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INVENTORY CONTROL AND PROFITABILITY IN AN ORGANIZATION: A CASE
STUDY OF LABOREX (U) LTD EURAPHARMA
BY
NAKAMANYA REHEMA
07/U/11919/EXT
A RESEARCH REPORT SUBMITTED TO MAKERERE UNIVERSITY IN PARTIAL
FULFILLMENT FOR THE AWARD OF A BACHELOR OF COMMERCE
DEGREE OF MAKERERE UNIVERSITY
AUGUST, 2011
DECLARATION
I, Nakamanya Rehema, declare that the work presented in this dissertation is entirely my original
work and that it has never been submitted elsewhere for academic award or any other purpose.
Signature………………………… Date:………………………..
NAKAMANYA REHEMA
07/U/11919/EXT
ii
APPROVAL
I the undersigned supervisor of this research paper accept that it is adequate for the ward of a
Bachelor of Commerce degree of Makerere University.
Signature……………………………………. Date ……………………..
MS. MBATUDDE SHEILA
SUPERVISOR
iii
DEDICATION
Praise is to ALLAH, the most glorified, who has blessed me with His endless mercy throughout
the period of compiling this work. The piece of work is dedicated to my family members
especially to my dear parents Mr. and Mrs. Byambi Ahmed who time and again encouraged me
to work hard and strive for success, may ALLAH grant them paradise.
To my dear Auntie Hajat Hadija Byambi, brothers Abaas Mawanda and Kiyimba Umar for both
financial and moral support throughout my education may ALLAH reward them abundantly.
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ACKNOWLEDGEMENT
The successful completion of this study was as a result of a number of people who I am greatly
indebted.
I express my sincere thanks to my supervisor Mrs. Mbatudde Sheila for her tireless efforts in
guiding and supervising me during the research to see this work through. Her constructive
criticism, encouragement, patience and understanding turned what seemed mountains to a
platform, enabling me to accomplish this study successfully.
I am greatly indebted to Laborex (U) Ltd Eurapharma management who has given me vital
information regarding the topic under study.
Further appreciation goes to my dear friends Ismael, Abdul who have helped to guide me
whenever necessary during the pursuit of my academics.
My special thanks go to my best friends Najjuuko Aisha, Ishaq Ssekiziyivu and my dear
nephews Rayan Mayanja and Bakunda Imran who have been a source of joy whose love has kept
me going.
My heart felt thanks to my Uncle Ismail Mulaala for his love and daily prayers that he prayed for
me during his time may his soul rest in eternal peace.
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LIST OF ABBREVIATIONS AND ACRONYMS
A – Agree
D – Disagree
EOQ – Economic Order Quantity
JIT – Just in Time
SA – Strongly Agree
SD – Strongly Disagree
vi
TABLE OF CONTENTS
DECLARATION ii
APPROVAL iii
DEDICATION iv
ACKNOWLEDGEMENT v
LIST OF ABBREVIATIONS AND ACRONYMS vi
TABLE OF CONTENTS vii
LIST OF TABLES x
ABSTRACT xi
CHAPTER ONE 1
1.0 Introduction 1
1.1 Background 1
1.2 Statement of the problem 3
1.3 Purpose of the study 3
1.4 Objectives of the study 3
1.5 Research questions 4
1.6 Scope of the study4
1.7 Significance of the study 4
CHAPTER TWO 5
LITERATURE REVIEW 5
2.0 Introduction 5
2.1 Inventory control techniques 5
vii
2.2 Determinants of profitability 15
2.3 Relationship between inventory control and profitability 22
2.4 Conclusion 25
CHAPTER THREE 26
METHODOLOGY 26
3.0 Introduction 26
3.1 Research design 26
3.2 Sampling population 26
3.3 Sampling method 27
3.4 Sampling size 27
3.5 Sampling procedure 27
3.6 Sources of data 27
3.7 Data collection procedures 28
3.8 Data collection tools 28
3.9 Data analysis and processing 29
3.10 Problems encountered 29
CHAPTER FOUR 30
DISCUSSION AND INTERPRETATION OF FINDINGS 30
4.1 Introduction 30
4.2 Findings from General Information 30
4.3 Findings on objective one: To find out the various inventory control techniques in place
32
viii
4.3 Findings on objective two: To establish factors that determines the level of profitability at
Laborex. 36
CHAPTER FIVE 39
DISCUSSION, CONCLUSION AND RECOMMENDATION 39
5.1 Introduction 39
5.2 Discussion of research findings 39
5.3 Conclusions 41
5.4 Recommendations41
5.5 Areas for further research 42
REFERENCES 43
APPENDIX 1 46
QUESTIONNAIRE 46
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LIST OF TABLES
Table 1: Finding on sex of respondents.........................................................................................30
Table 2: Education level................................................................................................................31
Table 3: Response on professional qualification...........................................................................31
Table 4: Respondents’ qualifications.............................................................................................32
Table 5: Results on just in time technique.....................................................................................33
Table 6: Results on Economic Order Quantity..............................................................................34
Table 7: Results on ABC Analysis................................................................................................35
Table 8: Results on factors that determine profitability................................................................36
Table 9: Correlation.......................................................................................................................37
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ABSTRACT
The study intended to find out the relationship between inventory control and profitability in an
organization. The study objectives included: to find out the various inventory control techniques
in place, to establish factors that determines the level of profitability at Laborex and to establish
a relationship between inventory control and the level of profits in an organization.
