100.0
Valid Percent
12.0
40.0
48.0
100.0
Cumulative
Percent
12.0
52.0
100.0
Source: Primary data
According to table 4, the biggest number of respondents is above 30years at 48%, the next group
lies between 20-30 years at 40% and below 20 years at 12%.40% of respondents included the
energetic workers.
18
Table5: Response on how long respondents have worked in the business
Lessthan1year
1-2years
3-4years
Morethan5years
Total
Frequency
3
8
21
18
50
Percent
6.0
16.0
36.0
42.0
100.0
Valid Percent
6.0
16.0
36.0
42.0
100.0
Cumulative
Percent
6.0
22.0
58.0
100.0
Source: Primary data
According to the table 42% of the respondents have worked in the approached small and medium
scale businesses for more than 5 years, 36% between 3-4 years, 16% between 1-2 years and 6%
less than 1 year. This means that the biggest number of respondents approached had enough
experience in the business because of staying in the business for over 5 years and therefore
provided reliable information about the study.
Table 6: Response on Education level of respondents
Degree
Diploma
Certificate
Just experience
Total
Frequency
5
5
19
21
50
Percent
10.0
10.0
38.0
42.0
100.0
Valid Percent
10.0
10.0
38.0
42.0
100.0
Cumulative
Percent
10.0
20.0
58.0
100.0
Source: Primary data
From table 6, the biggest number of respondents just have experience and these are represented
by 42% of the total, 38% have certificates, 10% diplomas and 10%degree.Meaning that most
small and medium scale businesses in Kikuubo are operated by people who have no or low levels
of education because of not requiring highly educated people but basic knowledge and experience
by especially the lower level staff, while the few with degrees and diplomas include the upper
staff who are few.
19
4.2 Findings on whether small and medium scale enterprises in Kikuubo have appropriate
inventory management system
Table 7: Response on whether the business has an effective inventory management system
Not sure
Disagree
Strongly disagree
Total
Frequency
10
11
29
50
Percent
20.0
22.0
58.0
100.0
Valid Percent
20.0
22.0
58.0
100.0
Cumulative
Percent
20.0
42.0
100.0
Source: Primary data
Table 7 shows that 58% strongly disagree that their businesses have effective inventory
management systems 22% disagree, 20% not sure; this shows that most businesses do not have
an effective inventory management system.
Table 8: Response on whether the business keeps inventory.
Strongly agree
Agree
Disagree
Total
Frequency
24
23
3
50
Percent
48.0
46.0
6.0
100.0
Valid Percent
48.0
46.0
6.0
100.0
Cumulative
Percent
48.0
94.0
100.0
Source: Primary data
From table 8, 48% of the respondents strongly agree that the business holds inventory, 46%
agree, 6% disagreed. This shows that among the businesses approached most of them hold
inventory. This explains the high carrying costs incurred by most businesses.
20
Table 9: Response on whether there is regular stock taking.
Agree
Not sure
Disagree
Strongly disagree
Total
Frequency
2
6
14
28
50
Percent
4.0
12.0
28.0
56.0
100.0
Valid Percent
4.0
12.0
28.0
56.0
100.0
Cumulative
Percent
4.0
16.0
44.0
100.0
Source: Primary data
According to table 9, 4% of the respondents agree that there is regular stocktaking, 12% were not
sure, 28% disagree and 56% strongly disagree. Meaning that most businesses do not carry out
regular stock taking for their businesses, this explains the high levels of stock loss due to theft
and damage.
Table 10: Response on whether all orders are authorized by relevant authorities.
Agree
Not sure
Disagree
Strongly disagree
Total
Frequency
8
8
22
12
50
Percent
16.0
16.0
44.0
24.0
100.0
Valid Percent
16.0
16.0
44.0
24.0
100.0
Cumulative
Percent
16.0
32.0
76.0
100.0
Source: Primary data
According to table 10, 16% agree, 16% were not sure, 44% disagree, 24% strongly disagree,
about all orders being authorized by relevant authorities. Meaning that there is no proper
authorization of all orders made in most businesses. This is clearly shown by a higher percentage
of those who disagreed.
