ABSTRACT

Inventory management involves comparison between the costs associated with keeping inventory and the benefits of holding inventory. Successful inventory management minimizes inventory spoilage, reduces cost and generally improves profitability. Thus, financial managers have a responsibility both for raising the capital needed to carry inventory and for the firm’s overall profitability. The goals of inventory management are to ensure that the inventories needed to sustain operations are available, but to hold the costs of ordering and carrying inventories to the lowest possible level. It is on this basis that this study sort to determine the effect of inventory management practices on the performance of construction companies in the Buea Municipality. The study made use of Economic Order Quantity, Just in Time, Material Requirement Planning as the independent variable while performance was the dependent variable. With a sample of size of 20, a descriptive survey research design was adopted while descriptive statistics were used to analyse the data. The study found that inventory management variables had positive effect on the project performance of contruction companies in the Buea Municipality.

Key Words: Inventory Management, Economic Order Quantity, Just in Time, Material Requirement Planning, Performance, Construction Companies

CHAPTER ONE

GENERAL INTRODUCTION

• Background to the Study

In today’s global business environment, many entities are confronted with immense and fierce competition. The management of all activities is of paramount importance for long term sustainability. Hence, every business must endeavor to see that they remain competitive or have a competitive edge over other businesses. The management of Inventory therefore plays an important role in numerous businesses. This means that any ineffective inventory system will result in loss of customers and sales. An effective inventory management is able to generate more sales from the company which directly affects the performance of the company. It therefore requires a systematic inventory management which is managed by a group of employees who are experts in this area.

Inventory is very critical to manufacturing and retailing organizations. They may consist of raw materials, work-in-progress, consumables, and finished goods. However, it is not imperative that an organisation has all these inventory classes. Whatever may be the inventory items, efficient management is required, as generally, a substantial share of its funds is invested in them. Different departments within the same organisation adopt different policies towards inventory. This is mainly because the particular functions performed by a department influence the department’s choice. 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 stocks 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, (Vohra, 2008:427, as cited in Anichebe & Agu 2013).

Generally, Inventory management is a function or a process which is of great and vital importance within most businesses, if not all. Many a time companies are capable of maximizing their rate of return and minimizing liquidity and business risk by optimally managing inventory. Inventory management involves comparison between the costs associated with keeping inventory and the benefits of holding inventory. Successful inventory management minimizes inventory spoilage, reduces cost and generally improves profitability. Thus, financial managers have a responsibility both for raising the capital needed to carry inventory and for the firm’s overall profitability. The goals of inventory management are to ensure that the inventories needed to sustain operations are available, but to hold the costs of ordering and carrying inventories to the lowest possible level. There is always pressure to reduce inventory as part of firms’ overall cost containment strategies, and many firms are taking drastic steps to control inventory costs (Brighamand Daves, 2004). However, the allocation of resources within an organization has become a pertinent issue. Organizations have to acquire, allocate and control production inputs which are vital for the success of any business venture. Inventory management as one of the essential activities of a business, has always been a content of cognition for the growth and long-term survival of businesses. The main objective of inventory management is making sure excess stocks are not held, thereby having to tie up capital so as to guide against incurring costs such as storage, spoilage, pilferage and obsolescence, also the desire to make goods available when and where required, so as to avert the cost of not meeting such requirements.

Thus, from the classical view point or perspective, inventories of raw materials, work-in-progress components and finished goods were kept as a buffer against the possibility of running out of needed items of stock. However, large buffer inventories consume valuable resources and generate heavy hidden costs. Consequently, many companies have changed their approach to production and inventory management. Since the early 1980s, inventory management leading to inventory reduction has become the primary target, as is often the case in just-in-time (JIT) systems, where raw materials and parts are purchased or produced just in time to be used at each stage of the production process.

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

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

The incorporation of Information technology (IT) in supply chain management and in particular inventory management holds enormous possibilities to unravelling the effectiveness of inventory management in today’s businesses by improving information sharing, increasing predictability, improve monitor of demand for certain products and place orders to prevent stock out thereby reducing lead time ( Fridah, 2015). The availability of information and the techniques or methods

of analyzing this information to reach meaningful results is of huge importance in inventory management. Haag and Stephen(2010) advocate that increasing importance of electronic business brings to the frontline new opportunities and the widespread use of internet makes IT tools a source of competitive power for many companies. Furthermore, it has been adopted in inventory management processes by firms as a competitive edge to build strategic long-term relationships.

That notwithstanding, poor inventory management had become an issue of great concern since performance is regarded as the main stream for development of organizations. A truly effective inventory management system minimizes the complexities involved in planning, executing and controlling inventory which is critical to business success.

1.2 Statement of the Problem

Many businesses operate nowadays in a very dynamic, challenging and highly competitive environment with immense pressure from political and economic factors. In order to succeed, businesses must take cognizance of the critical factors for their businesses and leverage on any competitive advantage they have to boost their performance in an ever challenging business environment.

