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AN EXAMINATION OF THE RELATIONSHIP BETWEEN INVENTORY MANAGEMENT AND ORGANIZATIONAL PROFITABILITY IN CAMEROON
CHAPTER ONE
INTRODUCTION
Background of the study
Inventory is a critical component of current assets, accounting for approximately 60% of the total. Every organization requires inventory to ensure efficient operations, as it serves as a link between production and distribution. As a primary component of current assets, inventory falls within the realm of inventory management, which is a crucial aspect of working capital management. Inventories represent the largest portion of current assets held by a business entity and are essential for the efficient functioning of business operations. Most corporations allocate a significant portion of their total asset investment to commodity equities (Ololade, 2018). As a result, the efficiency of inventory management is expected to impact the outcomes of operations and the financial assets of shareholders. Industrial establishments often maintain inventories of finished goods, semi-finished goods, and raw materials. The inventory of finished products acts as a buffer between production and sales activities, allowing the company to maintain stock and reduce the interdependence of purchasing, selling, and production processes.
Assets intended for sale in the ordinary course of business also qualify as inventory. According to Aquilano in Williams (2019), reserves are a collection of specific items deemed essential for any organization. Typically, these inventories make up 20% to 30% of a firm’s total investment. They are inactive resources with monetary value. To mitigate the effects of industry inflation or enhance a firm’s competitive edge in terms of customer desire and demand, Vrat (2014) suggests that these strategies can be advantageous for long-term profitability.
Inventory management is closely linked to working capital management, affecting both short-term solvency and profitability. Effective inventory management is essential for ensuring smooth business operations. It aims to minimize the cost of holding excessive inventories while maximizing the use of a company’s resources by ensuring a sufficient supply of materials for production (Earl, 2019). Inventory management also plays a crucial role in preventing redundant and unproductive funds. Strategic management decisions should help balance excessive and insufficient inventory. Implementing effective management practices by the inventory manager can lead to improved operational outcomes and reduced working capital expenditures. Accurate inventory management contributes to a consensus regarding the firm’s risk exposure and liquidity. According to Macey (2018), inventory management seeks to balance the benefits and costs associated with holding inventory. Within management, the inventory manager’s decisions are influenced by the firm’s strategic goals and aim to either maximize profit or minimize costs while meeting customer demands. This should position the organization optimally for replenishment.
Baird (2021) states that inventory management involves identifying each item of stock within an organization. The primary objective of inventory management is to determine the quantity and location of stocked products. Inventory management is necessary in various facility locations or across multiple nodes of a supply network to ensure the steady progression of production, avoiding disruptions from material or product shortages. How an organization optimizes its profits depends on efficient inventory management (Baird, 2021). Profit maximization relies on cost minimization and revenue maximization. Effective maximization involves increasing revenue without expanding resource consumption. Inventory management is vital for ensuring a business’s capital is not unnecessarily tied up in physical goods, which could lead to fraud and theft. Management aims to minimize stock losses resulting from store operations. Therefore, inventory is crucial to an organization’s profitability in business.
Inventory issues, such as unsold or overstocked quantities, can severely impact a company. Running out of a critical inventory item can lead to production halts. The effective management of inventory, known as inventory management, is essential for avoiding these issues (Aloza, 2020).
Since inventory represents a significant portion of total investment, effective inventory management is vital for an organization’s growth and profitability. How a company manages its inventory can significantly impact its success or failure. Poor inventory management can lead to stock-outs, resulting in a decline in consumer loyalty and goodwill, reduced profitability, and potentially the organization’s downfall, highlighting the importance of this study.
1.2 Statement of the problem
The critical roles that inventory performs in the operations of organisations are well understood by managers. Due to the funds allocated to inventory, direct materials can account for as much as 50% of the overall product cost in the majority of organisations; consequently, this has an impact on the organization’s profitability (Emile, 2019). Occasionally, organisations fail to exercise control over their inventory levels, which leads to insufficient stock and ultimately prevents them from commencing production. This ultimately undermines the efficacy of the organisation.
