Role of Inventory Management On Competitive Advantage Among Manufacturing Firms in Kenya A Case Study of Unga Group Limited1 2
Role of Inventory Management On Competitive Advantage Among Manufacturing Firms in Kenya A Case Study of Unga Group Limited1 2
Role of Inventory Management On Competitive Advantage Among Manufacturing Firms in Kenya A Case Study of Unga Group Limited1 2
ABSTRACT
The main objective of the study was to investigate the role of inventory management on the
competitive advantage of manufacturing firms in Kenya, with reference to Unga Group Limited.
Specifically, the study assessed the extent to which information technology is used in inventory
management in Unga Group Limited, determine how inventory lead time, inventory control and
inventory control practices affect competitive advantage of Unga group limited. The study
adopted a descriptive research design to support and meet the research objectives. The target
population was all the 289 employees working at Unga Group Limited headquarters who
directly deal with inventory management. Stratified sampling and simple random sampling
techniques were employed in the selection of 30 respondents. The study used both primary
and secondary data. Primary data was collected using self-administered questionnaires
consisting of closed ended and open-ended questions. The data collected was analyzed by
descriptive statistics using a statistical package for analysis (SPSS). The study revealed that
information technology, inventory control systems, inventory lead time and inventory control
practices are important factors in attainment of competitive advantage of manufacturing firms
in Kenya. The study recommended that the firm should embrace inventory control systems and
information technology so as to improve and enhance competitive advantage. This study also
recommended a similar research on other industries to ascertain whether the findings of the
study are universal.
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Introduction
Today’s customer demands improved products with shorter and more precise deliveries at a
lower cost (Srinivasan, 2012). In order to respond to these demands manufacturing companies
have to be competitive in several dimensions, such as cost efficiency, quality, delivery time and
process flexibility (Olhager, 2013). According to Porter (1980) there are three different
competitive strategies for manufacturing companies to choose from. They are differentiation,
cost leadership and focus. These strategies are based on combinations of cost, time, service and
quality. Manufacturing companies can use one of these strategies to achieve a competitive
advantage (Lysons & Farrington, 2012). Miltenburg (2005) states that when a manufacturing
company can defend and attract customers it has competitive advantage, which today is crucial
for manufacturing companies’ survival (Mescon & Thill, 2006).
Effective inventory management provide opportunities to create sustainable competitive
advantage and enhance the competitive position of companies. This entails reduction in cost of
holding stocks by maintaining just enough inventories, in the right place and the right time and
cost to make the right amount of needed products. High levels of inventory held in stock affect
adversely the procurement performance out of the capital being held which affects cash flow
leading to reduced efficiency, effectiveness and distorted functionality. Inventories are the
stock of products a company holds to further its production and sales (Pandy, 2003). Stock can
come in various forms such as raw materials, work−in−progress, finished goods and goods
ready for sale (Levis, 2009). 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. Inventory often represents as much as 40% of total
capital of industrial organizations (Moore, Lee and Taylor, 2003). It many represent 33% of
company assets and as much as 90% of working capital, (Sawaya Jr. and Giauque, 2006). Since
inventory constitutes a major segment of total investment, it is crucial that good inventory
management be practiced to ensure organizational growth and profitability.
Inventory management is vital in the control of materials and goods that have to be held (or
stored) for later use in the case of production or later exchange activities in the case of services.
Inventory management refers to a science based art of ensuring that just enough inventory
stock is held by an organization to meet demand (Jay & Barry, 2006). It is required at different
locations within multiple locations of a supply network, to protect the regular and planned
course of production against the random disturbance of running out of the materials or goods.
