ADDIS ABABA UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF MANAGEMENT

A SENIOR ESSAY PAPER SUBMITTED TO THE DEPARTMENT OF

MANAGEMENT IN THE PARTIAL FULFILLMENT OF THE DEGREE OF
BACHELOR OF ARTS IN MANAGEMENT

THE ROLE OF EFFECTIVE INVENTORY MANAGEMENT FOR

PRODUCTIVITY: A CASE STUDY IN KOTEBE METAL TOOLS
FACTORY

SUBMITTED BY: TEKLE GETACHEW (BER/8231/07)

ADVISOR: GETACHEW DINSA

JUNE, 2017

ADDIS ABABA, ETHIOPIA

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Abstract
Inventory consists of the most important element of any system dealing with the supply,
manufacture and distribution of goods and services. Inventory management is defined as a
science based art of ensuring that just enough inventory stock is held by an organization to meet
demand. All organizations keep a supply of inventory to maintain independence of operations, to
meet variation in product demand, to allow flexibility in service provision scheduling, to provide
a safeguard for variation in inventory delivery time, to take advantage of economic purchase
order size.

This study sought to examine the role of effective inventory management for productivity in
Kotebe metal tools factory. The population for this study constituted 135 employees who work at
the factory. This study has applied the non–probability sampling technique, specifically quota
sampling technique to select a sample size of 57 respondents. Primary data was collected using a
self-administered questionnaire and was analyzed by using table, percentage and graph. The
study found that even if the factory formulates policies and procedures regarding management of
inventory, it fails to implement the procedures completely and there is a transparency problem
between the management and the employees regarding the causes of the material shortage.
Therefore recommends the factory; since this situation hurts the factory, the management have to
be transparent to the employees, adopt ABC inventory management model. For effective
production system the factory has to arrange the system, product and information layout.

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Acknowledgement
The kindness, help and forgiveness of the almighty God and Saint marry have great value in my
life. Particularly, without their support completing this research paper was unthinkable.

I am grateful to my advisor Ato Getachew Dinsa for his wonderful advice, guidance, fatherly
approach, suggestions and comments in the course of doing this research.

Kotebe metal tools factory human and personnel administration office should deserve my
gratitude for their openness in providing background information about the factory. Top officials
of the factory who are participated in the study by providing relevant response for the
questionnaires distributed should also deserve great thanks. Specially, one of the staff members
of the factory Ato Yonas who is brotherly in approach when meeting him and contribute a great
share for this study shares my great thank.

In the last but not least, I would like to express my greatest gratitude for my family specially
mother and father who are the source of financial and ideal support, my friends, the library staffs
of Addis Ababa University, and those who have contributed more in course of doing this
research.

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Dedications
This work is dedicated to my mother Tsigemariam Atilaw, whom I am living for and I never
forget her support throughout my life. It also dedicated to all graduating class students of 2009
E.C. in the department of Management, and especially to all dorm television room members.

Tekle getachew

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List of tables
Table 1.1:- sample size determination…………………………………………………………….7

Table 2.1:- implementing ABC analysis ………………………………………………….……..22

Table3.1:- response rate …………………………………………………………………………30

Table 3.2:-age group of respondents……………………………………………………………..32

Table 3.3:- experience of respondents………………………………………………………..….33

Table 3.4:- policies and procedures of inventory management …………………………………35

Table 3.5:- optimality of inventory management…………………………………………...…...35

Table 3.6:- time of delivery of finished goods………………..…………………………….……36

Table 3.7:- state of coordination between departments ………..…………………………..……36

Table 3.8:-inventory control systems of KMTF………………….……………………….……..37

Table 3.9:- time of checking inventory ………………………….………………………………38

Table 3.10:- rate of inventory return……………………………..………………………………38

Table 3.11:- management of inventory ………………………….…………………………....…40

Table 3.12:- inventory movement among work units/sites/ warehouses……...…………….…...42

Table3.13:- customers awareness about material shortage ………..…………………………….43

Table 3.14:- futurity of material shortage ………………………..……………………………...45

Table 3.15:- customers on waiting list…………………………..……………………………….46

List of figures
Figure 2.1:- relationship between costs……………………………………………...…………..25

Figure 3.1:- gender character……………………………………………………...……………..31

Figure3.2:- education level of respondents ……………………………………...………………32

Figure 3.3:- inventory management/ modeling techniques………………………………………39

Figure 3.4:- KMTF has a minimum and maximum stock level System…………………...…….41

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Figure 3.5:- employees ethical behavior…………………………………………………………44

Figure 3.6:- implementation of ABC inventory management …………………………………..47

Figure 3.7:- customer dissatisfaction and material shortage …………………………...………..48

Figure 3.8:- employee information about material shortage………………………………..……49

Figure 3.9:- management awareness to material shortage………………………………….……50

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 Table of contents

Contents page
ABSTRACT ..................................................................................................................................... I

ACKNOWLEDGEMENT .............................................................................................................. II

DEDICATIONS ............................................................................................................................ III

LIST OF TABLES ........................................................................................................................ IV

LIST OF FIGURES ...................................................................................................................... IV

CHAPTER ONE: INTRODUCTION ............................................................................................. 1

1.1 BACKGROUND OF THE STUDY ................................................................................................. 1

1.2 BACK GROUND OF THE ORGANIZATION ................................................................................... 3
1.3 STATEMENT OF THE PROBLEM ................................................................................................ 4
1.4 OBJECTIVE OF THE STUDY ...................................................................................................... 5
1.4.1 General Objective ........................................................................................................... 5
1.4.2 Specific objectives........................................................................................................... 5
1.5 RESEARCH DESIGN AND METHODOLOGY ................................................................................ 6
1.5.1 Sources of data ............................................................................................................... 6
1.5.2 Sampling technique......................................................................................................... 6
1.5.3 Sample size ..................................................................................................................... 7
1.5.4 Method of data collection ............................................................................................... 8
1.5.5 Data Processing and Analysis ........................................................................................ 8
1.5.6 Method of presenting the outcome.................................................................................. 8
1.6 SIGNIFICANCE OF THE STUDY ................................................................................................. 9
1.7 SCOPE OF THE STUDY .............................................................................................................. 9
1.8. LIMITATION OF THE STUDY ................................................................................................... 9
1.9. ORGANIZATION OF THE STUDY ............................................................................................ 10

CHAPTER TWO: REVIEW OF RELATED LITERATURE .............................................. 11

2.1 DEFINITION AND PURPOSE OF INVENTORY ............................................................................ 11

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 2.2 OBJECTIVES OF INVENTORY MANAGEMENT ......................................................................... 14
2.3 DEMAND MANAGEMENT ....................................................................................................... 16
2.4 STOCK CONTROL .................................................................................................................. 16
2.4.1 Introduction .................................................................................................................. 16
2.4.2 Reasons for Holding Stock ........................................................................................... 17
2.5 INVENTORY ANALYSIS .......................................................................................................... 19
2.5.1 ABC Analysis of Inventories ......................................................................................... 19
2.5.2. Implementing ABC analysis......................................................................................... 21
2.5.3 Advantages of ABC Analysis ........................................................................................ 22
2.6 INVENTORY COSTS ............................................................................................................... 22
2.6.1 Inventory Carrying Cost:.............................................................................................. 23
2.6.2 Order/Setup Cost .......................................................................................................... 24
2.7. INVENTORY MODELING ....................................................................................................... 24
2.7.1. Economic Order Quantity (EOQ) Model .................................................................... 24
2.7.2. Economic Production Quantity (EPQ) Model............................................................. 27

CHAPTER THREE: DATA ANALYSIS, PRESENTATION AND INTERPRETATION 30

3.1. DATA ANALYSIS AND INTERPRETATION ............................................................................... 30

3.1.1. Introduction ................................................................................................................. 30
3.1.2. Gender characteristics of respondents ........................................................................ 30
3.1.3 Description of age groups of respondents .................................................................... 31
3.1.4. Description of education level of respondents ............................................................ 32
3.1.5. Marital Status of the respondents ................................................................................ 33
3.1.6. Work Experience of Employees ................................................................................... 33
3.2. NATURE OF INVENTORY MANAGEMENT ............................................................................... 34
3.2.1. Awareness of inventory and management of inventory ............................................... 34
3.2.2. Policies and procedures of inventory management ..................................................... 35
3.2.3. Optimality of inventory management .......................................................................... 35
3.2.4. Time of delivery of finished goods ............................................................................... 36
3.2.5. State of coordination among departments of the factory ............................................ 36
3.2.6. Inventory control system of the factory ....................................................................... 37
3.2.7. Time of checking inventory items ................................................................................ 38
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 3.2.8. Rate of inventory return ............................................................................................... 38
3.2.9. Inventory management/ modeling technique ............................................................... 39
3.2.10. State of purchase of items .......................................................................................... 39
3.3. INVENTORY MANAGEMENT AND PRACTICE OF KOTEBE METAL TOOLS FACTORY (KMTF). 40
3.4. UNETHICAL BEHAVIORS IN INVENTORY MANAGEMENT ....................................................... 43
3.5. INVENTORY MANAGEMENT SYSTEM CONTRIBUTION TO POOR CUSTOMER SERVICE PROVISION
AND OPERATION ......................................................................................................................... 45

3.6 MANAGEMENT AWARENESS ABOUT MATERIAL SHORTAGE AND CUSTOMER DISSATISFACTION ..... 48

CHAPTER FOUR: CONCLUSION AND RECOMMENDATION ...................................... 52

4.1 CONCLUSION ................................................................................................................... 52

4.2 RECOMMENDATIONS .................................................................................................... 53
4.2.1 To the factory ................................................................................................................ 53
4.2.2 to the Ethiopian Government ........................................................................................ 55
4.2.3 to the interested researchers......................................................................................... 55

REFERENCES ............................................................................................................................ 56

APPENDICES ............................................................................................................................. 59

TIME AND COST BUDGET ............................................................................................................ 59

Cost budget ............................................................................................................................ 59
Time budget ........................................................................................................................... 60
QUESTIONNAIRE ......................................................................................................................... 61

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Chapter one: Introduction
1.1 Background of the study
Inventory consists of the most important element of any system dealing with the supply,
manufacture and distribution of goods and services. The concept of inventory management is
very old but it came in light when Harris F.W (1915) published his work on classical order size
model and the work was extended by Raymend (1991) and Wilson (1934). But, only after the
second world war, with the development of operational research and computer technology that
the theoretical concepts got a practical application.

Holding inventory is often interpreted as carrying an asset, but also means carrying risk in terms
of obsolescence deterioration axed quality faults in financial terms inventory impacts the balance
sheet, cash flow, profit and loss account. Operationally, inventories affect production efficiency
and on time delivery. Goldratt (1999) identifies inventory as a key component for measuring
business performance in manufacturing environment.

Inventory management is a system concerned with integration of information, transportation,

acquisition, inspection, material handling, warehousing, packaging and control of supplies and
ensuring security of inventory. Inventory management aims at discovering and maintaining
optimal levels of investment in all types of inventories and maximizing the flow of goods,
information and other related resources like people and energy from the point of origin to the
point of final consumption (Peter, 2000).

