CHAPTER ONE

INTRODUCTION

1.1 Introduction

This study is aimed at examining the effect of inventory management practices on the financial performance of restaurants in Buea municipality. To achieve this, this study is structured into five main chapters. Chapter one is the introduction which includes aspects such as background of the study, statement of the problem, main and specific research questions, research objectives, the significance of the study, and the operational definition of terms. Chapter two is literature review which deals with the conceptual review and framework, theoretical literature review and empirical literature review. Chapter three looks at the research design, area of the study, nature and sources of data, variables and their measurement, model specification, justification of variables, techniques of estimation, validation of results and ethical considerations. Chapter four deals with the presentation of findings (descriptive aspects, diagnostic test results and results of each specific objective) and the discussion of findings. Lastly chapter five which looks at the summary of findings, recommendations, conclusions and suggestions for further research.

1.2 Background of Study

Inventories are all goods that a company holds so as to enhance its process of production (Pandey, 2017). Inventory management involves the planning, ordering and scheduling of the materials used in the manufacturing process. It exercises management over three types of inventories that is raw materials, work in progress, and finished goods (Odeleye, 2021). Inventory management does an essential role in every organization because an ineffective inventory system will result in loss of customers, sales and finally profit. Effective inventory management produces more sales for the company, which affects the financial performance of the entity (Francis et al., 2017). To accomplish their objective of maximizing profit, necessary mechanisms should be put in place by firms to ensure that materials are not only sourced from the right place but also ensure that they are received well on time to meet the constant flow of production process (Okpo & Ubi, 2020). This is important if the firm must attain its organizational objectives of profit maximization. Most of the time inventory management is not easy, the demand is very difficult to predict or forecast. Wang and Mersereau (2017) demonstrates that demand is changing over time and correct primary demand is never completely known by the manager of inventory.

Inventory management practices refers to the strategies and processes implemented by the business to effectively and efficiently manage their inventory levels (Koran 2012).  In order to put in place proper and adequate inventory and to reduce inventory management cost, many inventory management practices have been put in place, such as EOQ (economic order quantity), Just in time (JIT) model, Safe stock policy, First in First out (FIFO), Last in First out (LIFO), ABC analysis model and many others which has helped to increase the financial performance of an organization. The economic order quantity (EOQ) suggest that firms should maintain the quantity of inventory which provide the lowest total holding cost and acquiring cost. Thus, inventory management is vital for an effective and efficient firm. It is also important since it helps the firm in the determination of the optimal amount of materials and goods a firm can hold at any point in time (kumar & Bahl, 2014). First-in-first-out (FIFO) is an inventory evaluation method whereby companies account for selling and consuming the products in their inventory that was purchased first (Emmanuel and Abdullah, 2015), ABC analysis as explained by Douissa & Jabeur. (2016), category A represents very important items, Category B represents moderately important items and category C represents relatively unimportant items. Reid and Sanders (2005) explained further that, in order to adopt ABC analysis, the annual usage and value of each item should be determined. Just in Time (JIT) inventory system tries to eliminate waste by maintaining just enough inventories at the right place at the right time to produce just the right amount of product (Osei, 2015).

The purpose of inventory management is to save costs and retain inventory in order to ensure a constant supply for subsequent activities (Ahmed, Modibbo, Modu, & Muhammad, 2016). This is why inventory accounts for a major portion of total costs in several firms, which may have an impact on both Profitability and market Performance.

According to Etale & Bingliar. (2016), the viability and survival of any business relies on the ability to effectively manage inventory. This is true from the point of view of both liquidity and profitability. The authors further asserted that when there is poor management of inventory, funds may be unnecessarily tied up in idle аѕѕеtѕ. Explaining this claim, the author’s аrguеd that this will reduce liquidity of the company and аlѕo the company will not be in а position to invest in productive аѕѕеtѕ like plant and machinery which are deemed beneficial to the profitability, growth and survival of the company. Maama, Kusi, & Nsowah. (2016) аlѕo contend that inventory should be available in proper quantity at all timеѕ, neither more nor lеѕѕ than what is required. Maama, Kusi, & Nsowah. (2016) further opine thаt inadequate invеntory аdvеrѕеly аffеctѕ smooth running of buѕinеѕѕ, whеrеаѕ еxcеѕѕ of it involvеѕ extra cost, thus reducing profit margins which have long run impact on the growth, existence and survival of the buѕinеѕѕ. А major constituent of working capital is invеntory which in turn еѕtаbliѕhеѕ an effective link bеtwееn production and ѕаlеѕ level Anichebe & Agu. (2013). It therefore bеcomеѕ more critical for compаniеѕ and organizations to effectively and efficiently mаnаgе their invеntoriеѕ. According to Mohammad & Rahman. (2016), the main objective of inventory management is to minimize the total cost of relevant cost to еnѕurе profitable operations. The authors contend that the quantity of inventory ordered at once аffеctѕ inventory ordering and holding cost and will ultimately have а bеаring on profitability.