Inventory management also concerns fine lines between the replenishment lead time, carrying
costs, asset management, inventory forecasting, valuation of inventory, future inventory price
forecasting, physical inventory, inventory visibility, available space for inventory, quality
management, replenishment, returns ,defective goods and demand forecasting. The principal
goal of inventory management involves having to balance the conflicting economics of not
wanting to hold too much stock. Thereby having to tie up capital so as to guide against the
incurring of costs such as storage, spoilage, pilferage and obsolescence and, the desire to make
items or goods available when and where required (quality and quantity wise) so as to avert the
cost of not meeting such requirement. Inventory problems of too great or too small quantities
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manager must therefore, maintain an optimum level of stock at all time. Too much stock and
too little stock must be avoided.
According to Buffa & Salin (1987) there are several reasons for keeping inventory. Inventories
can be held to improve production scheduling, to smoothen production in the face of
fluctuating sales, to minimize stock out costs, to speculate on or hedge against price
movements, to reduce purchasing costs by buying in quantity, to shorten delivery lags, and so
on. A company can only realize substantial savings by using a rational procedure for inventory
control. Inventory control is typically a key aspect of almost every manufacturing and/or
distribution operation business. The ultimate success of these businesses is often dependent on
its ability to provide customers with the right goods, at the right place, at the right time. Failure
to have the right goods in the right place at the right time often leads to lost sales and profits
and, even worse, to lost customers.
A reliable inventory system implies higher confidence of customers and their attendant
continuous patronage. Inventory management systems are mostly applied in manufacture
settings, where its viability and potential economic value are duly attained. Inventory is kept to
meet reliability of operations, flexibility in production scheduling, change in raw material,
delivery time an change in economic purchase order size (Inyama, 2006). An inventory system
provides the operating policies and organizational structure for maintaining and controlling
goods to be stocked. A proficient management of inventory system requires an appropriate
way of making decisions about how much to order and when to order and a means of keeping
track of items in inventory. Decision on inventory in any organization depends on facts about
on-hand stock level, demand information with regards to the forecasted quantity, lead time
and lead time variation, inventory holding costs, ordering cost and shortage cost.
Installation of a proper inventory control system in any organization is of paramount necessity.
Inventory is the availability of any stock or resources used in an organization. An inventory
system is the set of policies that controls and monitor inventory level and determine what level
should be maintained, how large orders should be made and when stock should be replenished.
Inventory control is the supervision of the storage, supply and accessibility of items to ensure
an adequate supply without excessive oversupply (Miller, 2010). Inventory control means
availability of materials whenever and wherever required by stocking adequate number and
kind of stocks. The sum total of those related activities essential for the procurement, storage,
sales, disposal or use of material can be referred to as inventory management. Inventory
managers have to stock-up when required and utilize available storage space resourcefully, so
that available storage space is not exceeded. Maintaining accountability of inventory assets is
there responsibility. They have to meet the set budget and decide upon what to order, how to
order and when to order so that stock is available on time and at the optimum cost (Benedict &
Margeridis, 1999).
Inventory constitute one of the largest and most tangible investment of any retailer or
manufacturing organization. Intelligent inventory management strategies can not only help
boost profit but they can mean the difference between a business thriving or barely surviving.
Holding inventories at the lowest possible cost and giving the objectives to ensure
uninterrupted supplies for on-going operations is the aim of inventory management. When
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making decisions on inventory, management has to find a compromise between the different
cost component, such as the cost of supplying inventory, inventory holding cost and cost
resulting from sufficient inventories (Zipkin, 2000). According to Miller (2010), inventory control
is the activity which organizes the availability of item to the customers. It coordinates the
purchasing, manufacturing and distribution functions to meet the marketing needs.
Kotler (2002), asserts that inventory management refers to all the activities involved in
developing and managing the inventory levels of raw materials, semi-finished materials
(working-progress) and finished good so that adequate supplies are available and the costs of
over or under stocks are low. Inventory management is primarily about specifying 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 the random disturbance of running out of materials or goods. 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. Balancing these competing requirements leads to optimal inventory levels,
which is an on-going process as the business needs shift and react to the wider environment
(Ghosh & Kumar, 2003).