A combination of descriptive, analytical and cross sectional survey design was used and this
helped in collection of enough opinions from the respondents to achieve the objectives of the
study. The study involved 5 respondents from the management level, 15 respondents who were
the principal medical representatives, 20 respondents from the sales department and 10
respondents from the ware house (stores) who were expected to respond on behalf of the firm.
Purposive sampling method was used in such a way that respondents from Laborex were chosen
according to the departments they work with. Convenience sampling method was also used in
order to arrive at respondents who were readily available. The sources of data were categorized
into primary and secondary. Research analysis involved sorting an arranging of the data into
respective groups and tables using frequencies and percentages to enable easy analysis. This also
enabled the researcher to analyze responses from the respondents to be analyzed using statistical
package for social science (SPSS) to establish the relationship between the two variables.
It was concluded that; respondents were in disagreement that the control techniques in place
were adequate, majority of the respondents were in disagreement that the level of profitability at
Laborex (U) Ltd was satisfactory, there was a strong positive correlation between inventory
control and the level of profits in an organization (r = 0.553** P < 0.01).
It was recommended that management should adopt practical and adequate inventory control
techniques to establish, maintain and control the levels of inventory techniques, management
should ensure that it earn a return on investment in the company through positive gains from an
investment or business operation after subtracting for all expenses, management at Laborex (U)
Ltd should adopt adequate inventory control techniques so as to enhance the level of profits.
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CHAPTER ONE
1.0 Introduction
This chapter looks at the background of the statement of the problem, purpose of the study,
objectives, research questions, scope and the significance of the study.
1.1 Background
Inventory control refers to the techniques used to ensure that stock of raw materials or other
supplies, work in progress and finished goods are kept at levels which provide maximum service
levels at minimum costs (Lysons, 2000). Inventory control and management also involves the
supervision of the supply and storage and accessibility of items in order to ensure adequate
supply without excessive over supply. It is concern of inventory control therefore to minimize
inventory costs.
On the other hand, profitability has been defined as the ability to earn a return on investment in a
business, Wood and Sangster (2002). Also Don (2006), defined profitability as either accounting
profits or economic profits, therefore, all firms are set with certain objectives which all need to
be met, for such a firm to continue in full operation. The return on investment has been referred
to by the American Management Association (AMA) as a Gross Margin and has been defined as
the percentage of profit general from the sale
1
of inventory after deducting the cost of sales (American Management Association Journal 2000,
p.17).
Gross profit ratios henceforth indicate the average gross margin on sales of goods. A high
percentage however does not necessarily result in large absolute figures of gross profit unless it
is accompanied by a large sales volume. Gross profit is therefore the difference between sales
and cost of goods sold. Cost of goods sold includes manufacturing costs, transportation and
storage costs (Ray Wild, 2002).
Profit is a function of a variety of factors affected by the changes in sales volume, costs and
price. Profit may also be affected by either increase or decrease in selling price, volume of sales,
variable and fixed costs or a combination of all (Pandey, 2004). There are several factors which
motivate a firm to hold inventory, different economists have talked about different motives for
holding inventory such as to get cost advantage or price advantage or both and eventually a
return on such an investment in inventory. The dilemma of how much inventory to maintain to
avoid wastage of resources and obtain a higher return varies from one organization to another in
different industries.
To achieve a high return on an investment is desirable, however not easily attainable yet a
relatively low return on investment in inventory may indicate ineffective inventory control
practices. This is normally associated with holding costs that may increase the overall operating
costs of a firm (Ray Wild, 2002).
For example, Laborex (U) Eurapharma Ltd today is about to burn drugs worth one billion
shillings (Audit report 2008-2009). This has been due to many drugs expiring before they are
2
sold out and this has been blamed on inventory control practices. On top of the expired drugs the
organization has to incur an extra expense of burning such drugs since it is a condition for
National Drug Authority (NDA) to execute such an activity. Given such occurrences, profit
levels of the organization have been adversely affected. It is upon this background therefore that
a study should be carried out to investigate inventory control and the level of profitability of
Laborex (U) Eurapharma.