 Atnafu & Balda. (2018) examined the impact of inventory management practices on the competitiveness and organizational performance of micro and small enterprises (MSEs) in Ethiopia, and discovered that, higher level of inventory management practice can lead to an enhanced competitive advantage and improved organizational Performance and discovered that more competitive edge can enhance organization success. Ngumi, (2015), for example, uses a dataset of 50 big Kenyan manufacturing enterprises to discover the link between inventory management practices and work performance, and discovered that, inventory management techniques favorably increase production and profitability. Likewise, Prempeh, (2015) studies the influence of inventory management and the performance of four industrial operations listed in the Ghana Stock Exchange (GSE) and discovered that inventory management has a substantial strong and favorably effect on Profitability. Furthermore, research done by Bawa et al (2018) on inventory control and the efficiency of Ghanaian industries, on the other hand, found no significant influence of productivity. Moreover, Thogori & Gathenya. (2014) performed research in Kenya to analyze the influence inventory control had on fulfillment of production enterprises’ clients, discovered that, the firm’s inventory control system was poor, likely to result in supply shortages as well as lengthy lead times, resulting in inventory delays. As a result, the supply chain often results in consumer discontent. Likewise, Abdullahi, (2020) pursued to ascertain the firm’s inventory control techniques; the metrics it utilized for quality service; and the impact stock control had on client satisfaction; and discovered the firm’s use of the economic order quantity (EOQ) concept, which has a very strong connection among both inventory planning and client satisfaction result of the correlation coefficient of 0.83.

 In Cameroon, a study performed by Muffee, (2021) on the effect of inventory management on the performance of pharmaceutical shops in Buea municipality reveal that inventory Planning, and organizing had a significant positive relationship with financial performance of pharmaceutical shops while inventory control had no significant effect on the Performance of Pharmaceutical shops. The study also reveals that there is a negative relationship between inventory management and customer satisfaction

Considering the fact that restaurants business uses basic food materials on a daily basis and the food materials are perishable in nature, there is need to ensure that necessary food materials are obtained, stored and used in the right quantity and at the right time bearing in mind that anything contrary will spell disaster for the firm (Okpo & Ubi, 2020). The restaurants business contributes substantially to the economic development of the country. Apart from creating employments, they also add to the gross domestic product of the economy. Hence a study of this sector is not only important but necessary in order to emphasize its contributions to the socio-economic development of the society. Thus, the outcome of this study will continue to widen the scope of study on this very important area. Its findings will add to existing literature on inventory

1.3 Problem Statement

Many small businesses, particularly restaurants operate nowadays in a very dynamic, challenging and highly competitive environment where effective inventory management is crucial for success. In order to succeed, businesses must realize that inventory management is an indispensable and critical factor Muffee, (2021). This is so because the use of poor and ineffective inventory management systems will result or lead to loss of customers, sales and above all profits. However, an effective management will be capable of creating more sales for the company which directly affects the performance of the company in terms of profitability and other indicators (Bin, Mohamad, Rahman, & Suhaimi, 2016).

Restaurants business with high level of finished goods inventory have the opportunity to provide variety of products to customers. However, despite the fact that the importance of effective inventory management is known in theories, effective inventory Management is not adequately practiced at restaurants in Buea municipality, these establishments face significant challenges related to inventory management such as overstocking, stockouts, and inaccurate inventory records, which can lead to increased operational costs, food wastage, and reduced profitability.  In respect to this, Muffee, (2021) in his study found out that effective inventory management is not adequately practiced in Buea municipality.  These challenges hinder organizations from maximizing Profitability, meeting customer expectations, and gaining a competitive edge in the market.

Moreover, various signs such as the loss of customers, increased cost, dissatisfaction of customers as a result of poor service to them, delay in delivery time, and unavailability of menu items have been very evident in many restaurants in the Buea municipality for the past years. With respect to this, Temeng, Eshun & 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.

It is against this problem that the study seeks to examine if modern inventory management practices have an effect on the financial performance of restaurants in Buea municipality.

1.4 Research Questions

1.4.1 Main Research Question:

To what extent does inventory management practices affect the financial performance of restaurants in Buea municipality?

1.4.2 Specific Research Questions

• To what extent does Economic order quantity (EOQ) inventory method affect the financial performance of restaurants in Buea municipality?
• To what extent does Just in Time (JIT) inventory method affect the financial performance of restaurants in Buea municipality?
• To what extent does ABC inventory control method affect the financial performance of restaurants in Buea municipality?

1.5 Research Objectives

1.5.1 Main Objective

To examine the effect of inventory management practices on the financial performance of restaurants in Buea municipality.

1.5.2 Specific Objectives

• To examine the effect of economic order quantity (EOQ) inventory method on the financial performance of restaurants in Buea municipality.
• To examine the effect of just in time (JIT) inventory method on the financial performance of restaurants in Buea municipality.
• To examine the effect of ABC inventory control method on the financial performance of restaurants in Buea municipality.