CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Before the industrial revolution, merchants basically had to write down all the products they sold every day. Then they had to order more products based on their hand-written notes and their gut feelings. This was an incredibly inefficient and inaccurate way of doing business. Merchants couldn’t really account for stolen goods unless they did time consuming physical counts on a regular basis. They also had trouble making sure they got the right number of products when orders came in because of sparse record keeping. But it was the best they could.

Luckily, in 1889, a man named Herman Hollerith invented the first punch card that could be read by machines by feeding sheets of papers that have little holes in specific places, people could record complex data for a variety of purposes from census taking to clocking in and out of work. This was basically the precursor to computers that can read data in tiny microchips. And Hollerith’s company event went on to form the world’s first computer company. Harvard University took Hollerith’s idea in the 1930s and created a punch card system for businesses. Companies could tell which products were being ordered and also record some inventory and sales data based on punch card customers would fill out for catalogue items. Unfortunately, other management systems used to cost too much and was to slow to keep up with rising business challenges.

In the 1960s, a group of retailers (mostly grocery stores at first) got together and came up with a new method for taking inventory: the barcode. There were several competing types of barcodes before they were standardized with the universal product code (UPC) in 1974. It is still the most used barcode in the United States.

As computers become more efficient and cheaper, UPCs grew in popularity. In the mid-1990s, companies started experimenting with inventory management software that would record data as products were scanned in and out of the warehouses. The technology evolved into comprehensive inventory management solutions by the early 2000s. Now even small and medium size businesses can find affordable inventory management software to meet their needs. Inventories are vital to the successful functioning of manufacturing and retailing organizations. They may consist of raw materials, work in progress, spare parts/consumables and finished goods. It is not necessary that an organization has all these inventory classes. But whatever may be the inventory items, they need efficient management as, generally a substantial share of its funds is invested in them. Different departments within the same organization adopt different attitude towards inventory. This is mainly because the particular functions performed by a department influence the department’s motivation. For example, the sales department might desire large stock in reserve to meet virtually every demand that comes. The production department similarly would ask for tasks of materials so that the production system runs uninterrupted. On the other hand, the finance department would always argue for a minimum investment in stocks so that the funds could be used elsewhere for other better purposes (Vobra, 2008). Inventory represents an important decision variable at all stages of product manufacturing, distribution and sales, in addition to being a major portion of total current assets of many organizations represents as much as 40% of total capital of industrial organizations (Moore, Lee and Taylor, 2003). It may represent 33% of a company’s assets and as much as 90% of working capital (Sawaya Jr and Graque, 2006). Since inventory constitutes a major segment of total investment, it is essential that good inventory management be practiced to ensure organizational growth and profitability.

According to (Temeng et al., 2010), historically however, organizations have ignored the potential savings from proper inventory management, treating inventory as a necessary evil and not as an asset requiring management. As a result, many inventory systems are based on arbitrary rules. Unfortunately, it is not unusual for some organizations to have more funds invested in inventory and still not be able to meet customers’ demands because of poor distribution of investment among inventory items (Temeng, Eshun and Essey, 2010).

Managing assets of all kinds can be viewed as an inventory problem, for the same principles apply to cash and fixed assets (Koumanakos, 2008)’ The trade-off between ordering costs and holding costs characterizes the transactions approach to inventory management represented by the EOQ model of inventory developed many decades ago (Koumanakos, 2008).

In the recent years, as the field of operations management has developed, many new concepts have been added to the list of relevant inventory control topics.

These more management oriented concepts include material requirement planning (MRP) systems, Just-In-Time (JIT) while another emerging stream of studies postulate the characteristics of a firm’s demand and marketing environments also play an important role.

In determination of optimal corporate inventories, notwithstanding the theoretical and practical short comings inherent in these concepts and techniques, their application in real business life should have an effect on a firm’s performance (Koh et al., 2007).

Inventory management and control are crucial to a firm because mismanagement of inventory threatens a firm’s viability (Sprague and Wacker, 1996). Too much inventory consumes physical space, creates financial burden and increases possibility of damage, spoilage and loss. On the other hand, too little inventory often disrupts manufacturing operations and increase the likelihood of poor customer service.

Inventory management is a critical management issue for manufacturing companies, inventories are vital to the successful functioning of manufacturing of manufacturing organisations. According to (Buffa & Sarin, 2007), there are several reasons for keeping inventory. Too much stock could result in funds being tied down, increase in holding costs, deterioration of materials, obsolescence and theft. On the other hand, shortage of materials can lead to interruption of products for sales; poor customer relations are underutilized.