Ogbo (2011) posits that the major objective of inventory management and control is to inform
managers how much of a good to re-order, when to reorder the good, how frequently orders
should be placed and what the appropriate safety stock is, for minimizing stock-outs. Thus, the
overall goal on inventory is to have what is needed, and to minimize the number of times one is
out of stock. Inventory management is an ongoing process that relies on inputs from forecasts
and product pricing, and should be executable within the cost structure of the business under
an overall plan. Inventory control involves three inventory forms of the flow cycle: Basic Stock -
The exact quantity of an item required to satisfy a demand forecast. Seasonal Stock - A quantity
build-up in anticipation of predictable increases in demand that occur at certain times in the
year. Safety Stock - A quantity in addition to basic inventory that serves as a buffer against
uncertainty. Inventory control is the ability to supply goods and services at the right time with
the right quality and quantity. It is a reliable means in which businesses are been managed to
ensure customers are satisfied and organizations remain in operation via minimization of
losses.
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Challenges of inventory management and control have been around for a very long time
especially in area of discrepancies, theft, fraud, obsolescence, deterioration and breakages.
Organizations at times do not control their inventory holding, resulting in under stocking and
causing the organizations to stay off production, thereby resulting to organizational
ineffectiveness creating relationship problems between inventory management and
organizational productivity, profitability and effectiveness. Too much inventory consumes
physical space, creates financial burden, and increases possibility of damage, spoilage and loss.
If manufacturing companies have low levels of stock it may lead to delivery problems and
production stoppages (Miltenburg, 2005). On the other hand manufacturing companies strive
to have the lowest level of inventory possible but still be able to respond to customer demands
(Pong & Mitchell, 2012). If customer demands are not met, manufacturing companies may lose
money due to lost sales. Therefore, it is important for manufacturing firms to have control over
their inventory levels (Pong & Mitchell, 2012).
Every year organizations prepare and implement one type of economic policy/budget whereby
a large sum of money is spent on acquisition of materials without making an adequate planned
effort to provide for inventory facilities. These lapses coupled with improper stock control
system and lack of trained personnel account for the ineffectiveness of inventory function in
both public and private sector. Unga Group Limited does not exist in isolation. The same
problem as faced by other organizations both public and private is what Unga Group Limited is
facing. More so, being a private organization which is grounded on the principles of profit
maximization, the neglect as well as the improper care, control and management of stock can
be more terrible than required.
However, most of the local studies such as Pauline et al. (2013), Kimaiyo & Ochiri, (2014) and
Tyan & Wee (2003); Rogers (2005) and Kihara (2013) focused on inventory management and
organizational performance. No known study has specifically addressed the role of inventory
management on competitive advantage among the manufacturing firms in Kenya. It is against
this background that this research intends to bridge the knowledge gap and explore the role of
inventory management on competitive advantage among the manufacturing firms in Kenya
with specific reference to Unga group limited.
General Objective
The general objective of the study was to investigate the role of inventory management on
competitive advantage of Unga Group Limited.
Specific Objectives
2. To determine how inventory lead time affects competitive advantage of Unga Group
Limited.
3. To examine how inventory control systems affects competitive advantage of Unga
Group Limited.
4. To determine the effect of inventory control practices on competitive advantage of
Unga Group Limited.
Research Questions
The study aims to answer the following research questions;
1. To what extent has Unga Group Limited applied information technology in inventory
management?.
2. How does inventory lead time affect competitive advantage of Unga Group Limited?.
3. How does inventory control systems affect competitive advantage of Unga Group
Limited?.
4. What is the effect of inventory control practices on competitive advantage of Unga
Group Limited?.
Theoretical Framework
Structuration theory was first proposed by Anthony Giddens in his constitution of the society in
1984, which was an attempt to reconcile social systems and the micro/macro perspective of
organizational structure. Desanctis & Poole (1994) borrowed from Giddens in order to propose
Adaptive Structuration theory and the rise of group decision support systems. Adaptive
Structuration theory provides the model whereby the interaction between advancing
information technologies, social structures, and human interaction is described, and which
social structures, rules, and resources provided by information technology as the basis for
human activity. Adaptive Structuration theory is a viable approach in studying how information
technology affects inventory management because it examines the change from distinct
perspectives.
