CHAPTER I

INTRODUCTION

Background of the Study

In any type of business venture, it is important to keep track of all products that

will be used for consumption. Tracking of inventory is essential because of how it can

reduce the data redundancy, data loss, and inaccuracy of data. It can also lessen the

work of the users in terms of having an automatic computation of data (Roque, 2021).

According to Windward (2017) When you are running a business such as an auto

repair shop, there are enough moving parts to keep track of. Inventory control software

can help by giving you the tools to manage your stock levels and improve your cost

control process. You can avoid overstocking and outages better and organize inventory

data without ever having to write it down as hard copy or on a spreadsheet. Your

information will be easily traced, and you won’t have to worry about scraps of paper

ever being lost again.

Inventory management is important to a wide range of businesses, including

retail companies, shipping and logistics operations, and manufacturing businesses. The

exact nature of a business’s inventory management process is dictated by the type of

inventory it requires. For example, a retail business only needs to track the location and

quantities of the finished goods it is selling, while a manufacturer needs to account for

both raw materials and finished products (Adam Uzialko, 2022).

inventory management system in places. Profit maximization is all about cost

minimization and revenue maximization. An effective inventory management improves

the firm’s total performance through matching inventory management practices and a

competitive advantages especially now that most organizations operates in a more

competitive industries or sectors all over the world (Mahidin, 2017).

Part of the problem faced by auto repair businesses is the lack of visibility into

their automotive parts inventories. Inventory is more than just what exists in your supply

room, it also includes tracking those parts from the manufacturing floor into your shop.

Other issues stemming from poor inventory tracking include telling customers a part is

in stock only to find out that it is no longer available or will not be available for many

weeks (Ohio, 2022).

This study is very beneficial as it helps the businesses inform that too much and

too low inventories bring down the level of profitability of the business. As a result, this

study may contribute to a better understanding of inventory management techniques. It

will provide management a new perspectives as they work to increase productivity while

cutting waste.

Statement of the problem

Effective inventory management plays an important role in reducing overall inventory

maintenance costs and increasing return on investment. Many businesses do not use

effective inventory management practices, resulting in high material costs and low

profits.
 The following questions are related to the impact of inventory management on

profitability:

1. What is the demographic profile of auto repair shop owner in Mati City?

2. What is the level of inventory management in auto repair shop in Mati in terms

of;

2.1 Just in Time (JIT)

2.2 Stock Visibility

2.3 Inventory Shelf Life

2.4 Days Inventory Outstanding

3. What is the level of inventory management in profitability of auto repair shop in

Mati in terms of;

3.1 Return on Investment

Significance of the Study

The purpose of the knowledge gathered in this study is to find out how inventory

management affects the profitability of auto repair shop and its advantages and

disadvantages in today's market.

Businesses - This study will provide information by means of giving them ideas and

knowledge about the benefits of inventory management practices in order to achieve

higher profitability.
Academe - This research will help students in their studies, especially when it comes

to the impact of inventory management on the profitability of an auto repair shop. This

study will also be a guide for them during their research.

Business Owner - The data gathered can penetrate them by means of serving as a

guide and/or reference to them in terms of controlling costs. This will enable them to

have sufficient information on overseeing the inventory level of businesses. In addition,

it will give them the opportunity to recognize the advantages and disadvantages of

practicing inventory management including maintaining a desired stock level of specific

products or items.

Future Researchers - This will also benefit them by means of it will serve as an

additional information or as a supporting information that is related to inventory

management on the profitability of auto repair shop. Thus, they shall gain more data

and further study the issue/problem. This shall greatly benefit them in a perspective on

why the inventory management is being utilized and find out whether or not this will be

beneficial to them.

Scope and Limitation of the Study

This study particularly focused on the research of impact of inventory

management on the profitability of auto repair shop in Mati. Twenty selected shops in

Mati City will be interviewed and surveyed by the researcher. The information acquired

and the responses made by the respondents will be used by the researcher to create a

study of the proposed research.

Inventory management - “The ordering, storing, using, and selling of an

organization’s inventory is referred to as inventory management. This covers the

storing, processing, and management of raw materials, components, and finished

goods” (Hayes, 2022).

Profitability - Profitability is defined as the ability of a business to generate a

return on an investment based on its resources compared to an alternative investment.

