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CHAPTER ONE

INTRODUCTION

1.0  Introduction

This chapter of the study presents the background of the study, statement of the problem, general objective, specific objectives, research questions, scope of the study, significance of the study and definition of key terms

1.1 Background of the study

Companies face a dilemma in today's competitive marketplace, where on one hand, customers demand customized products and services and require that their orders are filled quickly, but on the other hand they do not want to pay a premium for this customisation and availability (Graman and Magazine, 2006). Therefore, organisations are exploring ways toward postponement strategy in response to constantly changing demands (Yang et al.(2004). Graman and Magazine (2006) argued that today, the cost of holding inventory, extensive product proliferation and the risk of obsolescence, especially in rapidly changing markets, make the expense of holding large inventories of finished goods excessive and that high demand items naturally have safety stock assigned to them, but in many organisations there are so many very-low-demand items that keeping any stock of these items is unreasonably expensive, so they argue that companies must now provide good service while maintaining minimal inventories. Therefore, inventory management control approaches are essential aspects of any organisation.

In traditional settings, inventories of raw materials, work-in-progress components and finished goods were kept as a buffer against the possibility of running out of needed items. However, large buffer inventories consume valuable resources and generate hidden costs. Consequently, many companies have changed their approach to production and inventory management control. Since at least the early 1980s, inventory management control leading to inventory reduction has become the primary target, as is often the case in just-in-time (JIT) systems, where raw materials and parts are purchased or produced just in time to be used at each stage of the production process. This approach to inventory management control brings considerable cost savings from reduced inventory levels. As a result, inventories have been decreasing in many firms (Chen et al., 2005), although evidence of improved firm performance is mixed (Kolias et al., 2011).

The role of inventory management control is to ensure faster inventory turn over. It increases inventory turn over by ten (10) and reduce costs by 10% to 40%. The so called inventory turn over is not yet right to sell products on the shelves based on the principle of FIFO cycle (Kenneth lysons and Michael gilligham, 2003).

Inventory is classified basing on the business undertaking from organization to organization. Common criteria used and are nature of inventory for example manufacturing, sale or retail, purpose for which inventory is being held in stock or function and the related usage in the supply chain. Typical classifications are raw materials (items in unprocessed state awaiting conversion e.g. timber, steel and coffee seeds), components and sub-assembles. These are for incorporation into the end product e.g. side mirrors, glasses for car assembling company and monitors or keyboards for a computer  assembling company), consumable (all supplies in an undertaking which are classified as indirect and which do not form part of saleable product. (Divided into production, maintenance, office and welfare). Proper classification of inventory and its control improve the financial position of a business (David Jessop and Alex Morrison 1994).

Inventory management control is primarily about specifying the size and placement of stocked goods. Inventory management control is required at different locations within a facility or within multiple locations of a supply network to protect the regular and planned course of production against the random disturbance of running out of materials or goods for improved performance (Garry, 1997). The scope of inventory management control also concerns the fine lines between replenishment lead time, carrying costs of inventory, asset management control, inventory forecasting, inventory valuation, inventory visibility, future inventory price forecasting, physical inventory, available physical space for inventory, quality management control, replenishment, returns and defective goods and demand forecasting (Lau A., and Snell, 2006).

Inventory management control involves the planning, ordering and scheduling of the materials used in the manufacturing process. It exercises management control over three types of inventories that is raw materials, work in progress and finished goods. Purchasing is primary concerned with management control over the raw materials inventory, which includes; raw materials or semi-processed materials, fabricated parts and MRO items (Maintenance, Repair and Operations) (Garry, 1997).

However, Lau and Snell (2006) argued that inventory management control is primarily about specifying the size and placement of stocked goods. Inventory management control is required at different locations within a facility or within multiple locations of a supply network to protect the regular and planned course of production against the random disturbance of running out of materials or goods for improved performance. The scope of inventory management control also concerns the fine lines between replenishment lead time, carrying costs of inventory, asset management control, inventory forecasting, inventory valuation, inventory visibility, future inventory price forecasting, physical inventory, available physical space for inventory, quality management control, replenishment, returns and defective goods and demand forecasting.

Poor inventory management control had become an issue of great concern since performance is regarded as the main stream for development of organizations. A truly effective inventory management control system minimizes the complexities involved in planning, executing and controlling a supply chain network which is critical to business success. The opportunities available by improving a company’s inventory management control can significantly improve bottom line business performance.

According to Jayeff (1998) argued that from a financial perspective, inventory management control is no small matter. Oftentimes, inventory is the largest asset item on a manufacturer’s or distributor’s balance sheet. As a result, there should be a lot of management control emphasis on keeping inventories. The objectives of inventory reduction and minimization are more easily accomplished with modern inventory management control processes that are working effectively for improved performance.

The inventory management control is much more complex than the initiated understood. In fact, in soft drinks industry the inventory control department is perceived as little more than a clerical function as it is probably not very effective. The result of this to inventory management control is lots of material shortages, excessive inventories, high costs and poor customer service (Briers, 1995).

Too much inventory and not enough customer service is very common, but unnecessary. There are proven techniques that can help accurately industry customer demand and to calculate the inventory needed to meet defined level of customer service. Using the right techniques for sales forecasting and inventory management control help to monitor changes and respond to alerts when action needs to be taken. The right approach to inventory management control can produce dramatic benefits in customer service with lower inventory (Kreg, Cristine, 2007).

Modern inventory management control in soft drinks industry utilize new and more refined techniques that provide for dynamic performance of inventories to maximize customer service with decreased inventory and lower costs. These improved approaches to inventory management control are of major consequence to overall competitiveness where the highest level of customer service and delivered value can favorably impact market share and profits.

However, on the other side Century Bottling Company Limited (Coca- Cola) uses different kinds of inventory management control, what is not brought out is how such kinds affect on the performance of the Company. This is therefore prompting the researcher to carry the study on the impact of inventory management control on performance of an organization like Coca Cola plant- Mbarara branch in Mbarara Municipality.

1.2 Statement of the problem

Inventory management control at Coca Cola Mbarara plant is mostly seen in arrangement of crates at the plant, bottles packing, buying of raw materials, supply of customers, issuing of raw materials for use in the plant departments. This is because the company uses different systems in inventory management control including integrated system (System Application and products) responsible for management control information system which helps to make serious decisions on stock, material requirement points, and over stock brands for the fast moving products (Supply Chain Manager Coca Cola Company- Mbarara, 2009).

However these techniques for inventory management control at Coca-Cola, performance of the company had reduced from 80% to 60% in the years 2008 and 2009 respectively. Baisng on the above information, Coca Cola Mbarara plant has registered decline in sales performance over time (Arinaitwe, 2009). The study was set to investigate the relationship between inventory management control on performance of Coca Cola plant- Mbarara.

1.3 General objective

The overall objective of the study was to find out the impact of inventory management control and performance of private organizations in Nigeria while considering Coca Cola plant- Mbarara

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