Adaptive Structuration theory is relevant in today’s inventory management practice due to the
expanding influence that advancing technologies have had with regard to the human-
interaction aspect of Adaptive Structuration theory and its implication on socio-biologically
inspired Structuration in security software applications( Ramakrishna,2005). Adaptive
Structuration theory presents specific advances in information technology that are driving
organizational changes in the areas of business alignment, information technology planning,
and development show that Adaptive Structuration theory is being used as a driving force of
effective management within organizations. The study uses the theory to investigate how
complexity of inventory management is influenced by Information Technology (Ramakrishna,
2005). In conclusion Adaptive Structuration theory’s appropriation process might be a good
model to analyze the utilization and penetration of new technologies in organizations.
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This theory is used in the various fields such as supply chain management, international
marketing, relationships, networks, databases, information as well as in transactional analysis
(Jraisat, 2010). This theory offers various dimensions such as commitment and cooperation that
are useful in studying the various relationships that exists between different phenomenon that
are related to the relationship between the buyer and the seller especially in aspects of
information sharing (Wilson, 1995). The relationship marketing theory explains the various
buyer-supplier relationships and its information sharing (Toften & Olsen, 2003) as well as offers
explanation of the various streams in the said relationships, the various dimensions in the
relationship as well as the rationale or the justification for the relationship such as the structure
and the process of the relationship.
The most common deterministic inventory model is Economic Order Quantity (EOQ). This is a
mathematical model developed within the scope of operations management to determine the
optimal inventory level. As Ross et al., (2008) observed, the Economic Order Quantity (EOQ)
model is an approach of determining the optimal inventory level that takes into account the
inventory carrying costs, stock-out costs and total costs which are helpful in the determination
of the appropriate inventory levels to hold. EOQ is the level of inventory that minimizes total
inventory holding costs and ordering costs.
The framework used to determine this order quantity is also known as Wilson EOQ Model or
Wilson Formula. The model was developed by F. W. Harris in 1913, but R. H. Wilson, a
consultant who applied it extensively, is given credit for his in-depth analysis (William, 2007).
EOQ only applies when demand for a product is constant over the year and that each new
order is delivered in full when the inventory reaches zero. There is a fixed cost charged for each
order placed, regardless of the number of units ordered. There is also a holding or storage cost
for each unit held in storage (William, 2007).
EOQ is used to determine the optimal number of units of the product to order so that to
minimize the total cost associated with the purchase, delivery and storage of the product The
required parameters to the solution are the total demand for the year, the purchase cost for
each item, the fixed cost to place the order and the storage cost for each item per year. Note
that the number of times an order is placed also affects the total cost; however, this number
can be determined from the other parameters (Heikkila, 2002). EOQ assumes that, the ordering
cost is constant, the rate of demand is constant, the lead time is fixed, the purchase price of the
item is constant i.e. no discount is available, the replenishment is made instantaneously, the
whole batch is delivered at once. EOQ is the quantity to order, so that ordering cost plus
carrying cost finds its minimum.
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The RBV theory is one of the fundamental principles for the competitive advantage of a firm.
The RBV of the firm posits that a firm's internal processes create a resource bundle which can
become the means of creating and sustaining a competitive advantage (Bates & Flynn, 1995).
The RBV literature considers a firm as a collection of heterogeneous resources, or factors of
production or as bundles of resources including all inputs that allow a firm to operate and
implement its strategies (Barney et. al., 1991). A company achieves a competitive advantage
when it has key resources (these can be physical resources, human resources or organizational
resources) that its competitors do not have (Barney, 1991). Developing and maintaining this
competitive advantage depends on whether the firm is able to identify, develop, deploy, and
protect the internal resources (Barney, 1991).