Profitability is a measurement of efficiency and, ultimately, its success or failure”

(Horton, 2021).

Auto repair shop - An automobile repair shop (also known regionally as a

garage or a workshop) is an establishment where automobiles are repaired by auto

mechanics and technicians.

REVIEW OF RELATED LITERATURE

This section examines existing literature on inventory management and

profitability as investigated by numerous scholars. This chapter provides the study's

conceptual framework and theoretical framework on the relationship between inventory

management and profitability.

Theoretical Framework

The Theory of Economic Order Quantity

The economic order quantity (EOQ) theory was proposed by Haris (1913) to

determine the optimal inventory level. EOQ refers to an inventory level that can

minimize both inventory holding cost and inventory ordering cost. The EOQ model

considers a tradeoff between storage cost and ordering cost when making a decision on

the quantity to use when replenishing inventory items. Ordering frequency is usually

reduced by a larger amount of quantity ordered, hence reduced ordering cost but

increases storage costs and requires a larger space for storage too (Schwarz, 2008).

Some costs declines with holding inventory, while others holding costs increases and

that the total inventory-associated cost curve has a minimum point (Lwiki et al., 2013).

Ordering costs refers to those costs which are incurred when additional inventories are

being procured or purchased while carrying costs are the costs incurred for inventory

holding. Thus, EOQ is determined by intersection of ordering cost curve and carrying

cost line. At this point total carrying cost and total ordering cost are equal to each other

(Kumar, 2016).
 The EOQ method is used in determining an optimal order quantity which will

minimize total inventory cost. The EOQ is very useful tool for inventory control and it

can be applied to finished goods inventories, work- in- progress inventories and raw

material inventories. It regulate the purchase and storage of inventory in a way to

ensure that an even production flow at the same time restricting excess investment on

inventories (Kumar, 2016).

Conceptual Framework

Presented in the figure is the conceptual paradigm of the study. The independent

variables of the study consist of the inventory management. It includes the FIFO,

demand forecasting, just in time (JIT), ABC analysis. These are determining factors of

the dependent variable which is the return on investment influenced by the moderating

variables which include the demographic profile of auto repair shop entrepreneur in City

of Mati.
 Moderating Variable

Independent Variable Dependent Variable

Inventory Management

Inventory management helps companies identify which and how much stock to

order at what time. It tracks inventory from purchase to the sale of goods. The practice

identifies and responds to trends to ensure there’s always enough stock to fulfill

customer orders and proper warning of a shortage. Once sold, inventory becomes

revenue. Before it sells, inventory (although reported as an asset on the balance sheet)

ties up cash. Therefore, too much stock costs money and reduces cash flow. One

measurement of good inventory management is inventory turnover. An accounting

does not want more stock than sales. Poor inventory turnover can lead to deadstock, or

unsold stock (Jerkins, 2020).

Benefits of Inventory Management

Traceability of inventory

Inventory management begins and ends with the simple goal of knowing where a

product is at all times. This includes knowing when a supplier has shipped the goods,

when the goods arrive at your storage facility, where the goods are moved to within your

facility, and when the goods have been shipped out of your facility to a buyer.

Whatever system you use, it should be able to track items right down to the

specific aisle and bin they are placed in within your warehouse or storage facility. Your

warehouse manager should enforce this process; if a worker moves an item without

updating your data – typically through an inventory management system – it will be

difficult to locate the item when it comes time to send it out for delivery (Uzialko, 2022).

Loss prevention

A major issue for warehouses is the loss or theft of products, known as inventory

shrinkage, especially when inventory management controls are not in place. Without

regular inventory audits, items could go missing for months, and you’ll have no idea

why. It could be a simple error, or it could be theft. Regardless, every missing item is a

wasted investment.
 A regular cycle count should be baked into your inventory management process

to help you confirm the accuracy of tracking information listed in your inventory

management system. This prevents the loss or theft of items, allowing the warehouse

manager to quickly confirm that all inventory is where it should be at any given time

(Uzialko, 2022).

Higher customer satisfaction

Customers today expect rapid fulfillment of orders, especially when ordering products

online. An effective inventory management process ensures that your products are

always in stock and that pickers can quickly locate them and send them out for delivery.

This, in turn, boosts customer satisfaction and increases the likelihood that you will gain

repeat business.