On the contrary, ineffective inventory management by management can result in extended periods for inventory conversion and increased inventory costs, which in turn reduce the ability to recycle funds. Consequently, this can have adverse effects on the profitability and liquidity of the enterprises. A significant proportion of business failures have been ascribed to the failure of business managers to effectively strategize and regulate the inventory conversion period and inventory levels of their organisations (Allwell, 2018).
In Cameroon, very little have been done concerning inventory management practices in profit organizations. It is on this note that this study will be examining the relationship between inventory management and organizational profitability in Cameroon.
1.3 Objectives of the Study
The aim of this study is to examine the relationship between inventory management and organizational profitability in Cameroon. Specifically the study seeks to:
Determine whether inventory management has a significant effect on organizational profitability in Cameroon.
Examine the impact of inventory management on organizational profitability in Cameroon.
Assess the challenges of inventory management in organizational profitability in Cameroon.
1.4 Research Questions
The following research questions will be answered in this study:
Does inventory management have a significant effect on organizational profitability in Cameroon?
What are the impact of inventory management on organizational profitability in Cameroon?
What are the challenges of inventory management in organizational profitability in Cameroon?
1.5 Research Hypothesis
The following null hypothesis will validate this study:
Ho1: Inventory management does not have a significant effect on organizational profitability in Cameroon.
1.6 Significance of the study
This study would be beneficial to different stakeholder’s such as inventory manager’s, Top-level management, Competitors, supplier and customer. The study will be useful for inventory managers to know their optimum stock replenishment status, and how and when tie down stock or ignore replacing stock.
Moreover, top-level management will benefit from the study, to know the feed-back effect of their flow decision from the top-ladder decision and policies that makes the firm. Competitors will be able to know the risk/return (opportunities and treats) that is induced in inventory control and techniques employed by firm. Suppliers will deduce from the study. On how their defect in supplying needed raw-material which will be transformed into finished goods affect the sector. Customers will have firsthand knowledge on how important their demand direct the profit or loss prospects of the firm.
1.7 Scope of the study
The study aims to examine the relationship between inventory management and organizational profitability in Cameroon. Empirically, this study will examine the impact of inventory management on organizational profitability, determine whether inventory management has a significant effect on organizational profitability and assess the challenges of inventory management in organizational profitability.
This study will be carried out in Cameroon.
1.8 Limitation of the study
The researchers encountered slight constraints while carrying out the study. The significant constraint was the scanty literature on the subject owing that the relationship between inventory management and organizational profitability in Cameroon discourse is vast thus the researcher incurred more financial expenses and much time was required in sourcing for the relevant materials, literature, or information and in the process of data collection, which is why the researcher resorted to a limited choice of sample size covering only residents of Cameroon. Thus findings of this study cannot be used for generalization for other regions within Cameroon. Additionally, the researcher will simultaneously engage in this study with other academic work will impede maximum devotion to the research. Howbeit, despite the constraint encountered during the research, all factors were downplayed in other to give the best and make the research successful.
1.9 Definition of terms
Inventory: It can be defined as the available stock, in the warehouse of the firm
Inventory techniques: These are techniques to control, coordinate and utilize stock effectively.
Stock control: Activity process or study of stock ensuring that quantities of stock or raw materials suppliers or finished goods are such that satisfactory services level is maintained for all stock keeping unit while holding cost are minimized.
Stock holder: A firm or a person who has a specified type of sock example wholesalers that has stock of manufactured goods.
Stock level: (Inventory level) this is the level at which sales are kept.
Stock out: This is a state of having in keeping stock or materials for some time example. The rent of storage space the wages of a store keeper the cost of sock records.
Profitability: This is the return gained from stages of production carried out by a firm.
Inventory management: Inventory management is the process of ordering, storing and using a company’s inventory: raw materials, components, and finished products.