In the context of the resource-based view, a firm might lose its competitive advantage if
important inventory management skills are scarce or are getting lost as they are not easily
duplicated or substituted. Inventory management skills are valuable as they help providing
supply strategies for future needs and developing supply management strategies to support
company strategies (Carr & Pearson, 2002). As purchasing professionals interact with other
functions within a complex social network, purchasing skills are difficult to replicate (Eltantawy,
2005). The two assumptions for RBV theory are (1) resources and capabilities are
heterogeneously distributed among firms; and (2) resources and capabilities are imperfectly
mobile, which make firms' differences remain stable over time (Barney 1991). Every firm is
different (heterogeneous) from other firms in terms of the resources and capabilities a firm
possesses or accesses. These differences differentiates one firm from another and a firm's
success is due to its firm-specific resources.
Conceptual Framework
A conceptual framework is a structure of concepts and or theories which are put together as a
map for the study and it shows the relationship of research variables (Mugenda & Mugenda,
2008). The conceptual framework is used to explain the relationship between the independent
variables and the dependent variable. The aspects of information technology, inventory control
systems, inventory lead time and inventory control practices form the independent variables
while competitive advantage forms the dependent variable. This relationship is
diagrammatically shown in Figure 2.1 below.
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Computerized Systems
Real Time Environments
EDI/EPOS
Profitability
Inventory Levels
Production Cycles Competitive Advantage
Flexibility Price
Quality
Inventory Lead Time Delivery
Dependability
Inventory Levels Time to Market
Cycle Times Product Innovation
Costs/Sales
Quality
Customer Satisfaction
Costs/Profits
Sales
Feasibility
to gain an understanding about some features or attributes of the whole population based on
the characteristics of the sample. A sample is a smaller and more accessible sub set of the
population that adequately represents the overall group, thus enabling one to give an accurate
(within acceptable limits) picture of the population as a whole, with respect to the particular
aspects of interests of the study. A sample of responding staff was drawn from 289 possible
respondents.
Stratified sampling technique was used to select the sample. According to Oso (2009), Stratified
sampling technique produce estimates of overall population parameters with greater precision
and ensures a more representative sample is derived from a relatively homogeneous
population. Stratification aims to reduce standard error by providing some control over
variance. The study grouped the population into three strata i.e. top, middle and low
management levels. From each stratum the study used simple random sampling to select 30
respondents.
Stratified random sampling technique was used since the population of interest was not
homogeneous and could be sub-divided into groups or strata to obtain a representative
sample. Statistically, in order for generalization to take place, a sample of at least 30 elements
(respondents) must exist (Cooper and Schindler, 2003). According to Mugenda & Mugenda,
(2003), when carrying out a descriptive study, 10% of the population yields an adequate
sample. This study selected 10% from each level which was thus regarded as sufficient or
adequate. Ten percent of the population produced a more representative sample size of 30
respondents out the 289 staff of Unga Group Limited.
Primary data was gathered using both open and closed ended questionnaires administered to
the 30 respondents who were picked for the purpose of analysis. Secondary data was obtained
from the existing materials such as, financial reports, journals, empirical researches in the area
and other relevant articles that related to the topic. Descriptive statistics in the form of
frequencies and percentages was used for analysis in this study. Statistical Package for Social
sciences (SPSS) computer software was used to present the data in the form of frequency
tables and percentages.
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costs (4.12), reduced obsolescence and surplus (4.48), increased sales 4.45 and reduced
inventories 4.31. Stevenson (2001) asserts that that the main purpose of lead time is to actually
enable the organization to acquire competitive advantages while delivering the right product at
the correct place and at the right time hence satisfying the ultimate customer.
Table 3. Inventory Lead Time response means and standard deviations
Statement on effect of Inventory Lead Time Mean Std. Deviation
Inventory lead time has increased profitability 4.07 .704
Inventory lead time has reduced materials cost 3.90 .489
Inventory lead time has led to shorter production cycle times 4.28 .841
Inventory lead time has led to improved product quality 4.41 .733
Inventory lead time has increased customer satisfaction 4.34 .897
Inventory lead time has reduced obsolescence and surplus 4.48 .986
Inventory lead time has increased sales 4.45 .686
Inventory lead time has reduced inventories 4.31 .712
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Competitive Advantage.