1.2 Statement of the problem
Inventory control involves the techniques used to ensure that stock of raw materials or other
supplies, work in progress and finished goods are kept at levels which provide maximum service
levels at minimum costs (Lysons, 2000). However, despite such great benefits, Laborex (U) has
failed to achieve high profit levels given the sophisticated inventory control system in place,
there is evidence that Laborex (U) has lost of money approximately two billions (Audit Report,
2008-2009) in stock theft, expired drugs, drugs recalled from the market and under stocking.
There is concern to investigate whether the inventory control techniques employed and
procedures in place are effective, and whether inventory control has a relationship with profit
levels.
1.3 Purpose of the study
The study intended to find out the relationship between inventory control and profitability in an
organization.
3
1.4 Objectives of the study
i. To find out the various inventory control techniques in place.
ii. To establish factors that determines the level of profitability at Laborex.
iii. To establish a relationship between inventory control and the level of profits in an
organization.
1.5 Research questions
i. What inventory control techniques are in place?
ii. What factors determine the level of profitability at Laborex?
iii. What is the effect of inventory control on the profitability levels of Laborex?
1.6 Scope of the study
The study investigated inventory control and profitability of Laborex (U) Eurapharma, therefore,
the researcher interviewed management and staff of the organization and the results from
therefore was taken conclusive from 2009 to date.
1.7 Significance of the study
The study is expected to be used as reference by other students who will be researching on a
related topic.
The study will also help management explain why it has suffered such a loss and suggest ways
how to mitigate such risks.
4
CHAPTER TWO
LITERATURE REVIEW
2.0 Introduction
Inventory control refers to the techniques used to maintain the stock of raw materials or supplies,
work in progress and finished goods are kept at levels, which provide maximum service levels at
minimum costs (Lyson, 2000).
Inventory control techniques refers to methods employed by a firm to establish, maintain and
control the levels of inventory items kept in the stores (Max Muller, 2003). The main aim of
inventory control techniques is to ensure that costs associated with materials/stock are
minimized. Among such costs include holding/carrying costs, ordering costs and purchase costs
which sum up stock cost (Lalla, 2000). Handling and ordering costs can be kept at minimum
amounts or controlled if the techniques in place could enable the organization to overcome the
problems of overstocking and under stocking of material items.
Different business concerns may apply different inventory control techniques to meet specific
requirements and circumstances; however, firms for inventory control (Horngrens et al, 2001)
commonly use the following techniques.
2.1 Inventory control techniques
2.1.1 Two bin inventory system
This is a fixed order size system and is commonly used when materials are relatively inexpensive
or non-essential. The material inventory is divided and placed in two separate compartments or
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bins. The first bin contains quantity of items that will be used between the time an order is
received and the next order is placed. The second bin contains enough stock to cover the usage
between to cover the usage between the dates of placing an order to the date of delivery
(Hammurabi, 2001). New supply is ordered as soon as the first bin is empty. Wild (2002)
observes that a two bin system helps reduce paper work as records are not maintained for each
transaction, the reorder point can further be determined by visual observation, that is to say when
stock in one bin is depleted, an order is initiated and demands are then filled from the second bin.
Further, the system facilitates single bin usage since an order ca be triggered when the inventory
level reaches a physical mark such as a painted line or a given volume level (for gasoline and
other liquids) (Wild, 2002).
2.1.2 ABC Analysis/classification
This technique categorizes inventory/material items in three groups basing on value and
materiality of inventory items that is A, B and C (Lysons 2000, Wild, 2002, Lalla, 2000).
Group A, this group represents a substantial amount of funds invested in inventory items of this
group. The items in this group are critical to the functioning and operation of an organization and
because of this, their level inventory levels must be monitored carefully. Wild (2002) observes
that items in this category are usually relatively few but account for a relatively large portion of
inventory cost or value.
Group B, the items in this group are important to the firm but they are not too critical, thus it may
not be necessary to constantly monitor the level of all these items of inventory. Group B items
are slightly larger in number however account for a smaller percentage of the total costs.
6
Group C, items in this category are not very important to the operations of the firm but still
necessary. These items constitute the lowest of the total inventory and therefore a simple control.
A graphical representation of the ABC technique of inventory control.
Adapted from Operations Management by (Ray Wild 2002)
Although high usage rate does not necessarily mean high stock levels, fast moving items, that is
to say, those which the usage rate is high and expensive items are likely to incur greater stock
costs than slow moving inexpensive items. Consequently, we should aim to aim fast
moving/expensive items since by doing so greater potential savings are possible (Ray, 2002).