Historically, inventory management has often been associated with either too much inventory
and too little management or too little inventory and too much management due to lack of
efficient inventory management practice. There can be severe penalties for excesses in either
direction. Inventory problems have proliferated as technological progress has increased the
organization‟s ability to produce goods in greater quantities faster and with multiple design
variations. The public has compounded the problem by its receptiveness to variations and
frequent design changes (Tersine, 2009).

Since the mid-1980s, the strategic benefits of inventory management and production planning
and scheduling have become obvious. The business press has highlighted the success of

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Japanese, European and North American firms in achieving unparalleled effectiveness and
efficiency in manufacturing and distribution. In recent years, many of the firms have „raised the
bar‟, yet again by coordinating with other firms in their supply chains. For instance, instead of
responding to unknown and variable demand, they share information so that the variability of the
demand they observe is significantly lower (Silver et al, 1998).

Silver et al (1998) continue arguing that in the United States of America and other Western
Countries, productivity improvement was pursued by reducing the amount of direct
manufacturing labor expended per unit of output. This was a valid strategy because of high labor
content in many manufactured products. In fact the ratio of purchased materials to sales (in
dollars) reached 60% for US firms in 1985. This implies that management of raw materials
inventories is an area that shows great promise for productivity improvement. The tremendous
interest in Just-in-Time (JIT) manufacturing indicates that work-in-progress inventory
management is also an area ripe for improvement. Consequently, many companies have changed
their approach to production inventory management. Since early 1980s, inventory management
which leads to inventory reduction has become the primary target, as is often the case in just-in-
time systems where raw materials and parts are purchased or produced just-in-time to be used at
each stage of the production process. As a result, inventories have been decreasing in many firms
(Chen et al, 2005) although evidence of improved firm performance is mixed (Fullerton et al.,
2003).

Chen et al (2005) observed that the extent of emphasis on inventories among American firms
reached the financial markets where there were rules that would reward firm that controlled
inventories and punish those that did not do so. This is because, during the 1970s, Japanese
manufacturing companies made substantial market share gains in the US markets in a range of
industries including most notably the automobile industry.

It is therefore important for production department of Kotebe Metal Tools Factory to have sound,
effective and well-coordinated inventory management systems because the business environment
is rapidly changing, highly competitive and this drastically affects the performance of the
organization. With the application of proper inventory management techniques, the right
materials will be available at the right time, with the minimum storage costs and investment.
According to Waters (2008), organizations have dramatically changed their views of stock in the

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recent years. Historically, they saw stock as a benefit, with high stocks ensuring maximum
service and even giving a measure of wealth. But with the advent of the 20th C, it became clear
that these stocks had costs that could be surprisingly high. Then organizations began to view
stocks not as unreserved benefits but as a resource that needs careful control and thus the need to
device ways of minimizing overall costs.

1.2 Back ground of the organization

Kotebe Metal Tools Factory (KMTF) was established in 1969 by Polish and Ethiopian investors
as a private limited company (plc.) and is engaged in the manufacture of various hand tools like
pick axes, axes, shovels, hammers and crow bars required by the construction and agriculture
sectors. The plant was nationalized in 1975 and put under the ex-National Metal Works
Corporation (NMWC). A sickle manufacturing plant was added to the factory in 1984 by
NMWC. When the NMWC was dissolved by the current Ethiopian government, the supervision
of the KMTF was passed to the Privatization and Public Enterprises Supervising Agency
(PPESA) until it was sold and handed over to Nigat Mechanical Engineering S.C. as of March 1,
2006.

Nigat Mechanical Engineering S. C. (Nigat) was legally formed in August 2004 under the laws
of Ethiopia. Its founding members are all professionals, the vast majority being practicing
mechanical engineers. It is administered by a board of directors elected from among the
shareholders. The Board is primarily composed of mechanical engineering professionals and
business persons with long and distinguished careers in government and private industries. Nigat
had 29 shareholders on initial start-up and this has currently increased to 156.

Nigat was established with a subscribed capital of Birr 1.04 million and this has been increased
to Birr 80 million with a current paid-up capital of Birr 44 million. Nigat was initially formed,
eyeing the government‟s plan to privatize numerous establishments, especially factories it had
under its holding. It acquired the name “Kotebe Metal Tools Factory” (KMTF) from the
government as of March 1, 2006. Nigat has taken a number of measures to rehabilitate and
expand the factory since its acquisition (KMTF: - 2016).

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1.3 Statement of the problem
As the researcher browse the website related to inventory management, hold the following facts
that necessitate for this study to be conducted which has a research topic of the role of effective
inventory management in metal tools factory, particularly Kotebe Metal Tools Factory.

Inventories are assets that are held for sale in the ordinary course of business or in the process of
production for sale or in the form of materials or supplies to be consumed in the production
process or rendering of services (Kagiri, 2006). However, according to Lysons and Gillingham,
Inventory is described as “an American term describing the value or quantity of raw materials,
components, assemblies, consumables, work in progress and finished goods that are kept and
used as the need arrives” (2003:93). They emphasized that the effective and efficient functioning
of a productive system requires the regular demand and supply of inventory at the input,
transformation and output phases of the production process. In this case, inventory management
has become mandatory for each and every manager responsible for production in an
organization. Inventory is one vital resource that any organization requires and just like any other
resource requires effective management rather than neglect. In the first place inventory
management is the process of tracking product orders keeping adequate amount of products on
hand and organizing products in warehouse and retail location. The fundamental problem of
inventory is over stocking and under stocking of stocks due to the absence of an effective
inventory management system. There have been cases of materials overstocking which
eventually get expired or out dated, lack of stock-taking, theft of materials by workers and delays
in deliveries of materials into the organizations among others. Under stocking leads to stock out
or nil stock leading to production bottleneck (delay) and for that matter halting organizational
operations. The effects of stock out are production inefficiency, loss of sales, loss of profit, the
cost of employing labor who cannot produce and the reputational damage that the company will
face as a result of the failure to meet customer needs and requirements. In recent years, a number
of firms have faced numerous challenges especially in inventory management, thus affecting the
performance of manufacturing companies. Then inventory management lets companies enjoy
many benefits which include achieving inventory balance, using resource wisely, cutting costs,
saving time and becoming more efficient and planning a head for seasonal changes in demand.
Therefore, it is deemed necessary to study this area and to unpack how effective inventory
management can affect the productivity of an organization.

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To this end, the research has tried to answer the following questions.

1. Which inventory management systems are applied in the production department of

Kotebe Metal Tools Factory (KMTF)?

2. What is the level of effectiveness of inventory management practices of the factory?

3. What is the level of performance of production department of the factory?

4. Does computerized inventory management system influence the performance of the

production department of the factory?

5. Does the theoretical aspects of inventory management relate with the actual practice of
inventory management?

6. Does the industry inventory management policy, procedure and techniques are to
maintain the optimum level?

7. Does the industry is very careful to buy the right items, at the right price and in the right
quantity from the right supplier?

1.4 Objective of the study

1.4.1 General Objective
The general objective of this study is to assess the role of effective inventory management on the
performance of the production department of Kotebe Metal Tools Factory and to give
recommendations about the strength and weaknesses of Kotebe Metal Tools Factory.

1.4.2 Specific objectives

The specific objectives of this study were:

 To find out inventory management systems applied by Kotebe Metal Tools Factory
(KMTF).

 To assess the level of effectiveness of inventory management practices of the factory.

 To determine the level of performance of the factory‟s production department.

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  To determine whether computerized inventory management system influences the
performance of the production department of the factory.

 To compare and contrast the actual practice of the factory‟s inventory management with
the theoretical aspect.

 To give some constructive suggestions and recommendations based on the fact of the
study for the factory.

1.5 Research design and methodology

This refers to the variables over which the data for the study have been collected and the method
that has been used in the data collection, analysis and interpretations.

1.5.1 Sources of data

The study has used primary and secondary data sources but its focus was on primary data in
order to obtain enough data in great depth and to avoid vagueness on interpretation of the
responses. In addition to avoiding refusal of the respondents to give the right responses, it is also
flexible because it can use open ended and unstructured interview questions. The primary data
sources of this study were the employees and the related departments such as procurement
department, production department, stores department and also the management. On top of
primary data sources, secondary data sources were also included in this study.

1.5.2 Sampling technique

This study seeks to deeply understand the role of effective inventory management for
productivity. According to Kothari, research population can be defined as “all items in any field
of inquiry. Population can be categorized under finite population and infinite population; the
population of a city, the number of workers in a factory etc… can be an example of finite
population” (1990:55-56). As a result, the sampling frame of the study was all employees of
Kotebe Metal Tools Factory.

According to Malhotra and Birks (2006), probability sampling requires not only a precise
definition of the target population but also a general specification of the sampling frame. This
study has applied the non–probability sampling technique, specifically quota sampling technique.
This method of sampling was used to select respondents that have the expected knowledge about
the inventory management in the factory as well as to permit the researcher to have complete

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freedom of selecting individuals who can provide relevant data and to choose sample element
according to the researcher‟s wish/desire.

Furthermore, to accomplish this study 57 respondents were selected using judgmental sampling
technique. According to David and Rubin “the decision on sample size of a non-probability
sampling nature is usually made based on subjective manner” (2005:281). The researcher had
selected the sample size that he or she felt give a reasonable depiction of the population. In
addition, the reason for selecting this technique was to obtain respondents proportionally from
each selected departments. Also David and Rubin suggest that, “in quota sampling it is assumed
that if a sample has the same distribution on these („these‟ implies the employees of the factory)
particular parameter (population), then it is likely to be representative of the population with
regards to other characteristics” (2005:221).

1.5.3 Sample size

Table 1.1: sample size determination

Total workers Factory workers Office workers

Male Female Total Male Female Total male Female Total

109 26 135 88 4 92 21 22 43

Using all population for data collection is difficult for one researcher. As sampling is using small
part of large population to make conclusion about the whole population, the research had
selected 57 respondents from different departments such as stores department, production
department, purchase department and workers through by using the following formula to
establish judgmental sampling technique.

n=

Where, N= total population

n=sample size

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 =significance level

By using 135 populations and 10% significance level, we could calculate the sample size as
follows:

= = 57

1.5.4 Method of data collection

Primary data was collected by preparing a questionnaire. The questionnaire types which the
researcher had used are structured questionnaires. These types of questionnaires were used to
include both close and open ended questions. The study also used direct observation of the stores
department, production department and the warehouse and unstructured interview method in
order to get reliable data because of the flexibility of questions to be asked and the researcher
was allowed too much freedom. The research was also use the secondary data that were collected
from the last consecutive five years (2010-2015) inventory report of the factory.