21
Table 11: Response on whether situations of excessive stock exist
Strongly agree
Agree
Not sure
Total
Frequency
29
13
8
50
Percent
58.0
26.0
16.0
100.0
Valid Percent
58.0
26.0
16.0
100.0
Cumulative
Percent
58.0
84.0
100.0
Source: Primary data
Table 11 shows that 58% respondents strongly agreed, 26% agreed and 16% were not sure. This
means that businesses keeps excessive stock than necessary this explains the high costs of
carrying stock incurred by most small and medium scale businesses operating in Kikuubo which
have adversely affected their businesses.
Table 12: Response on whether deliveries are often made in time
Agree
Not sure
Disagree
Strongly disagree
Total
Frequency
5
9
13
23
50
Percent
10.0
18.0
26.0
46.0
100.0
Valid Percent
10.0
18.0
26.0
46.0
100.0
Cumulative
Percent
10.0
28.0
54.0
100.0
Source: Primary data
According to table 12, 10% of respondents agree that deliveries are always made in time to
customers, 18% were not sure, 26% disagreed and 46% strongly disagreed. This means that
deliveries to customers are not made in time explaining the increasing amount of lost sales
reported in most businesses due to disgruntled customers.
22
Table13: Response on whether there is segregation of duties.
Not sure
Disagree
Strongly disagree
Total
Frequency
14
13
23
50
Percent
28.0
26.0
46.0
100.0
Valid Percent
28.0
26.0
46.0
100.0
Cumulative
Percent
28.0
54.0
100.0
Source: Primary data
Table13 shows that 28% of respondents were not sure, 26% disagreed, and 46% strongly
disagreed. This means that there is no segregation of duties explaining the unauthorized access to
the stores by all staff and constant loss of stock due to theft.
Table 14: Response on whether goods are inspected when received and before being
Agree
Not sure
Disagree
Strongly disagree
Total
Frequency
4
6
30
10
50
Percent
8.0
12.0
60.0
20.0
100.0
Valid Percent
8.0
12.0
60.0
20.0
100.0
stored
Cumulative
Percent
8.0
20.0
80.0
100.0
Source: Primary data
According to table 14, 8% respondents agreed, 12% were not sure, 60% disagreed and 20%
strongly disagreed. This implies that once goods are received from suppliers, they are not
inspected for quality, this leads to sell of substandard goods to customers and also taking
damaged goods into the store which are loss to the business.
23
Table 15: Response on techniques used to manage inventory
Economic order quantity
Just in time system
ABC analysis
Total
Frequency
33
5
12
50
Percent
66.0
10.0
24.0
100.0
Valid Percent
66.0
10.0
24.0
100.0
Cumulative
Percent
66.0
76.0
100.0
Source: Primary data
From table 15, 66% of respondents in businesses approached use Economic order quantity, 10%
use just in time system and 24% use ABC analysis, this shows that most businesses use economic
order quantity to manage inventory as clearly shown by the high percentage, however though the
method of keeping minimum inventory is used, its not effectively applied due to the fact that
there are situations of excessive stock in most businesses.
4.3 Findings on the profitability levels of small and medium scale businesses in Kikuubo.
Table 16: Response on whether the firm consistently makes profits
Disagree
Strongly disagree
Total
Frequency
16
34
50
Percent
32.0
68.0
100.0
Valid Percent
32.0
68.0
100.0
Cumulative
Percent
32.0
100.0
Source: Primary data
From table 16 it’s shown that, 32% of respondents disagreed, 68% strongly disagreed. This
shows that businesses do not consistently make profits, thus losses are made in some periods, and
this was attributed to the high operating costs including carrying costs and high levels of stock
loss due to theft.