“Your customers can be buying on a website or in-store, so you have to be sure

you are stocked up,” Ali said. “The whole goal is to make sure you have the products

you’re managing and that you can support fulfillment. Knowing where your demand is

coming from and allocating your inventory to those orders is key (Uzialko, 2022).

Consistent inventory levels

An effective inventory management process also helps with inventory control,

letting you know when it is time to reorder products. Again, this is largely based on how

quickly you sell a particular item, but once you have this data, you can clearly determine

when you should order more.

from suppliers when you’re down to your minimum quantity. However, you might prefer

to create purchase orders manually, especially if your organization is very small

(Uzialko, 2022).

Just in time

JIT is an inventory-management method used by enterprises to boost efficiency

and reduce waste by obtaining inventory just when needed; lowering inventory

expenses (Lee, 2013). This strategy necessitates firm’s effectively forecasting demand.

It is a departure from the previous just-in-case model, in which corporations kept

substantial stocks in case increasing needs were to be met. The most significant

advantage of Just-in-Time inventory management over traditional approaches is that it

saves money by eliminating the need for warehouse storage (Monden, 2011).

Businesses also spend less money on inventories since they acquire only what

they need. On the other side, any supplier delays may result in the loss of both present

and future sales, as well as increased prices of acquiring on short notice. Furthermore,

there is always the possibility of a stock-out when using a JIT approach. JIT is a system

that assures inventory is received and utilized as soon as possible - hence the term "just

in time" (Bruwer, 2010). Its ideology is built on intentional waste removal and ongoing

productivity enhancement. Small-business owners are likely to reap a variety of benefits

from using the JIT method, including increased system flexibility, significant

improvements in product and service quality, and increased administrative efficiency.

Storage and 17 holding costs are also significantly lowered by balancing the two JIT
goals of preventing stock-outs and minimizing inventory. There is also a lower possibility

of shares being disposed of owing to expiration or obsolescence.

According to Gupta (2012), the most major benefit of the JIT approach is

improved responsiveness of a corporation to market changes, allowing it to gain a

competitive advantage. On the contrary, one of the drawbacks of this JIT method is that

it necessitates extensive coordination between retailers and suppliers in the distribution

route (Houston Chronicle, 2015: Online). Retailers typically sync their computers with

suppliers to facilitate the coordination process, which may be costly for MSMEs due to

the need to modernize their systems. Furthermore, organizations that adopt JIT are

continuously balancing between having too much and too little inventory. This may not

be a healthy environment for MSMEs because they cannot afford the luxury of stock-

outs.

Poor stock visibility

According to Bartlett (2017), increased supply chain visibility can be achieved

through supplier-customer collaboration. While increased availability of supply chain

data creates the illusion of visibility, it also increases a company's challenges.

Furthermore, 90% of all supply chains report that their global supply chain technology is

insufficient to provide timely information to their finance organization for budget and

cash flow planning and management. The lack of complete visibility, whether complete

or incomplete, is especially crippling for global supply chains, which can have $1 billion

in pipeline inventory. Poor visibility and uncoordinated multi-tier processes can result in
significant "just in case" inventory carrying costs, premium freight expenses, and

extended cycle times for these businesses.

Furthermore, using a newsvendor framework for a wholesaler and retailers

subject to inventory data inaccuracies, Dallery (2009) attempted to quantify the

economic impact of poor visibility caused by inventory inaccuracy. The impact of various

actions, such as the deployment of a new data capture technology to combat inventory

inaccuracy, is also investigated. Fleisch (2015) demonstrate using simulation that

improved IV can reduce three-echelon supply chain costs as well as out-of-stock levels

by eliminating inventory inaccuracy. Another simulation of a two-tier inventory system

with a retailer, a distribution center, and a supplier that includes multiple item types and

uses cycle counting as the corrective action reached the same .

Inventory shelf-life

The shelf-life of a product is an important quality parameter to consider before

commercializing any product. It is the time from the formulation of a food product until it

becomes unacceptable in terms of sensory, nutritional, or safety attributes (Kumar et al.,

2017). According to conversations with item managers and wholesale/retail storage

facilities, existing inventories are not immediately updated with shelf-life extensions until

the next scheduled shelf-life review, and item managers do not immediately transmit

acquisition changes to commodity procurement agents. Furthermore, procurement

agents are not required to amend existing delivery contracts or modify requests for bids

issued to vendors. Contracts may be let based on the original bid specifications or

existing contracts. As a result of out-dated information and the increased labor required
at the wholesale/retail level to re-label newly manufactured inventory material with the

latest information, large quantities of material are forwarded to waste facilities or

Hazardous Minimization Canters.