1.5.5 Data Processing and Analysis

After the necessary data was collected from both primary and secondary sources, the next
assignment was processing and analyzing the collected data. Thus, the study had used tabulation
and percentage which help the researcher to present all the collected information in the simplest
form to arrive at effective conclusions and possible recommendations. Data processing is an
activity which involves editing, coding and classifying data to make it suitable for further
analysis, and then the compiled data was processed. After all the relevant data were collected and
processed, then they have gone to further analysis and transformation of the processed data into
groups. Finally, the outcome of the research was presented in a formal report.

1.5.6 Method of presenting the outcome

Once the analysis process has been completed, the interpretation of all data was as follows: it
was presented using different tools such as table and percentage to make clear the relationship
among variables. Finally, the analyzed data was presented in easy understandable way to draw
conclusion and recommendations as well as find out the role of effective inventory management
for the productivity of different manufacturing firms.

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1.6 Significance of the study
The study could provide a clear cut picture about the value or importance of inventory
management in Kotebe Metal Tools Factory and to identify problems concerning inventory
management. It is believed that the study would clearly reflect, what to see any opportunities to
utilize, to give relevant recommendation, suggestion and solution that help top management,
interdepartmental as well as the organization to make good decision concerning inventory
management and help in designing a better systematic form for inventory management system.
In addition, the study has given an overview of the factory‟s use of inventory management
system to external bodies. This study also is useful for other researcher to use it as a source.

Despite all the efforts made by the government to increase supply of materials, frequency of
material shortage and customers‟ dissatisfactions that were observed from long waiting lists has
remained a challenge regardless of changes in management and organizational re-structuring.
There is limited to no evidences as to whether these problems were attributable to inventory
management practices or not. Therefore, this study is vital in generating and filling evidence
gaps that serve as inputs for management of Kotebe Metal Tools Factory to improve the
operations there by citizens and organizations were gotten satisfactory service which helps them
contribute for their nation‟s development.

1.7 Scope of the study

There are different metal tools factory in Ethiopia. Due to time and resource limitation, the study
is limited to one manufacturing firm i.e. Kotebe Metal Tools Factory. The study has both areal
and conceptual delimitation. Since the main objective of the study is on the role of inventory
management in Kotebe Metal Tools Factory, the study is delimited to examining store,
production and purchasing departments of the industry in order to investigate the issue in depth
and to make the study manageable.

1.8. Limitation of the Study

This study was not going to cover all aspects of the metal tools factory. Therefore the findings
were not being generalized to the operations as a whole because operation includes raw material
purchase, inspection of raw materials, and assembly of working materials production, process
layout, finished materials layout, distribution and material sales. The study did not cover other

9
factors that contribute to material shortage and customer dissatisfaction. The study is limited to
role of inventory management to production part operations of the factory.

In undertaking the study the researcher faced some constraints. Of these, the major ones were
lack of time, finance, and workload, lack of experience, limited scope, appropriate data and
reluctance of respondents to give information. Such factors have great impact on diminishing the
quality of the study which in turn affects its reliability.

1.9. Organization of the study

The study is organized in four major chapters. The first chapter deals with the general
introduction of the study including background of the study, statement of the problem, objective
and significance of the study. The second chapter is all about the summery of literatures
reviewed. Data presentation, interpretation and analysis of the study are presented in the third
chapter. The last chapter which is chapter four is the conclusion and recommendation part of the
study.

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CHAPTER TWO: REVIEW OF RELATED LITERATURE
Under this sub section, literatures and theories related to the inventory management have been
reviewed.

2.1 Definition and Purpose of inventory

Inventory management is defined as a science based art of ensuring that just enough inventory
stock is held by an organization to meet demand (www.Fishbowl.Inventory management.Com).
Inventory is the availability of any stock or resources at right quantity and quality used in an
organization.
An inventory management system is the set of policies that controls and monitors inventory level
and determine what level should be maintained, how large orders should be made and when
stock should be replenished so as to support the operation of the business (Miller, 2010).
The availability of materials whenever and wherever required activities were essential for the
procurement, storage, sales, disposal or use of material can be referred to as inventory
management. Individual responsible for inventory management have to know the space they
have for storage and provide information when materials reach at their minimum level and utilize
available storage space resourcefully, so that available storage space is not exceeded. They have
to assist the organization to decide what quantity to order, how to order and when to order so that
stock is available on time and at the optimum cost (Benedict and Margeridis, 1999).
Inventory management involves planning, organizing and controlling the flow of materials from
their initial purchase unit through internal operations to the service point through distribution
(Smaros et al, 2003). Inventory constitutes one of the largest and most tangible investments of
any organization which also decides their success in operation.
Inventory plays a decisive role in the growth and survival of an organization in the sense that
failure to an effective and efficient management of inventory was mean that the organization was
fail to meet its objectives. Customer desire has always been a vital issue in accompany not only
to maintain sales but also to survive as a company (www.Fishbowl.Inventory management.Com).
Kotabo (2002), points that Inventory management refers to all the activities and organizations
involved in maintaining inventory for their operation so that adequate supplies were available
and the costs of over or under stocks were low.
Inventory management is required at different locations within multiple locations to protect the
regular and planned course of operation against the random disturbance of running out of

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materials. The scope of inventory management covers replenishment lead time, carrying costs of
inventory, inventory forecasting, inventory valuation, inventory visibility, future inventory
pricing, physical inventory, available physical space for inventory, quality management,
replenishment, and returns. Balancing these competing requirements leads to good inventory
management system, which is an on-going process as the business needs shift and react to the
wider environment (Ghosh and Kumar, 2003).
According to Ghosh and Kumar (2003), all organizations keep a supply of inventory for the
following reasons:
1. To maintain independence of operations: A supply of materials at a lost work center allows
that flexibility in operation inventory allows management to reduce the number of setups.
The time that it takes to do identical operations will naturally vary from work unit to work unit.
The sum total performance of an organization is the collective performance of workstation
located at different localities or units. Therefore, to meet business goal, effective and efficient
inventory management at all work station is crucial.
2. To meet variation in product demand: If the demand for the product or service is known
precisely, it may be possible to provide services exactly to meet the demand.
But demand is not completely known because we can‟t have full information about customers,
and a safety or buffer stock must be maintained to absorb variation.
3. To allow flexibility in service provision scheduling: A stock of inventory relieves the
pressure on the service provision to get the goods out. This leads to longer lead times, which
permit service planning for smoother flow and lower cost operation through larger lot size
production.
4. To provide a safeguard for variation in inventory delivery time: When material is ordered
from a vendor, delays can occur for a variety of reasons: a normal variation in shipping time, a
shortage of material at the vendor‟s plant causing backlogs, an unexpected strike at the vendor‟s
plant or at one of the shipping companies, a lost order, or a shipment of incorrect or defective
material.
5. To take advantage of economic purchase order size: There were costs to purchase
materials.
The larger each order is the lower ordering cost of the materials because of the bulk purchase.

12
Organization has to decide the quantity and time to procure materials economically. Materials
have to be purchased by comparing the ordering and storing costs. The most economical point
where materials to be procured is at the lowest cost of storage and order cost.
Inventory Management plays a decisive role in the enhancement of efficiency and
competitiveness of business enterprises. There is increased need for organizations to in place
effective inventory management practices as a strategy to improve their quality of business
operation (Rajeev, 2008). Effective inventory management system means holding an appropriate
quantity of inventory with better quality. Too much inventory consumes unnecessarily our
limited space, creates a financial burden, and increases the possibility of materials to be obsolete.
Too little quantity of inventory often disrupts business operations, and increases the likelihood of
poor customer service (Dimitrios, 2008).
Wise inventory management requires the analysis of the costs of maintaining certain levels of
inventory as there were costs involved in holding too much stock. There were also costs involved
in holding too little inventory hence the need to put in place an effective stock management
system to ensure reliable business operation (www.Fishbowl.Inventory management.Com). The
Economic Order Quantity (EOQ) model is very important for determining the optimal inventory
level that takes into account the inventory carrying costs, stock-out costs and total costs which
were helpful in the determination of the appropriate inventory levels to hold
(Http://www.Inventory Management.Com). Large organization rely on quantitative and computer
program to get more information on their inventory management but small firms make use of
management judgment without quantitative or computerized systems for decision making on
inventory.
Just-in-time inventory management techniques were increasing in popularity, as were automated
time-phased inventory re-order system. Some inventory management practices such as assessing
inventory levels and balancing stock-out costs against expenses related to higher inventory levels
were seldom used in practice (Romano, 2011).
Maintaining optimal inventory levels reduces the cost of possible interruptions or of loss of
business because of scarcity of inventory, reduces supply costs, and protects from customer
dissatisfaction. The inventory conversion period has a negative effect on a business‟s
performance. Shortening the inventory conversion period could increase stock out costs of
inventory which results in losing sales opportunities and leads to poor performance. The

13
importance of firms keeping their inventory at an optimum level by analyzing the relationship
between working capital management and corporate profitability will lead to excessive tying up
of capital at the expense of profitable operations.
Inventory management has impact on demand and supply of products, buffer stock to cover for
supply uncertainty and lead time. The quantity of inventory ordered at particular intervals does
affect the replenishment intervals (Sander et al. 2010). Stock-outs have serious implications for
businesses and they affect consumers, retailers, and manufacturers. Consumer purchase
behaviors, such as product replacement, delayed purchase, or not making a purchase sometimes
result from such events. Zinn and Liu (2008) suggest that when organizations faced with a stock-
out, a consumer search for a substitute product if they have alternatives. Once customer lost, the
consumer may be lost forever, resulting in a negative impact on the long-term built good will of
the organization. Even a loyal consumer may visit another firm to find the desired product, a
situation that may result into loyalty switching. Repeated stock outs negatively affect not only
manufacturers but also retailers through the loss of customers and employee time.
For effective inventory management on the performance of businesses, Sushma and Bhupesh
(2007) in their study established that businesses‟ inventory management policies had a role to
play in their profitability performance. Mismanagement of inventory will lead to tying up excess
capital at the expense of profitable operations and suggested that managers can create value for
their firms by keeping inventory to an optimum level.
Effective inventory management processes helps increase operational efficiency of firms;
improves customer service; reduces inventory and distribution costs; and enables businesses
track items and their expiration dates consequently balance between availability and demand
(Pandey, 2003).

2.2 Objectives of Inventory Management

According to Cannon (2009), the main objective of a good inventory management is to place an
order at the right time from the right source with the right quantity and quality. While developing
an appropriate management system of inventory, the following objectives should be kept in
mind:
 Organizations should try to minimize the possibility of inventory obsolescence by giving due
attention during procurement of materials. Besides materials storage, distribution and usage
should be appropriate to avoid shrinkage or obsolescence of the materials.