24
Table 17: Response on whether actual profits made are the budgeted
Not sure
Disagree
Strongly disagree
Total
Frequency
5
24
21
50
Percent
10.0
48.0
42.0
100.0
Valid Percent
10.0
48.0
42.0
100.0
Cumulative
Percent
10.0
58.0
100.0
Source: Primary data
Table17 shows that 10% of respondents were not sure, 48% disagreed and 42% strongly
disagreed. This indicates that the business owners and managers do not achieve their planned
profit targets, and most of them attributed the variance to the unplanned for costs incurred by the
business like inventory related costs that affect profits.
Table 18: Response on whether there are measures in place to determine profits
Not sure
Disagree
Strongly disagree
Total
Frequency
4
22
24
50
Percent
8.0
44.0
48.0
100.0
Valid Percent
8.0
44.0
48.0
100.0
Cumulative
Percent
8.0
52.0
100.0
Source: Primary data
From table 18, it’s shown that 8% of respondents were not sure, 44% disagreed, 48% strongly
disagreed, meaning that most enterprises in Kikuubo do not have measures in place to determine
their profitability and this makes it hard to ascertain performance of the business.
25
4.4 Findings on the relationship between inventory management and profitability of small
and medium scale enterprises.
Table19: Response on whether there is high stock out and ordering costs
Agree
Not sure
Disagree
Strongly disagree
Total
Frequency
8
2
24
16
50
Percent
16.0
4.0
48.0
32.0
100.0
Valid Percent
16.0
4.0
48.0
32.0
100.0
Cumulative
Percent
16.0
20.0
68.0
100.0
Source: Primary data
According to table 19, 16% agree, 4% were not sure, 48% disagree and 32% strongly disagree.
Implicating that most businesses do not experience stock out and ordering costs due to the fact
that there is always more than enough stock available so there are low or no stock outs. Costs of
ordering are also low because orders are made once in predetermined period.
Table 20: Response on whether the business experiences high carrying costs
Strongly agree
Agree
Not sure
Disagree
Total
Frequency
28
10
2
10
50
Percent
56.0
20.0
4.0
20.0
100.0
Valid Percent
56.0
20.0
4.0
20.0
100.0
Cumulative
Percent
56.0
76.0
80.0
100.0
Source: Primary data
From table 20, 56% of respondents strongly agree, 20% agree, 4% were not sure and 20%
disagreed on incurring carrying costs. This implicates that most businesses in Kikuubo incur
carrying costs due to holding excessive inventory, such costs include storage, and theft and this
negatively affect profits.
26
Table 21: Response on whether the business has lost sales due to late deliveries
Strongly agree
Agree
Total
Frequency
34
16
50
Percent
68.0
32.0
100.0
Valid Percent
68.0
32.0
100.0
Cumulative
Percent
68.0
100.0
Source: Primary data
According to table21, 68% strongly agreed, 32% agreed that they have lost sales due to failure to
deliver in time; this is explained by the number of disgruntled customers due to late deliveries
which negatively affects sales.
Table22: Response on whether inventory related costs affect profitability
Not sure
Agree
Strongly agree
Total
Frequency
6
22
22
50
Percent
12.0
44.0
44.0
100.0
Valid Percent
12.0
44.0
44.0
100.0
Cumulative
Percent
12.0
56.0
100.0
Source: Primary data
Table22, 12% were not sure, 44% agreed and 44% strongly agreed, this implies that inventory
related costs highly affect profitability of the business.
27
Table23: Relationship between inventory management and profitability
INVENTORY
PROFITABILITY
Pearson Correlation
Sig. (2-tailed)
N
Pearson Correlation
Sig. (2-tailed)
N
INVENTORY
1
.
50
.445 **
.001
50
PROFITA
BILITY
.445 **
.001
50
1
.
50
**. Correlation is significant at the 0.01 level (2-tailed).
From table 23 above, findings revealed that there is a weak positive relationship between
inventory management and profitability at Pearson correlation coefficient r=0.445(**). This
implies that a change inventory management would slightly affect profitability by 44.5%.