There are numerous other definitions of shelf-life in the literature, but the concept

of consumer perception of food quality is always present. Food quality is defined as the

sum of a product's attributes or characteristics that determine consumer satisfaction and

compliance with legal standards. According to Labuza, (2o07), shelf life is defined in

time units, shelf life is not a function of time; rather, it is a function of environmental

conditions and the amount of quality change that can be tolerated.

Yang (2013) investigated an inventory model with a constant decay rate

proportional to inventory level. For perishable items, these models assume a

dichotomous shelf-life effect. The item is either as good as new or has been damaged

and cannot be used. However, in some cases, this assumption is incorrect. An

agricultural product is an obvious example. The perceived quality of products by

consumers may deteriorate during the shelf-life period. They may buy substitute

products or brands with a later expiration date. When the product is fresh, demand is at

its peak, and it gradually declines over time. Only a few inventory models took

perishable items with a fixed shelf-life into account.

Day’s inventory outstanding

Evaluating the DIO can assist in determining a company's level of inventory

control. It accomplishes this by displaying the volume of inventory necessary for storage

at a particular time and also keeping track of inventories available within a specific
timeframe (Mauchi et al., 2011). As a result, if a firm experiences a decrease in DIO, it

is an indication that the company is improving in its working capital management, which

also transfers positively to the company's profit margins (Tradecko, 2020; Warrad &

Khaddam, 2020).

Days Inventory Outstanding (DIO) provides information on the length of time it

takes a company to sell its inventory. Therefore, a smaller DIO is more preferable for a

corporation. A high and rising trend in the DIO may be a sign that consumer interest in

the company's products and services is waning. Holding inventories also results in

storage expenses (Al-Shubiri & Aburumman, 2013) and is subject to obsolescence. So,

if a short inventory holding policy is followed, the business wins. On the other hand, if

the business stores minimal inventory and is overly efficient, it misses the chance to sell

these products when there is unforeseen market demand.

Mathuva (2014) discovered a favorable correlation between the DIO and

profitability. High inventory levels, he claimed, lower the costs of potential production

interruptions and commercial losses brought on by product shortage.

Profitability

Profitability is a company's ability to make money. A profit is what remains of a

company's revenue after it has paid all expenses directly related to revenue generation

(Grimsley, 2017). Eroglu and Hofer (2011) discovered that leanness improves a

company's profitability. Similarly, Koumanakos (2008) believes that lean inventory

management improves a firm's financial performance; however, he believes that the

higher a firm's level of inventories preserved, the lower the rate of return.
 According to Rogers, and Schatzberg (2010), there are numerous factors that

influence a firm's profitability. Inventory management is one of the most important

factors influencing a manufacturing company's profitability. Researchers discovered that

effective inventory management can lead to a profit-making organization.

Profitability refers to a company's ability to generate a profit from its operations. It

is the enterprise's supreme criterion (Peter, 2013). Profitability reflects a company's

ability to earn profits in relation to sales, total assets, and own capital (Sartono,2014).

Return on equity is used as an accounting tool to measure profitability in this study.

Return on equity is an important ratio for investors to use to measure a company's

ability to obtain net income related to dividends. High profitability is preferable for

investors because it indicates a promising investment opportunity.

Return on Investment

ROI, or return on investment, is a common business term used to identify past

and potential financial returns. Managers and executives look to the ROI of a project or

endeavor because this measure indicates how successful a venture will be. Often

expressed as a percentage or a ratio, this value describes anything from a financial

return to increased efficiencies. Any expense a company has can be calculated in terms

of ROI. While some expenses or activities – such as buying staples or repairing an

employee bathroom – may not have a direct or financial ROI, each expense contributes

to an overarching investment.

Companies even use ROI to measure the success of a specific project. If a

business owner were to invest money in an advertising campaign, they’d analyze the
sales generated by the ad and use that information to determine the ROI. If the money

generated exceeded the amount spent, then a business could consider it an acceptable

ROI (Writer, 2022).