14
  A firm should maintain inventory to such a level that smooth and unhampered service
provision is ensured without any obstruction.
 Investment in inventory should be kept at minimum so that undue amount is not locked
up in it as investment in inventories involves costs.
 A firm should maintain sufficient amount of inventory to meet the demand of customers
regularly because if not done customers may shift to the competitors, which will result in
permanent loss to the firm.
 Provide both internal and external customers with required service levels in terms of
quantity and order rate fill.
 Ascertain present and future requirements for all types of inventory and to avoid
stocking while avoiding bad production.
 Keeps cost to minimum by variety reduction economical lot sizes and analysis of costs
incurred in obtaining and carrying inventories.
 Provide upstream and downstream inventory visibility to the supply chain.
So it is essential to have necessary inventories which were sufficient to the operation of the
organization. Excessive inventory is an idle resource on which resource is tied up rather than
investing on other better alternative. The investment in inventories should be just sufficient in the
optimum level. The major dangers of excessive inventories were:
High customer dissatisfaction and failure of operation
The unnecessary tie up of the firm‟s funds and loss of profit.
Excessive carrying cost, and
The risk of liquidity.
The excessive level of inventories consumes the scars funds of business, which cannot be used
for any other purpose and thus involves an opportunity cost. The carrying cost of inventory, such
as the cost of shortage, handling insurance, recording and inspection were also increased in
proportion to the volume of inventories.
The low level of inventories may result in frequent interruptions in the production or service
provision schedule resulting in under-utilization of capacity and poor operation that leads to
customer dissatisfaction. The aim of inventory management thus should be to avoid excessive
inventory and inadequate inventory and to maintain adequate inventory for smooth running of
the business operations. Efforts should be made to place orders at the right time with the right

15
source to purchase the right quantity at the right price and quality for the operations of the
organization.

2.3 Demand management

Demand for inventory generates forecasts based on sales history, currently scheduled orders,
scheduled marketing activities and customer information (Veinott, 1966). Demand of inventory
should be done collaboratively and interactively both internally across the firm‟s functional
components and externally with supply chain partners to develop a common and consistent
forecast.
The forecast must also incorporate feedback from customers to integrate the influence of
combined demand generation activities because unless the customers were satisfied the inventory
demand forecast is meaningless. Practically, inventory demand management and forecasting
were closely related, and forecasting is an extensive topic in itself (Bowersox at al., 2002).

2.4 Stock Control

2.4.1 Introduction
Stock control is defined as the means by which materials of the correct quantity and quality were
made available at the time when they were required, with due regard to economy in storage and
ordering costs, purchase prices and working capitals.
The modern stores management has a wide variety of functions that they have to perform as
efficiently as possible. The way in which stores management carries out these tasks will be
reflected in the overall efficiency of the organization because it is key supporter to the operation.
The primary concern in the management of stock control must be to provide the right goods in
the right condition at the right price in the right place at the right time.
The control procedure of inventory should:-
 Safeguard stock against loss, obsolescence or misuse
 Maintain stock at appropriate level of quantity.
 Ensure that the inventory of the organization is properly used for business operations
 Ensure that the inventory is duly accounted for purchasing and controlling purpose
depending on individual organization.

16
2.4.2 Reasons for Holding Stock
Every organization has warehouse for its inventory since in contrary to the quantity of inventory
organizations need, they need inventory to run their business. Generally, organizations hold
inventory in their stores for one or more of the following reasons (veinott, 1966).
 Improve Customer Service: Having inventories will ensure that customer who desire or
must have immediate stock availability or short delivery times are satisfied in their
dealing with the firm. This measure assists the marketing department and specifically the
level of customer service to the customers.
 Encourage Production Economies: Items purchased or manufactured in quantities
greater than what is needed immediately will create lot-size inventories. This is to take
advantage of quantity discounts, to reduce shipping, clerical, setup costs and in some
cases, where it is impossible to make or purchase items at the same rate it will be used or
sold.
 Permit Purchase and Transportation Economies: Inventory acts as buffer between
demand and supply so that production can be geared to a more constant output than
fluctuating demand. Therefore, lowest per-unit cost is possible due to the fact that
production runs at a constant quantity. Inventory will also allow the seizure of lower per-
unit rates of full-vehicle-load quantities. Likewise, lower prices can also be realized from
price-quantity discount offer as more can be purchased and inventoried.
 Act as Hedge against Price Changes: Goods that are purchased on the open market are
subject to the price levels dictated by changing supply-demand pattern. Purchases may be
made in advance of need because of anticipated price increases.
 Protect against Uncertainties in Demand and Lead Time: In most cases, the level of
demand on a logistics system and the time required for re-supply cannot be known for
sure. To assure product availability, additional amounts of stock are maintained. These
stocks are in addition to the regular stock to meet production and marketplace needs.
 Act as a Hedge against Contingencies: Labor strikes, fire and floods are just a few of
the contingencies that can happen. Therefore, maintaining backup inventories is one way
in which normal supplies can be maintained for a period of time.
The common factor in every stock management is that stock serves to bridge operation of an
organization with customer service.

17
The two possible reasons exist for this bridging operation of inventory:-
(a) Stocks were held because time is required to the procurement process or move inventory
from store to store or from store to operation sites.
(b) Stocks were required for organizational work units to schedule their working responsibilities
independently. The work units may locate in different geographical areas and their operation
should be bridged by the stock.
Inventory management is concerned with the acquisition, storage, handling and use of
inventories so as to ensure the availability of inventory whenever needed, providing adequate
provision for contingencies, deriving maximum economy and minimizing wastage and losses.
Inventory management ensures that the supply of required quantity and quality of inventory at
the required time and at the same time prevent unnecessary investment in inventories.
Inventory management is one of the most vital phases of material management. Reducing
inventories without impairing operating efficiency frees working capital that can be effectively
employed elsewhere. Inventory control can move a company ahead or return back by breaking
its operations.
A sound inventory management system is in a large measure for balancing operations. It is the
focal point of many seemingly conflicting interests and considerations both short range and long
range because too much or too little inventory affects negatively the operation of an
organization. The aim of a sound inventory management system is to secure the best balance
between “too much and too little inventories.” Too much inventory carries financial rises and too
little reacts adversely on improved continuity of operation of an entity. The real problem is not
the reduction of the size of the inventory as a whole but to secure a scientifically determined
balance between several items that make up the inventory.
The efficiency of inventory control affects the flexibility of the firm in either direction.
Insufficient procedures may result in an unbalanced inventory. Some items out of stock, other
overstocked, necessitating excessive investment which could hamper the operation. These
inefficiencies ultimately will have adverse effects upon profits and by large customer
satisfaction. Turning the situation round, difference in the efficiency of the inventory
management for a given level of flexibility affects the level of investment required in inventory.
The less efficient is the inventory management, the greater is the investment required. Excessive
investment in inventories increase cost and reduces profits.

18
Management of inventory is exercised by introducing various measures of inventory control by
companies, such as ABC analysis, JIT, fixation of norms of inventory holdings and reorder point
and a close watch on the movements of inventories.

2.5 Inventory analysis

Items that are in the inventory are not of equal importance in terms of the amount invested, profit
potential, stock out penalties…etc. therefore, all items do not deserve the same degree of
attention. This implies that selective inventory management approach has to be applied. From
this we can conclude that a different control management effort has to be allocated to the various
classes of inventoried items according to their relative importance.
According to joffrey and joannes (2012), inventories can be classified in to various groups on the
basis of the selective inventory management approach as follows.
1. ABC (Always Better Control) inventory analysis.
2. VED (Vital, Essential, Desirable) inventory analysis.
3. SDE (Scarce, Difficulty, Easy) inventory analysis.
4. HML (High, Medium, Low) inventory analysis.
5. FNSD (Fast moving, Normal, Slow, Dead) inventory analysis.
From the above mentioned classification of inventory, we are going to look at the ABC inventory
analysis in detail.

2.5.1 ABC Analysis of Inventories

The ABC inventory control technique is based on small part of an organization‟s inventory could
take a lion share of the total inventory, while a relatively large number of items may from a small
part of the money value of stores. The money value is ascertained by multiplying the quantity of
material of each item by its unit price.
The segregation of inventory into value/volume group enables management to allocate their
resources in relation to relevant group as to minimize the impact on total cost. Since companies
invest most of their fund on high value item, this approach recommends high value items were
more closely controlled than low value items. Each item of inventory is given A, B or C
denomination depending upon the amount spent for that particular item. “A” or the highest value
items should be under the tight control and under responsibility of the most experienced store
personnel, while “C” or the lowest value may be under simple physical control because if high
control is in place it may be more than their investment cost.

19
The following example could make the issue more clear:
A- Items are goods which annual consumption value is the highest. The top 70 to 80% of the
annual consumption value of the company typically accounts for only 10 to 20% of the
total inventory items.
B- Items are the interclass items with a medium consumption value. Those items with 15 to
25% of annual consumption value typically accounts for 30% of total inventory items.
C- Items are on the contrary, items with the lowest consumption value. The lower 5% of the
annual consumption value typically accounts for 50% of total inventory items.
The relative position of these items show that items of category A should be under the maximum
control, items of category B may not be given that much attention and item C may be under a
loose control.
ABC analysis procedure
The following procedure can be used for classifying items in to A, B, C categories.
1. List the items and compute the annual usage value for each of the items by
multiplying the annual consumption or usage by the unit cost.
2. Rank or arrange the items in descending order of annual usage value i.e. from the
highest value to the lowest value.
3. Determine the cumulative annual usage value and total number of items.
4. Convert the annual usage value and total number of items into percentage.
5. Observe how your classification fits in to A, B and C or categorize the items into
ABC on the basis of the given percentage.

Example
XYZ factory adopts the ABC method for classifying items in inventory. Currently the factory
has to items. The following is the data related to the items and assuming that you are the
inventory control officer, classify the items in to the three classes with A taking 70%, B 20% and
C 10% of the total expenditure.
Item number Annual usage Unit cost
1 2000 5
2 2500 3
3 1000 9.5
4 5500 20

20
5 4500 8
6 3000 9
7 400 5
8 150 10
9 5000 3
10 7000 20
Solution
Step -1 calculate the annual consumption value
Item no Annual usage Unit cost Annual consumption
(quantity) value
1 2000 5 10000
2 2500 3 7500
3 1000 9.5 9500
4 5500 20 110000
5 4500 8 36000
6 3000 9 27000
7 400 5 2000
8 150 10 1500
9 5000 3 15000
10 7000 20 140000
Total 31050 358500

Step -2 put the items in rank and determine the cumulative value and number of items
Rank Item Annual usage Birr usage % of items % of birr usage Class
no (quantity)
1 10 7000 140000 22.50% 39.05% A
2 4 5500 110000 17.71% 30.68%
3 5 4500 36000 14.50% 10.00% B
4 6 3000 27000 9.66% 7.33%
5 9 5000 15000 16.10% 4.18%
6 1 2000 10000 6.44% 2.79% C
7 3 1000 9500 3.22% 2.65%
8 2 2500 7500 8.10% 2.10%
9 7 400 2000 1.29% 0.56%
10 8 150 1500 0.48% 0.42%
Total 31050 358500 100% 100%

2.5.2. Implementing ABC analysis

Table 2.1: implementing ABC analysis

21
Factor Item A Item B Item C
Degree of control High Moderate Low
Ordering procedure High Moderate Low
Priority treatment High Moderate Low
Safety stock Low Moderate High
Price discount Low Moderate High
Physical stock taking High Moderate Low
Value analysis Heavy emphasis Moderate Less emphasis
Nature of purchasing Centralized Combined Decentralized
Table2.1 implementation of ABC analysis

2.5.3 Advantages of ABC Analysis

According to an online source (http://onlineaccountreading.blogspot.com), there are many advantages
of ABC analysis. From those many advantages, some are the following.

a. Reduction in investment: under ABC analysis, the materials from group 'A' are purchase in lower
quantities as much as possible. With this, the effort to reduce the delivery period is also made. These in
turn help to reduce the investment in material.

b. Strict control: under ABC analysis, strict control can be exercised to the materials in group 'A' that
have higher value.

c. Minimum storage cost: since, the ,material from group 'A' are purchase in lower quantities as much as
possible, it reduce the storage cost as well.

d. Saving in time: since a signification effort is made for management of the material from group 'A', it
helps to save time as well.

e. Economy: this method is economical, since equal time and labor is not needed for all types of
materials.