28
CHAPTER FIVE
5.0 Summary, Conclusion and Recommendations
The chapter covers the summary, conclusion and recommendation of the findings. The summary
covers the findings in relation to the objective of the study. The summary is followed by the
conclusion which is based on the findings of the study. And recommendations to improve on the
management of inventory among small and medium scale business in Kikuubo
5.1 Summary of Findings
The study was mainly concerned about the effects of inventory management policy on
profitability of small and medium scale enterprises. This summary based on the objectives of the
study.
5.1.1 Findings on inventory management techniques of small and medium scale
enterprises in Kikuubo trading area
It was found out that most businesses hold inventory. And the most used inventory management
technique is Economic order quantity, done through holding minimum stock levels however the
method of holding inventory has not been used effectively by most businesses. Other techniques
used are the just in time system, and the ABC system.
It was also found out that there is loss of stock, from stores, during transfers and after storage.
There is no regular stock taking done which has led to maintaining of irregular stock levels thus
carrying and stock out costs.
There is handling of excessive stock by businesses, no segregation of duties and goods are not
inspected when received thus storage of poor quality goods consequently leading to sale of poor
quality goods to customers this adversely affects sales.
29
5.1.2 Findings on the profitability of small and medium scale enterprises in Kikuubo
The study findings showed that businesses in Kikuubo have been experiencing inconsistencies in
growth levels where sales and profits have been fluctuating over time.
There are no measures in place to determine profit of the business because most owners use basic
knowledge to calculate profits for their businesses.
Actual profits made vary from the budgeted and most businesses attributed losses made in certain
periods to high operating costs. This has been due to not catering for inventory related costs that
negatively affect the returns.
Another weakness on the aspect of growth observed was the lack of existence of proper way of
gathering data and making forecast of growth levels
5.1.3 Findings on Relationship between Inventory Management and Profitability
It was found out that there is a positive relationship of 0.44 between inventory management and
profitability of small and medium scale enterprises. This means that if a business is to increase its
profits, it should maintain an optimal level of inventory.
The business should also consider other factors affecting their profitability apart from inventory
management because the relationship between inventory management and profitability is
imperfect.
5.2 Conclusion
Small and medium scale enterprise in Kikuubo use inventory management techniques like
Economic Order Quantity, ABC system and just in time system. Also profits of the business have
been inconsistent for the past three years and there is a positive relationship of 0.44 between
inventory management and profitability.
However it should be noted that the relationship between inventory management system and
profitability is weak, indicating that there are other factor to be considered that affect the profits
of the small and medium scale enterprises.
30
5.3 Recommendations
Basing of the study carried out which led to the conclusion above the following recommendation
were forwarded.
Small a medium scale enterprise should not concentrate on inventory management as the only
factor that affect the profitability, but other factors like quality control, competition, tax planning
to avoid paying unnecessary taxes, are other factors that should also be given consideration.
Small and medium scale enterprises in Kikuubo should opt to use Just in Time system as an
inventory management technique by ordering for specific quantities according to customers need
at a particular time. As this will help to reduce on the amount of stock held and thus leading to
reduction in carrying costs incurred due to the fact that there is Zero inventory handling.
Inspection will also be made easier as small quantities are ordered for at a time and thus are
easily inspected for quality
Internal controls
Management of small and medium scale enterprises should establish and strengthen the internal
controls over inventory and other financial resources to reduce on mismanagement and
misappropriations.
The internal controls to be established among others include; segregation of duties, approval and
authorization, supervision of lower employees and stock taking on regular basis of received
inventory to reduce on theft and mismanagement of inventory.
Motivation incentives
Introduction of motivation incentives for example increase of salaries, wage and other nonmonetary rewards. This will help reduce on the theft of inventory from business and give them a
heart of commitment hence efficient management of resources.