This study aims to determine the impact of inventory management on the

profitability of auto repair shop in the City of Mati, Davao Oriental. This chapter contains

how the study will be conducted and how the data will be gathered and treated. This is

divided into several sections, namely: the research design, source of data, research

locale, respondents of the study, sampling technique, sample size, data collection, and

data treatment.

Research design

This study will be use descriptive statistics as a research design, which will use

quantitative in nature and focused on objective measurements and statistical analysis of

data collected through online surveys (Babbie, 2018). It will use descriptive research to

collect data and explain using survey questions, as well as to evaluate or measure the

outcomes against some known or speculative norms (Hubbard, 2017). As a result, the

5.0 Likert scale was employed to assess management practice and profitability impact

of inventory management on the profitability of auto repair shop in City of Mati.

Sources of data

Primary data was used in gathering information about the study which consists of

two variables, namely: inventory management and profitability. Also, data for this

research will be collected from businesses owners and managers who belonged to a

auto repair owner in the City of Mati through the use of survey questionnaires, and the

results will be presented. The researchers will ask permission to Bureau of Internal
Revenue Mati to determine the number of registered shops in Mati City. Secondary data

sources will include old webpages, articles, and other online materials.

Research Locale

The locale of the study is shown in figure 2. This study will be conducted in Mati

City, one of the cities in the province of Davao Oriental. This location was chosen

because it has different kind of SMEs that will contribute to our conducted survey.

Source: earth.google.com
Respondent of the study

The researchers select 20 respondents of auto repair shop owners who reside in

the City of Mati, Davao Oriental, and may potentially be respondents to this survey. All

of these participants were selected through a convenient sampling method. This

questionnaire was open to managers, owner-managers, shop employees, or

accountants because it was considered that these individuals had understanding of the

company's inventory management procedures and could provide insightful answers to

the survey's questions. This is because they will be able to provide the most accurate

information and data about the impact of inventory management on the profitability.

Sampling Plan

The researchers will utilize the purposive sampling method in choosing the

respondents. According to Crossman (2020), a purposive sample is a non-probability

sample chosen based on characteristics of a population and the study's objective.

Purposive sampling is distinct from convenience sampling, and it is also referred to as

judgmental, selective, or subjective sampling.

Sample Size

The researcher will identify 20 business owners of auto repair shops in City of

Mati to answer survey questionnaires that can be used as a basis for this research.
Data Collection Procedure

The study will begin with the formulation of the problem and the identification of

the variables, as outlined in the research paradigm, using the procedures outlined below

for data collection:

1. Seeking Permission to Conduct the Study - First, researchers will ask permission

to conduct research from the research committees and the board of directors of the

institute. The researchers then write a letter to the manager/owner of auto repair shop

requesting permission to conduct a survey.

2. Construction of Questionnaires - The researchers then prepared questionnaires,

which were then approved by a panel of experts. The reliability of the questionnaire will

also be checked.

3. Distribution of Questionnaires - Questionnaires are sent to survey respondents

who are asked to answer questions honestly in order to collect accurate and reliable

data. Due to pandemic restrictions, researchers will adhere to minimum hygiene

standards set by the International Organization for Standardization (IATF), including

wearing masks and face shields and maintaining social distancing.

4. Retrieval of Questionnaires. The responses will be double-checked and statistically

analyzed.
5. Analysis and Interpretation. The findings will be examined and interpreted in the

light of the study’s objectives. The output of this study will be submitted to the Institute

of Business and Public Affairs. It will be archived after 3 to 5 years.

Data Treatment

A descriptive method is used to gather and analyze the data presented in the

study. It is also quantitative research that describes the characteristics of several

variables under the study. The questionnaire used in the survey is the primary method

for conducting quantitative research. The five-point likert scale will be in the form of a

questionnaire, which is the most widely used approach to scaling responses in survey

research.

This study will be subject to some ethical issues to establish and safeguard

ethics in conducting this research. The names of the respondents will not solicit in any

part of the research. During the floating of the questionnaires, the respondents have the

right to decline and not forced to do what they do not want. The researchers also

guaranteed that the questions in the questionnaires would not hurt any person or

organization and ensured the responses would just be utilized for research. These, will

be to make sure that no one would be harmed physically or emotionally.