2.6 Inventory Costs

Inventory costs are the costs related to storing and maintaining its inventory over a certain period
of time. Typically, inventory costs are described as a percentage of the inventory value (annual
average inventory, i.e. for a retailer the average of the goods bought to its suppliers during a
year) on an annualized basis. They vary strongly depending on the business field, but they are
always quite high. It is commonly accepted that the carrying costs alone represent generally 25%
of inventory on hand.

22
According to a source (http://www.lokad.com/definition-inventory-costs), inventory costs are
classified into two. These are: carrying or holding costs and ordering or setup costs. Both
carrying and ordering cost have their own sub divisions.

2.6.1 Inventory Carrying Cost:

Holding cost includes such costs associated with investing in inventory and maintains the
inventory in store. Cost of capital, insurance, taxes, deterioration, storage and obsolesce are
examples of holding cost and opportunity cost of the money invested (Silver et al, 1998).
Carrying cost is usually computed per year. There were four major components of inventory
carrying cost: capital cost, storage space cost, inventory service cost, and inventory risk cost.
1. Capital Cost- Also sometimes called the interest or opportunity cost which type focuses upon
what having capital tied up in inventory. The capital cost is frequently the largest component of
inventory carrying cost. A company usually expresses it as a percentage of the value of the
inventory the company holds. All companies seek to reduce inventory because management
recognizes that holding excessive inventory provides no value added to the firm‟s operations.
2. Storage Space Cost- This cost category incorporates handling costs associated with moving
products into and out of inventory, and storage costs such as rent, heating, and lighting. Such
costs may vary considerably from one circumstance to the next.
3. Inventory Service Cost- This carrying cost component includes insurance and taxes.
Depending upon the product value and type, the risk of loss or damage may require high
insurance premiums. In most cases, there will be few, if any; significant changes from year to
year in the tax and insurance components of the inventory carrying cost such as marine or inland
insurance.
4. Inventory Risk Cost- This major component of inventory carrying cost reflects the very real
possibility that inventory value may decline for reasons largely beyond corporate control. The
inventory risk costs most of the time were due to management problem and includes the costs
associated with obsolescence, pilferage, damage, theft, and other risks to inventoried product.
Annual carrying cost = where, Q is the order quantity

H is holding cost per unit

23
2.6.2 Order/Setup Cost
The other inventory cost affecting total inventory cost is ordering cost or setup cost. Ordering
cost is cost associated with making requisitions, analyzing vendors, writing purchase orders,
receiving materials, inspecting materials, following up orders and making sure that the
transaction is completed. The followings are some of the inventory order costs.
1. Order cost. The costs associated with ordering or acquiring inventory have both fixed
and variable components (Parlar, 2000). Cost of the information system, facilities, and
technology available to facilitate order placement activities can be considered as part of
fixed order costs. The fixed order cost will remains constant in relation to the number of
orders placed. There were also a number variable order costs that vary in relation to the
number of orders that were placed for more inventories. Some of such variable costs
include reviewing inventory stock levels; Preparing and processing order requisitions or
purchase orders; Preparing and processing receiving reports; Checking and inspecting
stock prior to placement in inventory and preparing and processing payment.
2. Setup Cost. Production setup costs may be more obvious than ordering or acquisition
costs. Setup costs were expenses incurred each time a firm modifies a production line to
produce a different item for inventory. The set up cost has both fixed and variable cost
components. The fixed portion of setup cost might include use of the capital equipment
needed to change over production facilities, while the variable expense might include the
personnel costs incurred in the process of modifying or changing the production line.
Annual ordering cost = where, D is annual demand

Q is the order quantity

S is cost per order

2.7. Inventory Modeling

This is a quantitative approach for deriving the minimum cost model for the inventory problem
on hand.

2.7.1. Economic Order Quantity (EOQ) Model

The Economic Order Quantity also known as the Wilson EOQ model is a model that defines the
optimal quantity to order that minimizes total variable costs required to order and hold inventory.
This model is applied when the objective of the organization is to minimize the total annual cost

24
of inventory in the organization. Economic order quantity is that size of the order which helps in
attaining the above set objective. The EOQ model is one method of determining the adequate
(optimum) inventory level for independent demand materials. This model is one of the
mathematical models and it results in an inventory level which is not too large or too small i.e. it
is the economical level of inventory. Here very large order size may result in few number of
orders thereby low ordering cost. However, the annual carrying cost may be high for large size of
inventory. On the other hand, small order size involves many orders which decreases the annual
carrying cost and increases the annual ordering cost of the item. Therefore, the annual total
increment at cost will be large due to both inadequate and more than adequate inventory level. At
the point of EOQ, the total inventory cost will be kept at minimum level (Lee, 2002).

2.7.1.1. Assumptions of EOQ model

EOQ refers to the optimal ordering quantity for an item of stock that aids in the minimization of
costs. This inventory management technique assumes that annual demand for the item is known
with certainty-through forecast or actual order placed, Lead time is known and fixed, the receipt
of the order occurs in single instant, quantity discounts are not calculated as part of the model
and shortages of inventory or stock out do not occur. Economic order quantity graph illustrates
the relationship among the ordering costs, holding costs, total costs and economic order quantity
(Lee, 2002).

25
As we have seen in the above figure, at the quantity level of 0 units the cost of ordering is high
and holding cost is zero; the total cost is decreasing because as there were no items in the store
the company is forced to order an item. When the amount of items increase holding cost also
increase but ordering cost becomes decrease. At a certain point holding cost and ordering cost of
an item becomes equal and total cost becomes at its minimum and starts to increase because the
rate of increment of holding cost is greater than the rate of decrement of ordering cost. The
quantity at which ordering cost and holding cost becomes equal is called Economic Order
Quantity (EOQ). Ordering cost does not become zero as the minimum number of order is one.

2.7.1.2. Economic order quantity determination

Bennet (1999), says that in order to arrive at the economic order quantity, the formula below is
used. EOQ is an order size that balances the annual carrying cost and annual ordering cost. At
EOQ the annual carrying cost is equivalent to the annual ordering cost. Now in order to calculate
the annual carrying cost let us look at the concept of average inventory. The concept of average
inventory is based on the following assumptions.
Purchase is made at the beginning
Usage rate is constant
The last item is used on the last date

Then the average inventory will be where, Q is the order quantity in units

Therefore, at EOQ point total annual ordering cost is equal to total annual carrying cost.

Where, D = annual demand

Q= order quantity
S= cost per order
H=holding cost

Multiply both sides by Q

Multiply both sides by 2

Divide both sides by H

Therefore at EOQ, Q=

26
Example:
ABC manufacturer produces 125,000 oil seals each year to satisfy the requirement of their client.
They order the metal for the bushing in lot of 30,000 units. It cost them $40 to place the order.
The unit cost of bushing is $0.12 and the estimated carrying cost is 25% of unit cost. Find out the
economic order quantity? What percentage of increase or decrease in order quantity is required
so that the ordered quantity is Economic Order Quantity?
Given D= 125000
S=40
H=0.03

Solution Q=

= 18258 units

Since the order quantity is 30000 which are more than the EOQ; the quantity should be
decreased to reach EOQ. Percentage decrease in order quantity required is

=39.14%

2.7.2. Economic Production Quantity (EPQ) Model

We have seen the application of EOQ model in determining the optimum order quantity of items
purchased or ordered from external suppliers. But when the company is the producer and user of
its items, the run size is the economic production quantity (EPQ). In other words the company is
the supplier for itself.
In the determination of the EPQ the carrying cost remains the same but the ordering cost is
replaced by set up cost which is the cost of preparing production for operations.

2.7.2.1. Assumptions of economic production quantity

1. Annual demand, carrying cost and set up cost for a material can be estimated
2. No safety stock is utilized; materials are supplied at a uniform rate p and used at a
uniform rate d and materials are entirely used up when the next order begins to arrive
3. Shortages are not permitted

27
 4. Quantity discount do not exist
5. Supply rate p is greater than usage rate d
6. Set up time or lead time is constant
Let us now derive the formula for EPQ;
Let d= daily demand rate for the products
P= daily production rate for the product
t=number of days for a production run
When ;
 Daily rate of inventory buildup = p-d
 Level of inventory by the end of t day
 Run size 

 Run time = which is stated as days

 The maximum inventory is given above as =

 Since it can also be stated as

 Therefore, the annual carrying cost is

The annual set up cost can be obtained as follows:

Number of set ups per year is

Total set up cost where D= annual demand

Q= run size
S=set up cost per year
Therefore, at EPQ total annual set up cost is equal to total annual carrying cost

Multiply both sides by Q,

Multiply both sides by 2,

Divide both sides by

28
Where; D= annual demand
s=set up cost per year
d= daily usage rate
p= daily production rate
h= holding or carrying cost
= part of production that is carried in inventory

Example
The XYZ Company produces wheat flour as one of their products. The wheat flour is produced
in the pack of 1kg. The demand for wheat flour is 40,000 packs per year & the production rate is
50,000 packs per year. 1kg pack of wheat flour costs $0.50 each to make. The Procurement cost
is $5. The carrying cost is high because the product gets spoiled in few week times span. It is
nearly 50 percent of cost of one pack. Find out the operating doctrine.
Given
D= 40000
P= 50000
h= 0.25
s=5
Solution

=2828.42

29
Chapter three: Data analysis, presentation and interpretation
3.1. Data analysis and interpretation
3.1.1. Introduction
Forty out of the fifty seven (70.2%) questionnaires issued were returned fully filled with the
remainder being treated as non-response bias. The response rate reflected the view of Mugenda
& Mugenda (2003) who indicated that a response rate of 70% and over is very good as it gives a
representative sample for meaningful generalization and minimizes errors.

Table 3.1: response rate

Questionnaire Frequency Valid percent

Returned 40 70.2

Not returned 17 29.8

Total 57 100.0

Source: primary data collected by student researcher

The background information of respondents was deemed necessary because the ability of the
respondents to give satisfactory information on the study greatly depends on their background.