31
Competent Staff
Management of small and medium scale enterprises should employ competent staff that has
experience and skill in Inventory Management. They should also consider training their
employees on inventory management practices and the system in place.
Preparation of Books of Accounts
Small and medium scale enterprises should consider recording their inventory and preparing
books of accounts not only for controlling inventory but also for other financial resources this
will help in ascertaining performance.
Computerization
They should computerize their inventory management system to avoid any manipulation and
encroachment by unauthorized users; this will lead to faster processing of transactions and reduce
on fraud errors and mistakes in books of accounts.
There should also be measures put in place to determine profits made by the businesses, through
analyzing different profits for example profits before interest and tax, after cost of sales and also
doing profit planning for the business.
Conclusion
Inventory control and management should however not be the responsibility of only the
purchasing personnel but for all involved workers and management of the small and medium
scale business to be able to control inventory related costs.
32
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Ekpeyong D.B and Nyong M.O (1992). Small and medium scale enterprise in Uganda. ‘The
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Lucey. T. (1996). Cost and Management Accounting, 6th edition, prentice Hall. International
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Jordan H. Henry (1997). “Inventory Management” IBS.
Ammey and Egginton (1993). “Effective Inventory Management System” 2nd Edition. Harcourt
Brace College Business.
Raghubur, Dayal.P.Zechariah and K.Rajpal (1996). Inventory and credit management “Eric. Vol.
II New Delhi Mittal Publications.”
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www.tutor 2u.net/Economics/revisionnotes.htm.
Campsey; B.J (1999). “Financial Management Accounting” Six edition South Western College
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34
APPENDICES
MAKERERE UNIVERSITY
APPENDIX 1: QUESTIONNAIRE ON EVALUATION OF THE IMPACT OF
INVENTORY MANAGEMENT SYSTEMS AND PROFITABILITY OF SMALL AND
MEDIUM SCALE ENTERPRISES
Dear Sir, or Madam,
Am by names NAKINTU CAROLINE, I am a student of Makerere University pursuing a
bachelor of commerce degree and as a pre-requisite for the award, I am undertaking a study on
inventory management systems and profitability of small and medium scale enterprises in
Uganda.
The questionnaire is purely an academic research and all the information obtained will be held in
strict confidence and any assistance extended will be appreciated.
Please circle the appropriate figure or code which best suits you view and fill in the blanks where
necessary.
SECTION A: PERSONAL INFORMATION
1. Title ………………………………………………………………………………
2. Gender
Male 1
Female 2
3. Age: Below 20 years
20-30 years
Above 30 years
4. How long have you worked in the Business
Less than 1 year
1- 2
3-4
More than 5
5. Education level
Degree
Diploma
Certificate
Just Experience
Others specify. ……………………………………………………………………
35
SECTION B. INVENTORY MANAGEMENT
Strongly Agree Agree
Not sure
Disagree
Strongly
Disagree
6. The business holds inventory
7.There is an effective inventory
management system
8.There is regular stock taking
9. All orders are authorized by
relevant authorities.
10.Situations of excessive stock
exist
11. Deliveries are often made in
time.
12. There inspection of goods
when received and before
storage.
13. The inventory management system used by the business is
Economic order quantity
Just in Time system
ABC system
36
PART C. PROFITABILITY
1
2
0
3
4
Strongly
agree
Agree
Not sure
Disagree
Strongly
disagree
15. The firm consistently makes
profits.
16.There are measures in place
to determine business’s
profitability
17. Actual profits made are the
budgeted
PART D: Impact of inventory management system used on profitability.
Strongly
Agree
Agree
18. The business experiences
high stock out costs and
ordering costs.
19. The business experiences
high carrying.
20. Inventory related costs
highly affect profitability of the
business.
21. The business has lost sales
due to failure to deliver in time.
37
Not sure
Disagree
Strongly
Disagree
APPENDIX II: LETTER FROM THE CASE STUDY
38
APPENDIX III: INTRODUCTORY LETTER
39