Factors such as the loss of customers, increased cost, dissatisfaction of customers as a result of poor service to them, delay in delivery time, have been very evident in many construction firms for the past decade. With respect to this, Temeng, Eshun and Essey (2010), argued that companies have ignored the possibility of cost savings from proper inventory management viewing inventory as an indispensable aspect of business and not as an asset which requires proper management. As a result, inventory systems decisions have been limited to subjectivity.

Unfortunately, it is not unusual for a business to have money tied up in inventory and still not be capable of satisfying customer needs because of ineffective inventory management (Temeng et al., 2010). According to Anichebe & Agu (2013), 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. It represents 33% of company assets and as much as 90% of working capital. Therefore, unless operators in the construction industry understand the true costs associated with inventory management and poor inventory productivity, and evaluate the benefits of different approaches, they will remain complacent, accepting average profit instead of better performance (Prempeh, 2016).

Inventory management is crucial in the construction industry, influencing operational efficiency and minimizing costs. Inventory control is a critical aspect of material management, aimed at optimizing the use of resources and minimizing costs. Effective inventory management ensures that materials are available when needed while preventing excessive stockpiling that can lead to higher costs

Gitau (2016) asserts that the major aim of the construction companies is to maximize profits. The financial performance of the companies is very crucial in determining whether it is able to meet its goals. The construction companies seem to focus more on acquiring more projects, since the industry is becoming more competitive, and they concentrate less on coming up with proper inventory management procedures (Bamgbade, Mohammed & Nawi, 2016). It is because of inadequate systems in place that there is a lot of inventory theft and this affects the overall performance of companies. Kimani, (2016) claims that the management is forced to procure more

items for completion of a project.

Inventory management is crucial in the construction industry, influencing operational efficiency and minimizing costs. Inventory control is a critical aspect of material management, aimed at optimizing the use of resources and minimizing costs. Effective inventory management ensures that materials are available when needed while preventing excessive stockpiling that can lead to higher costs.

However, there are a lot of shortcomings in the inventory control management that are employed by the construction companies (Jagongo&Makori, 2015). Ondari and Gekara (2013), claim that the companies are yet to lay the procedures to ensure that they maximize the profits of the organisation.  Management needs to ensure that the approach they decide to employ suits the organisations, failure to do it, the profit margins and customer satisfaction will definitely decrease continually.

Construction companies across the world suffer from poor performance in the projects that they undertake (Mowery, 2016). According to CMS International Construction Survey (2017), the performance of construction projects in UK as at 2016 show a decline in profitability from 7 percent in 2014 to 5 percent in 2016. Further the projects that were completed in time and according to the budget were 45 percent. In the USA, it was reported that most construction companies had a failure and bankruptcy rate of 75 percent meaning that few of them succeed. A study by Kashiwagi (2013) identified the management of inventory as the biggest source of projects failure. Further the previous research show that 38 percent of the players within the construction sector see the issue of poor records on materials used as the main problem. A global construction survey (2015) indicated that globally, only 50 percent of the construction companies use a project management system with 32 percent of those using it having failed to integrate it with other systems starting from procurement systems, inventory management system and accounting systems.

In Africa, the construction sector has not been without challenges just like in other countries of the world (Bamgbade, Mohammed & Nawi, 2016). The problems facing the construction companies are significant and more complex. In South Africa, the construction sector has been struggling with challenges and problems such as poor performance of projects (Sibiya, Aigbavboa &Thwala, 2014). Scarce resources and lack of transparency in systems of procurement and labor are some of the challenges (Construction Industry and Development Board, 2015). The construction sector in Nigeria comprises 22 percent foreign companies and 78 percent local companies, and while construction companies like Costain West Africa plc and Reynolds construction company, most of them are not able to operate on a large scale as they face the challenge of poor management of inventory and other resources which often lead to poor performance (Osuzugbo, 2019). Construction entities in Cameroon and Buea are not spared from all the problems and challenges elaborated in the paragraphs above. As such this study sought to delve into the inventory management practices of construction companies in the Buea municipality. On the basis of the forgone, the following question arises:

1. How does the use of economic order quantity affect project performance of construction companies in the Buea municipality?
2. How does the use of just affect the project performance of construction companies in the Buea municipality?

III. How does the use of material requirement planning affect the project performance of construction companies in the Buea municipality?

1.3. Objectives of the Study

The Main Objective is to assess the effects of Inventory management on the performance of construction companies in the Buea municipality. This gives rise to the following specific objectives:

1. To assess how economic order quantity (EOQ) affects the project performance of construction companies in the Buea Municipality.
2. To determine the effect of just in time (JIT) on the project performance of construction companies in the Buea Municipality.

III. To evaluate the effect of material requirement planning (MRP) on the project performance of construction companies in the Buea Municipality

1.4. Statement of Hypotheses

Based on the objectives, the following hypotheses have been established to be tested for this study

Hypothesis 1

H0: Economic Order Quantity technique of managing inventory does not significantly affect the performance of construction companies in the Buea Municipality.

Hypothesis 2

H0: Just in Time approach of managing inventory does not significantly affects the performance of construction companies in the Buea Municipality.

Hypothesis 3

Ho: Materials Requirement Planning technique does not significantly affect the performance of construction companies in the Buea Municipality.