Thus, the background information of respondents were categorized into gender, age, education
levels, marital status, family size, monthly income and length of service year in the factory and is
presented as follows.

3.1.2. Gender characteristics of respondents

The study examines and describes the gender details of respondents and displayed in the figure
below. The factory‟s metal tools may be affected by the gender of employees due to the nature of
the work. The gender composition might have an impact on the inventory management and
operation of the factory and that is why it is important to see the gender characteristics of the
factory. The gender composition might have an impact on ethical behavior of employees when
managing inventory.

30
Fig3.1: Gender character

Source: primary data collected by student researcher

The above table shows that 55% of the respondents were males. This may indicate that there
were still low levels of employment of females in the factory. This was necessary for the study to
get a balanced picture of the respondents‟ views regarding inventory management practices of
the factory.

3.1.3 Description of age groups of respondents

The study obtained details about the age groups of the respondents for the purpose of
understanding their age and possibly the experience they possess in their respective positions.
Details of the findings are shown in table 3.2 below. According to the research conducted by
Woldeabrha Berhane (2015), employees‟ attitude towards corruption and commitment to work
may be affected by their age. To provide quality service to customers, ethics is very important.
Age is included in this study to assess if most of the employees were under the category of the
productive age or not.

31
 Table 3.2: Age group of respondents

Age group Frequency Valid percent

18-25 9 22.5

26-33 10 25.0

34-41 8 20.0

42-49 7 17.5

6 15

Total 40 100.0

Source: Primary data

The above data shows that more respondents are in the age group between 26-33, followed by
18-25 and 34-41 in the order of 25%, 22.5% and 20%. From this we can understand that most of
the employees of the factory are under the category of productive age (assuming legally
Ethiopians start work at the age of 18 years).

3.1.4. Description of education level of respondents

Fig.3.2: education level of respondents

Source: primary data collected by student researcher

32
The above figure shows that the majority of the employees of the factory were first degree
holders that account about 30% of the total. This means that the respondents were not enough
qualified persons to manage the operations of the factory properly.

3.1.5. Marital Status of the respondents

The study examines the marital status of respondents. The researcher wants to study about the
marital status of employees as most married people were not interested to work on holidays as
well as weekends which obviously affect the quality of customer satisfaction. The marital status
of employees may have physical or psychological stress and this may affect the quality of
customer service. Besides the marital status could have effect on the ethical behavior of
employees.

From the survey of the employees of the factory, 65% of the respondents were married and the
rest 35% were single there is no employee either divorced or widowed. This indicates that most
employees of the factory were married and unless the factory is systematic to motivate these
employees, they may not be happy to work on different holidays as well as weekends.

3.1.6. Work Experience of Employees

The study has investigated the work experience of employees in the factory and the findings
were presented in the table below. As we all know, the nature of the work needs caution and
commitment. On top of this, silly mistake may take life and at the same time unnecessary cost to
the factory. To minimize this, employees of the factory need to have sufficient work experience
to proactively understand the nature of the materials, work and the technology.

Table 3.3: Experience of respondents

Frequency Valid percent

1-2 10 25

3-4 13 32.5

4-6 6 15.0

11 27.5

Total 40 100.0

Source: Primary data

33
The above table shows that a significant number of employees served the factory for less than 4
years which accounts about 32.5%. This information show that even though the factory is in
service for decades, 72.5% of the employees served the factory for less than 6 years and this
indicates that the employee turnover in the factory is high. This resulted in loosing employees
who know the inventory management system of the factory.

3.2. Nature of inventory management

Organizations rely on inventory to balance supply and demand, and to buffer uncertainties in the
supply chain. However, inventory can be one of the most expensive assets of an organization;
hence it must be managed closely. A management that cannot decide strategically could fail to
run an organization in the right direction. Whether it is a private or public sector, the acquisition,
storage, issuance, and usage of stock is crucial in running operations of the business.
Organizations allocate resources for their activities. To achieve business‟s objectives,
organizations have to acquire, allocate and control both material and financial resources.
Inventory management as one of the key activities of business functions, has always been a
major preoccupation for the company‟s growth and survival. Inventory management is
concerned basically with planning and control of materials. There must be a store, where to buy,
when to buy, and how much to buy to control materials. The purpose of inventory management
is to ensure uninterrupted supply of inventory at lowest possible cost for ongoing operation of
business. Management has to compare different cost components such as cost of supplying
inventory, inventory holding costs, and costs resulting from insufficient inventory when making
decision on inventory (Varma, 2002).

This research‟s objectives are sought to assess the role of effective inventory management for
productivity, inventory management systems applied by Kotebe Metal Tools Factory, the level of
effectiveness of inventory management practices of the factory, and determine the level of
performance of production department of the factory.

3.2.1. Awareness of inventory and management of inventory

The respondents were asked to indicate whether they are aware of inventory and management of
inventory and 100% of the respondents answered yes, from this one can conclude that there is
management of inventory in the factory and the respondents can be able to answer questions that
are raised against inventory and management of inventory.

34
3.2.2. Policies and procedures of inventory management
Respondents were asked to indicate whether the factory has policies and procedures to keep
inventory level that avoid excess inventory.

Table 3.4: policies and procedures of inventory management

Frequency Valid percent

Yes 34 85

No 5 12.5

Missing 1 2.5

Total 40 100

Source: primary data

Table 3.4 shows that 85% (34) of the respondents think that the factory has policies and
procedures that keep the inventory level to avoid excess inventory. So, the researcher can
conclude that the factory has policies and procedures that keep the factory from either running
short or keeping excess inventories.

3.2.3. Optimality of inventory management

Respondents were asked to indicate whether there is optimal level of inventory management in
the factory and the results were summarized in the following table.

Table 3.5: optimality of inventory management

Frequency Valid percent

Yes 16 40

No 23 57.5

Missing 1 2.5

Total 40 100

Source: primary data

Table 3.5 indicates that the factory has no optimal level of inventory management rather the
respondents think that the level of inventory management is unfavorable that is why 57.5% (23)
respondents stated that there is no optimal level of inventory management in the factory.

35
3.2.4. Time of delivery of finished goods
Respondents were asked to indicate the time of delivery that the production department of the
factory delivers finished goods to its customers. The following table summarizes this.

Table 3.6: time of delivery of finished goods

Frequency Valid percent

Delivery on time 23 57.5

Sometimes there is late 14 35

delivery

Does not deliver on time 2 5

Missing 1 2.5

Total 40 100

Source: primary data

In this regard the factory‟s ability to deliver finished goods to customers, the respondents seem to
think that the factory is delivering finished goods at the time when the goods are needed. From
the table, the researcher can conclude that even if the factory delivers finished goods on time
there are times when the factory doesn‟t deliver finished goods on time that is why 40% (16)
respondents replied sometimes there is late delivery and no delivery at all.

3.2.5. State of coordination among departments of the factory

Respondents were requested to indicate the level of coordination among production, stores and
purchase department of the factory. The responses are depicted in the table below.

Table 3.7: state of coordination between departments

Frequency Valid percent

Strong coordination 19 47.5

Satisfactory coordination 15 37.5

Weak coordination 5 12.5

Low coordination 1 2.5

Total 40 100

Source: primary data

36
According to the above table, 47.5% of the respondents replied strong coordination among the
departments in the factory. From this we can infer that even if more respondents think strong
coordination, 52.5% of the respondents replied coordination other than strong. They had given an
open ended question and strengthen this idea by providing the following reasons.

 Due to the factory‟s low salary base the employees were forced to terminate, so the new
employee who take the position is not well experienced about the nature of the job.

 The department‟s managers are not aware of the inventory management.

 Most managers are assigned in the position without training and developing them.

 The department heads sometimes become boredom about the job because the factory has
no special benefit for the managers.

3.2.6. Inventory control system of the factory

Respondents were asked to indicate the type of inventory system in which the factory use to
control inventory and the results are summarized as follows.

Table 3.8: inventory control system of the factory

Frequency Valid percent

Perpetual inventory system 4 10

Periodic inventory system 11 27.5

Both 24 60

Missing 1 2.5

Total 40 100

Source: primary data

As per the response of the respondents, 60% replied that both periodic and perpetual inventory
systems were applied by the factory. From this one can conclude that the factory had used both
periodic and perpetual inventory systems to control its inventory. This means that, the factory
records the inventories when transactions were taken place and the inventories were counted
after some period in order to know ending inventory. This indicates that the factory has huge
amount and low price items as well as small amount and high price items.
37
3.2.7. Time of checking inventory items
Respondents were requested to indicate how frequently the factory checks its inventory. The
responses are depicted in the table below.

Table 3.9: time of checking inventory

Frequency Valid percent

Monthly 7 17.5

Semi annually 2 5

Annually 28 70

Quarterly 2 5

Missing 1 2.5

Total 40 100

Source: primary data

70% of the respondents indicated the factory count its inventory annually and 5% indicated the
factory count quarterly. From this the researcher can conclude that the factory count its
inventories once a year. This evidence tells that the factory has huge amount of inventories that
are sold with low price.

3.2.8. Rate of inventory return

Respondents were asked to indicate the rate in which inventory was returned after sale as a result
of defect. The responses were depicted in the following table.

Table 3.10: rate of inventory return

Frequency Valid percent

Always 4 10

Most often 13 32.5

Few 22 55

None 1 2.5

Total 40 100

Source: primary data

38
According to the table, the rate of inventory return is low that is why 55% replied few items were
returned as a result of defect. Even if there were few amount of inventory that are returned as a
result of defect, the evidence show that there is small amount of inefficiency in the production
department.

3.2.9. Inventory management/ modeling technique

Respondents were asked to indicate the type of inventory management/ modeling technique that
the factory uses to control its inventory.

Figure 3.3: inventory management/ modeling technique

Source: primary data

According to the above figure, most of the respondents replied that the factory uses stock level
management technique in which the factory orders inventory when the amount that is specified
as minimum level is reached, that is why 65% (26) respondents replied stock level. From this
information, the researcher could understand that the factory follow good inventory management
technique because in stock level technique there are reorder level, minimum level, maximum
level and economic order quantity or reorder quantity.

3.2.10. State of purchase of items

Respondents were asked to indicate whether the factory is very careful to purchase the right
items/ inventories of the right quantity at the right price. 75% respondents replied that the factory
39
is very careful to buy the right item, the right quantity at the right price. From this we can
conclude that the factory purchase items with the correct quantity by their exact price which in
turn leads to minimize wastage and unnecessary cost.

3.3. Inventory management and practice of Kotebe Metal Tools Factory (KMTF)
Respondents were requested to indicate whether the factory has managed its inventory in
appropriate way. The responses were depicted below.

Table 3.11: management of inventory

Frequency Valid percent

Yes 28 70

No 11 27.5

Missing 1 2.5

Total 40 100

Source: primary data

According to the above table 70% respondents replied that the factory is managing its inventory
in appropriate way. From this the researcher understands that the factory could minimize cost
and obsolescence of inventory by applying the correct inventory management/ modeling
technique, purchasing the right quantity of items at the right price, assigning the right person
who is qualified for specific job.