The study also aimed at establishing the respondents' level of agreement with statements
related to Competitive advantage of manufacturing firms in Kenya. As illustrated in table 4.10
below, the respondents agreed that the firm offers high quality products and services to its
customers as shown by mean score of 4.07.
The respondents also agreed that the firm offers highly reliable products and services, provides
dependable delivery, provides customized products and services, the firm is always the first in
the market to introduce new products and services and that the firm has fast product
development as shown by mean scores of 4.24, 4.28, 3.93, 3.55 and 3.62 respectively. The
respondents disagreed that the firm is not able to compete based on quality and that it rarely
delivers customer orders on time as shown by mean scores of 1.90 and 1.97 respectively.
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Conclusions
The study concludes that Unga Group Limited embraces Information Technology in inventory
management as a competitive tool as shown by an overall mean of 3.69. The firm uses
Electronic Point of sale (EPOS) and Electronic Data Interchange Technology (EDI) in its inventory
management activities. The study also concludes that the firm's computers are linked with
those of the suppliers in a Real Time environment although with varied responses. The firm at a
lesser extent has computerized all its inventory management systems.
The study concludes that Unga Group Limited has attained much through inventory control
systems. Inventory control system has enhanced timely deliveries, reduced production costs,
increased product quality, decreased production cycle time, reduced wastages, reduced stock
levels and increased profitability as shown by a general mean of 4.12. The ratings showed that
inventory control systems played a vital role in attaining competitive advantage, and as such,
organizations must ensure that inventory control system be highly involved in inventory
management activities.
From the findings, the study concludes that inventory lead time is a very important competitive
tool. Inventory lead time showed how the organization acquired competitive advantages as it
delivers the right product at the right place and within the shortest time possible. As shown by
an overall mean of 4.28, lead time has increased profitability, reduced materials cost, reduced
production cycle times, improved product quality, increased customer satisfaction, reduced
obsolescence and surplus, increased sales and reduced inventories. Dimitrios, (2008) asserts
that Cycle-time reduction almost always means reduced costs, reduced inventory levels,
improved production predictability, increased customer service, and better quality. To reduce
cycle time, manufacturers need to streamline every aspect of their operations, especially the
order-to-delivery process. The study further concludes that inventory control practices affects
competitive advantage of Unga Group Limited as shown by an overall mean of 3.67. This is in
line with Tasli (2011) who asserts that inventory management reduces unnecessary costs and
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increases revenue in a business and Kent (2002), effective stock control increases the profit
making of an organization.
The study concludes that inventory management affects competitive advantage of
manufacturing firms in Kenya. As shown by an overall mean of 4.28, the firm offers high quality
products and services to its customers, highly reliable products and services, provides
dependable delivery, provides customized products and services, provides customized products
and services, the firm is always the first in the market to introduce new products and services
and that the firm has fast product development. The study further concludes that the firm is
able to compete based on quality and that it delivers customer orders on time. Competitive
advantage comprises capabilities that allow an organization to differentiate itself from its
competitors and is an outcome of critical management decisions Li et al., (2006). The literature
review has identified price/cost, quality, delivery, and flexibility as important competitive
capabilities.
Recommendations
In reference to the findings and conclusion, the study recommends that the firm should
embrace inventory control systems and information technology so as to improve and enhance
competitive advantage. Unga Group Limited should develop a policy framework for faster
implementation of the best inventory management practices like JIT and MRP. The firm should
invest in modern information technology in inventory management as this will reduce inventory
costs and improve returns, improve information sharing and hasten orders from suppliers
hence shortening the lead time. In order to attain competitive advantage in the industry, firm
should increase resource allocation to staff training, research and development in inventory
management so as to develop the necessary skills, update their knowledge, and further
enhance New Product Development.
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