Respondents were given a statement that reads „the factory has a minimum and maximum stock
level system that alerts the management when to purchase an item‟ and their level of agreement
was sought on a scale. Accordingly, the chart below presents their level of agreement to this
statement.

40
Figure 3.4: KMTF has a minimum and maximum stock level system

Source: primary data

As can be seen from the chart, 65% of the respondents had either disagreed or strongly disagreed
to the statement that the factory has stock threshold level indicating that there was practice of
using minimum/maximum stock level as a standard of inventory management. This implies that
there were high possibilities of running out of stock. This in turn may lead to long customer
waiting list and thereby increases customer dissatisfaction.

Moreover, regarding a statement that reads „the factory has a system that can easily move from
stores/work units/regions where materials were in excess to work units/stores/regions where
there is shortage‟ and the level of agreement to the statement by the respondents are summarized
in the table below.

41
 Table 3.12: Inventory movement among work units/sites/warehouses

Frequency Valid percent

Strongly disagree 21 52.5

Disagree 6 15

Neutral 5 12.5

Agree 7 17.5

Strongly agree 1 2.5

Total 40 100

Source: primary data

As can be seen from the above table, 67.5% of the respondents have either disagreed or strongly
disagreed to the statement showing that inventory movement between warehouses/work
units/sites was difficult or impossible even the service delivery is compromised due to shortage
of inventory in the other site. The most common reasons given by respondents for the lack of
flexibility were:

 There was misunderstanding among the different work units;

 Bureaucratic system of management putting bottlenecks in place;

 Due to lack of stock level threshold, staff were not aware of the existence of such
materials in their warehouses; and

 Due to fear of untimely stock replenishment, some staffs had developed an attitude to
reserve materials for their own sites/districts/regions and they were unwilling to share.

In a similar way, the respondents were given a statement that reads „the factory proactively
informs its customers when it faces material shortage‟ and the level of agreement to this
statement was summarized in the table below:

42
 Table 3.13: Customers awareness about material shortage

Frequency Valid percent

Strongly disagree 8 20

Disagree 16 40

Neutral 6 15

Agree 10 25

Strongly agree 0 0

Total 40 100

Source: primary data

From the above table, it is evident that 60% of the respondents have disagreed or strongly
disagreed to the statement. This shows that the factory has no practice of proactively informing
its customers of the service interruptions or delay of new connections due to material shortage.
This leads customers not only to be dissatisfied by the factory services delivery but also to have
distorted guesses about the finished goods supplies. The respondents‟ reason to this is the lack of
management‟s transparency to the employees and customers regarding the shortage of material.

3.4. Unethical behaviors in inventory management

Respondents were given a statement that reads „the material shortage that the factory faced will
expose some employees to unethical behavior like corruption‟ and their level of agreement to the
statement was summarized in the chart below:

43
Figure 3.5: Employees ethical behavior

Source: primary data

As shown on the above figure, 70%, of the respondents agreed or strongly agreed to the given
statement. This reveals that few employees of the factory might consider the current material
shortage as an opportunity to deal corruptive activities with customers. The operation of the
factory might be hampered due to unethical behavior of few employees of the factory. Corrupted
employees might illegally collect money from their clients and bring the required materials from
the factory and give the demanded services to the spender needy clients in return to the unlawful
payment. This could indicate that corrupted employees use the factory‟s materials for their own
dishonest activities. On the space provided for open ended question, customers suggested that the
factory might need to take remedial action because some employees never give service unless the
customers give money. According to the research conducted by Woldeabrha Berhane (2015),
Male and single employees deal more for corrupt activities than married and female employees.

Respondents were also given a statement that read „you observe that some employees and
management members need to continue the current material shortage‟ and their levels of
agreement to the statement were summarized as follows:

44
 Table 3.14: Futurity of materials shortage

Frequency Valid percent

Strongly disagree 4 10

Disagree 9 22.5

Neutral 6 15

Agree 4 10

Strongly agree 15 37.5

Missing 2 5

Total 40 100

Source: primary data

The table above illustrates that 47.5% of the respondents agreed or strongly agreed to the given
statement. Almost half of the respondents think that some employees and management members
need the current material shortage to continue. Among the respondents 32.5% disagree or
strongly revealed that the employees and management do not need the material shortage to
continue. The respondents also added that their interest is to arrange personal benefits. This
implies some management and employees of the factory don‟t worry regarding the customer
dissatisfaction and poor operation of the factory due to material shortage.

3.5. Inventory management system contribution to poor customer service provision

and operation
Respondents were given a statement that read „this days customers were forced to stay long on
waiting for finished goods due to shortage of materials‟ and their responses to the statement were
summarized as follows:

45
 Table 3.15: customers on waiting list

Frequency Valid percent

Strongly disagree 2 5

Disagree 4 10

Neutral 5 12.5

Agree 11 27.5

Strongly agree 17 42.5

Missing 1 2.5

Total 40 100

Source: primary data

As illustrated in the table above, 70% respondents revealed that they had agreed or strongly
agreed to the statement and only 15% of the respondents disagreed or strongly disagreed to the
statement. This implies that the major cause for the current customers on waiting list is shortage
of materials. The respondents added that, even though there were many customers on waiting
list, the factory still collects cash from the customers without any effort to solve the problem.
The regions/service centers report to the management of the factory regarding customers on
waiting list but no corrective action is issued to adjust this problem.

Respondents were given a statement that reads „the factory uses ABC inventory system by giving
more attention to the most important materials and less attention to the least important items
which were more in quantity but less in investment value‟ and their level of agreement has been
summarized in the chart as follow:

46
Figure 3.6: Implementation of ABC inventory management

Source: primary data

As indicated in the figure above, the professional background of most respondents allows them
to respond to the statement and agreed that the factory didn‟t use the ABC inventory
management system. Among the respondents, 67.5% have disagreed or strongly disagreed to the
given statement and 20% of the respondents did not give response to the given statement because
they do not have knowledge about ABC inventory system. This implies that the factory does not
give any special attention to materials which were very important to its operational activities.
Had the factory been implementing ABC inventory management system, the number of obsolete
materials could be less than the current situation and the factory could adhere to the standards by
minimizing the current huge number of customers on waiting list. The practice of the factory
relating to ABC inventory management system resulted in failing to provide services to customer
on time and becomes source of customer dissatisfaction. Respondents were given a chance to
give any additional opinion regarding inventory management of the factory and its role to
operation. Their responses were summarized as follows:

(a) The employees assigned at warehouses didn‟t get training

(b) Inventory management is a bottleneck to KMTF to improve its operation

47
(c) We were killing the country because of the material shortage and it needs immediate solution

(e) Materials procured were with poor quality

(f) Accountability and transparency should be in placed

(g) Strong internal control over inventory is needed

(i) The current inventory management is poor and not well organized

(j) Implementing minimum and maximum inventory management system is important for the
factory

(k) The bureaucratic bottleneck should be solved to improve the inventory management

(l) The management and employees should free of corruptive activities

3.6 Management awareness about material shortage and customer dissatisfaction

A statement read as “The current major customers‟ dissatisfaction is directly related to material
shortage” was given to respondents and their level of agreement to the statement is summarized
in the figure below.

Figure 3.7: customer dissatisfaction and material shortage

Source: primary data

48
As shown in the figure above, 72.5% respondents have agreed or strongly agreed to the
statement. This indicates that the current customers on waiting list could directly relate to
material shortage. This could in turn imply that the practices of the factory were very poor in
providing information to customers about material shortages. Most of the customers put their
opinion on the opinion box of the factory that they were highly dissatisfied because the
employees told them there was no material to serve them. The reports and documents of the
service revealed that the customers were not getting service due to material shortage.

Respondents were also given a statement that read “as an employee of the factory, you were well
informed about the cause of the material shortage” and their levels of agreement to the statement
were summarized as follow:

Figure 3.8: Employees information about material shortage

Source: primary data

The figure shows that only 12.5% (5) of the respondents have agreed or strongly agreed to the
statement. Majority of the respondents (67.5%) knew that there was shortage of materials but
they had information gap regarding the causes of material shortage and had disagreed or strongly
disagreed to the statement. The employees of the factory were involved on day to day operation

49
of the factory but they were not aware about the causes of the material shortage. This implies
that:

(a) There is transparency problem of the management

(b) Employees working at community level were at front to the customers but they couldn‟t
provide correct information to their customers

(c) This could increase customer dissatisfaction

(d) The employees might be forced to guess and provide groundless information about material
shortage for the customers and other stakeholders

(e) The information gap could affect the commitment of the employees

(f) It could affect the sense of ownership and blaming the management

A statement reads “you believe that the management has no full information about the shortage
of materials because the service centers didn‟t report on time” was given to the respondents and
their level of agreement was summarized in the figure below:

Figure 3.9: Management awareness to material shortage

Source: primary data

50
The figure indicates that 57.5%, of the respondents have disagreed or strongly disagreed to the
given statement and few respondents (27.5%) agreed or strongly agreed that the management of
the factory did not have full information about the shortage of materials. Most of the respondents
think that the management has full information regarding the material shortage. The respondents
think that the management had got different reports regarding material shortage and other
problems including customers on waiting list, maintenance and emergency and the reasons for
outstanding activities. The respondents believe that the management has full information about
the material shortage and the material shortages had to be solved or at least the customers should
be informed properly. The management transparency problem could lead the customers and even
employees to guess the root causes of the material shortage.

51
CHAPTER FOUR: CONCLUSION AND RECOMMENDATION
4.1 CONCLUSION
From the data obtained from the factory, most of the workers are males which account about
80.7% of the total workers. This implies that, even if the factory is in operation for decades, the
employment of females is very low in that factory. Assuming legally Ethiopians start work at the
age of 18, most of the workers are under the category of productive age group. Although the
respondents are educated to respond to the questionnaire, they were not qualified enough to
manage inventory and the operations of the factory properly. Most of the factory employees were
married and unless the factory is systematic to motivate these employees, they may not be happy
to work on holidays and weekends. Due to the low salary scale of the factory, most employees
are not willing to work for a long period of time. As a result there is a high labor turn over in the
factory.

Although the factory has policies and procedures of inventory management, its inventory
management practices have gaps that need attention of the management so as to run the
operation smoothly. The management had information about the material shortages but failed to
solve the problem. Some employees used the current problem in inventory management practices
as an opportunity for unethical activities and the management did not take remedial action.
Because of the transparency problem of the management, the employees were not aware of the
root cause of the problem. The work units were not ready to give materials to others because they
fear that there was no guarantee when the inventory could be refilled.

The study concludes that the factory should have to see its inventory management as a key
functional part which can determine the quality of finished goods provision. There was a
problem of inventory management at all levels and its result was reflected directly on customer
dissatisfaction and poor quality service provision. Even though there were other causes cited by
the respondents for inventory management, which was out of the scope of this project, all
respondents agreed that the main one was material shortage. The study found out that
enhancement in the level of effectiveness in inventory management practices would result in
increased business performance of Kotebe Metal Tools Factory (KMTF). Thus, it can be implied
that inventory management of the factory has very crucial role to the operation of the factory
while there were critical issues that needs improvement in the KMTF‟s inventory management.

52
Some of these issues were economic order quantity, application of ABC inventory management
rules, planned self-reliance in material supply where domestic production and supply is opted,
transparency to customers and employees, strong attention from the Board of
Directors/Government, strengthening internal control systems to reduce misuses and increasing
ethical awareness of the employees.

4.2 RECOMMENDATIONS
Based on the major finding of the study, the following recommendations were made in order to
improve the inventory management of the factory and support the quality of its operation.

The recommendations if adopted will create room for better operation, effective utilization of
resources, better employees‟ ethics, better sense of ownership, and economic use of materials for
the factory.

4.2.1 To the factory

 For the factory to be sure of consistent quality of finished products, the factory should
identify very important inventory items which can hamper the operation and need to be
kept in the warehouse. The long waiting list of customers is due to shortage of some key
materials and by implementing ABC inventory system the problem could be minimized
and in return it could improve the customer satisfaction.

 The self-sufficiency strategy (able to provide what is needed e.g. by making enough
money or growing enough food, without having to borrow or buy from others) of the
government should assist the factory by supporting the local manufactures to improve
quality of inventory and awareness to the factory employees should be given. The
manufacturers should be clearly informed that unless they produce quality materials and
supply on time there will never guarantee to purchase materials from them. Continuous
awareness creation should be given to the employees and management to change the
negative thinking to locally produced materials.

 The management of the factory, it is better to be transparent to its employees and

customers when material shortage is there because the employees are able to transmit
reliable information for the customers that want to know the causes of material shortage.

53
 For inventory estimation of new and existing customers, giving due attention is better to
avoid materials dropped on street sides. If so the materials found on street can be used for
other customers on waiting list and the unethical activities of some employees of the
factory could be minimized.

 It is better to fix stock levels for items and materials purchased and held in stores in order
to help provisioning. These levels (maximum, minimum and re-order levels) could be
fixed based on the previous purchasing order and the result adjusted in the light of what is
likely to occur in the future.

 The factory‟s metal tools provision standards are better to be known by the new
customers. Since customers do not get service as per the standard, they were forced to
deal with unethical employees and get material through corruption.

 For the factory to be sure of customer satisfaction and for proper accountability; a good
character, honest and trustworthy personnel who strive to provide quality operation and
better inventory management system should be recruited and employed.

 For easy identification of materials in the stores and to reduce the misleading practices
due to storing new materials with obsolete once an appropriate inventory management
system should be employed. This can be done by disposing obsolete materials on time,
and proper planning during procurement. The computerized store system shows as if key
materials were available but when request to issue the materials they were obsolete. This
situation results in avoiding employees‟ trust by customers and aggravates customer
dissatisfaction. The system could be based upon the nature of the store systems, the
purpose for which items were bought, or on any other basis regarded as suitable for the
factory.

 For operation free of corruptive activities and to in place transparent metal tools
provision, the management of the factory should proactively provide right information to
the employees and the public. The public at large assumes that the material shortage is
due to material export or shortage of metal tools production in the country. Most of the
employees do not have clear information regarding the root cause of material shortage.
This situation results in that the employees at service centers to refer to the head office

54
 management to the materials shortage and the customer dissatisfaction could be high due
to the blurred information.

 The balanced scorecard retains traditional financial measures. But financial measures tell
the story of past events, an adequate story for industrial age companies for which
investments in long-term capabilities and customer relationships were not critical for
success. These financial measures are inadequate, however, for guiding and evaluating
the journey that information age companies must make to create future value through
investment in customers, suppliers, employees, processes, technology, and innovation. So
the factory will become competitive by developing and implementing the concept of
balanced scorecard.

4.2.2 to the Ethiopian Government

The aforementioned limitations of the Kotebe Metal Tools Factory obviously requires the
government‟s due attention as it is the major manufacturing sector which seriously affects the
lives of the individuals, groups, communities the economy of the country at large. The lives of
almost all rural residents of Ethiopia were directly dependent on metal tools. If the government
failed to improve the current repeated shortage of materials, it hampers the economy of the
country and aggravates the customer dissatisfaction. So the Ethiopian government has to:

 Give supportive actions for those that engage in the production of metal tools like Kotebe
Metal Tools Factory.

 Create a favorable environment for the factory to promote transparency and

accountability of the management of the factory.

4.2.3 to the interested researchers

The researcher recommended for capable researchers to conduct a comprehensive research in
Kotebe Metal Tools Factory regarding other causes for the repeated shortage of materials and
mismanagement of inventories.

This study can give some insight about the causes of material shortage in metal tools factory as
well as other manufacturing firms like soft drink factories, garment factories and the like. So,
interested researchers are recommended to conduct research in other manufacturing firms and
give a solution for this material shortage because it is a serious issue in today‟s world.

55
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Chicago, A.W. Shaw Company.

12. Http://www. Fishbowl. Inventory management. Com. Accessed on February 2, 2017.

13. Http://www. Inventory Management. Com. Accessed on February 2, 2017.
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Business Press, London.
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Appendices
Time and cost budget
Cost budget
S.n items needed total cost

1 stationary materials 125

2 Transportation 150

3 mobile calls 100

4 secretary service 360

Contingency (25%) 183.75

lump sum 918.75

59
Time budget
Months Decemb January Februar March April may June
er y

Weeks 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4
Activity

Selection of
title

Preparation of
proposal

Review of
related
literature

Development
of data
collection
tools

Data
collection

Editing,
coding and
classification
of data

Data
presentation
and analysis

Writing 1st
draft

Writing final
paper

Binding,
submission
and
presentation

60
Questionnaire
Addis Ababa University

College of business and economics

Department of management

Research questionnaire
Objective of the Questionnaire

Dear Respondents,
My name is Tekle Getachew. I am a prospective graduate of the year 2017 in the department of
Management at Addis Ababa University College of business and economics. The questionnaire
is designed to analyze the role of effective inventory management for productivity in the factory
of Kotebe metal tools in partial fulfillment of the requirement for the Award of bachelors of Arts
Degree in Management.
Your response will represent the opinions of thousands of people much like yourself. Therefore,
the student researcher would like to ask you with due respect to give the right response, as the
validity of your response has high contribution to the success of the research outcome and to
addition of the existing body of literature. Your responses will be strictly confidential and data
from this questionnaire will be reported only in aggregate.

For any further enquiry you may reach me through [email protected] and/or +251-
925-40-3889.

Thank you in advance for your time and support!

Remark

 Writing your name on the questionnaire is not necessary

 The questions have alternative answers, so put a  or x mark on the chosen box.
 If the questions are open ended you are kindly asked to write the correct data

61
Section I: General Characteristics of the Respondent

The below listed questions are related to General Characteristics of the Respondent, therefore,
you are kindly requested to put/make  or x mark on the chosen box which represents you.

1. Gender:
A. Male B. Female

2. Age:

A. 18-25 D. 42-49

B. 26-33 E. > 50

C. 34-41

3. Educational Level

A. Below High School D. First Degree

B. High School E. Master‟s Degree

C. Diploma F. PhD

4. Marital Status

A. Single C. Divorced

B. Married D. Widowed

5. Family Size

A. 1-3 C. 7-9

B. 4-7 D. > 9

6. Monthly Income

A. Below ETB 1000 C. ETB 2501-3500

B. ETB 1001-2500 D. > ETB 3500

62
7. How many years do you have worked in the factory?

A. 1-2 C. 4-6

B. 3-4 D. > 6

Section II: questions related to inventory management

Here under are questions related to inventory management Dimensions and Overall inventory
management Performance, therefore, you are kindly requested to put/make  or x mark on
the chosen box which represents your answer. If the question require open ended answers write
briefly

1. Do you know the term inventory and management of inventory?

Yes No
2. Does your factory has policies and procedures to keep inventory level that avoid excess
inventory?
Yes No
3. Do you think there is optimal level of inventory management in the factory?
Yes No
4. In which case does the production department deliver finished goods inventory?
Delivery on time
Some time there is late delivery
Does not delivery on time
5. Is there coordination among production department, stores department, and purchase
department of the factory?
There is strong coordination
There is satisfactory coordination
There is weak coordination
There is low coordination

63
6. If your answer for the above question 5 is other than strong coordination state the reason
behind that
________________________________________________________________________
______________________________________________________________________
7. Which inventory system does the industry use?
Perpetual inventory system
Periodic inventory system
Both
8. How frequently does the factory count/check its inventory?
Monthly Semiannually annually quarterly
9. How often is inventory returned by customer as result of defect?
Always Most often Few None
10. Which type of inventory management/modeling technique does the factory follow?
Economic order quantity just in time
ABC technique Stock level All the above
11. Does the factory manage its inventory in appropriate way?
Yes No
12. Is the factory very careful to buy the right item, at the right price and in the right
quantity?
Yes No
13. If your answer is no for question number 12 above, specify the reason
___________________________________________________________________________
___________________________________________________________________________
________________

64
 Section III. Please read the following statements carefully and choose the level of
agreements (1-5) that best reflects your position regarding the given statements
Strongly Dis agree Neutral Agree Strongly
disagree agree

14 the factory has a minimum and maximum

stock level system that alerts the
management when to purchase an item

15 The factory has a system that can easily

move from stores or work units/ regions
where materials were in excess to work
units where there was shortage

16 The factory proactively informs its

customers when it faces material
shortage

17 If this question is not in your

professional area please go to question
18, The factory uses ABC inventory
system by giving more attention to the
most important materials and less
attention to the least important items
which were more in quantity but less in
investment value

18 The current major customers‟

dissatisfaction is directly related to
material shortage

19 The material shortage that the factory

faced will expose some employees to
unethical behavior like corruption

20 This days customers were forced to stay

long on waiting for finished goods due to
shortage of materials

21 As an employee of the factory, you were

well informed about the cause of material
shortage

22 you believe that the management has no

full information about the shortage of

65
 materials because the service centers
didn‟t report on time

23 you observe that some employees and

management members need to continue
the current material shortage

24. Referring to questions 14 and 15 above, if not were cases where customers faced problems
regardless of the availability of materials in other stores
______________________________________________________________________________
______________________________________________________________________________
25. Refer to question number 18 and if you strongly disagree or disagree, please describe briefly
any cause of customer dissatisfaction either fully or partially
______________________________________________________________________________
______________________________________________________________________________
_________________________________
26. By referring question 19-21, if your answer is strongly disagree/ disagree, please describe
your reasons
______________________________________________________________________________
______________________________________________________________________________
____________________

27. Referring to question 23, if your answer was strongly agree or agree, do you think personal
benefit?
______________________________________________________________________________
______________________________________________________________________________
___________________

Thank you for your time!!!

66