2.1.3 Materials requirement planning (MRP)
This is a production planning technique that spells out or provides a list of materials that will be
required at different production stages. It is an approach for coordinating the planning of material
acquisition and production. MRP is a flow control system in the sense that it orders only what
components are required to maintain the manufacturing flow. The approach begins by
establishing the quantity and timing of finished goods demanded and then bases on this to
determine the material units that will be needed at different stages in the production process. The
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Group A
Group B
Group C
master production schedule provides the list of finished goods that will be demanded at different
periods. The production schedule therefore, enhances the production of the materials requirement
plan. This control approach helps managers not replenish raw materials when they are not
actually desired (Dury, 2000). The system functions by working backwards from the scheduled
completion dates of the end products or major assemblies to determine the sates and the
quantities of various components parts and materials that are to be ordered. The works well when
a specific demand for a product is known in advance, the demand for items tied I a predictable
fashion to the demand for other items (Michael, 2001).
The MRP technique is summarized in a diagram below
Adapted from Lysons Kenneth & Michael Gillingham (2001): Purchasing and Supply chain
Management
2.1.4 Economic Order Quantity (EOQ) or Re-order quantity
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Master production schedule
Customer order Forecast
Engineering changes MRP package Inventory transactions
Inventory status file Schedule reports Bill of materials
Lysons (2000) defines EOQ as the optimal ordering quantity for an item of stock that minimizes
costs. According to Bernard (2003), it is the quantity point at which carrying and ordering costs
are not only minimum but also are equal. One of the major problems of inventory control is how
much inventory of an item should be added when inventory is replenished. If the firm is buying
raw materials, then it has to decide the lots in which it has to be purchased on each time of
replenishment.
Brian Marchant (2003) while addressing the problems of procurement of the quantity and the
time to buy, if more units are ordered at one time, fewer orders will be required in a year. This
will mean a reduction in the total ordering costs. However, when fewer orders are placed, larger
average stocks must be maintained, which leads to an increase in carrying costs/holding costs.
The problem is therefore, one of trading off the costs of carrying large against the costs of
placing more orders. The optimum order size will help in minimizing such costs. The optimum
order size is therefore, the order quantity, which will result in the total amount of ordering and
carrying costs being minimized. The optimum size in this case is known economic order
quantity.
Lysons (2000) observes that for the EOQ to work effectively the following assumptions have to
work side by side.
Demand for the item is uniform, that is, certain and continuous over time
The lead time is constant and certain
The cost of planning an order is independent of size of the order. The delivery charge is
also independent of the quantity ordered.
The cost of holding a unit of stock does not depend on the quantity in stock
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All prices are constant and certain
Exactly the same quantity is ordered each time a purchase is made
From the above assumptions therefore, it is clear that the ordering cost per order is known and
also the carrying cost per unit is known and fixed, thus this situation leads us to a graphical
representation below.
Figure 1: Showing graphical representation when price, carrying and holding costs are constant
Q represents the quantity order and used in a given period of a month. Since receipt of stock is
stantaneous, at the end of each month, the depleted stock will be immediately replenished. The
organization will have ample stocks during the month, which are replaced without delay at the
end of the month. The EOQ can also graphically be found by plotting order quantity on the
horizontal axis and costs on the vertical axis.
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Time
Inventory in Units
Average inventoryQ/2
Figure 2: Deriving EOQ by plotting cost against quantity
Adapted from Cost and Management Accounting by (Kamukama, 2006)
Inventory costs are minimized where the total cost curve meets the ordering cost curve. The
optimum quantity (EOQ) that should be purchased is determined at that level (Kamukama,
2006). Pandey (2004) says the total cost of inventory is incentive to moderate changes in order
and it may be appropriate to say that there is an economic order range. If total costs do not
change, then the firm can change EOQ within the same range without suffering significant
losses.
2.1.5 Re-order level
Once a firm has calculated and established its EOQ, it must determine when to place an order
(David, Goetsch & Stanley, Davis 2003). The reorder point is that inventory level at which an
order should be placed to replenish the inventory. Because of uncertainty in determining the
lead-time and usage, the firm to guard against stock out situations should keep a buffer
inventory. Pandey (2004) looks at the reorder point as a point when replenishment should be
ordered with minimum risk of incurring costs associated with inventory. To determine the
reorder point under certainty, that is say usage and lead-time, do not fluctuate, we should know
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Quantity
Ordering cost
Minimum cost
Total cost
Carrying cost
Costs
EOQ
the lead-time, average usage and EOQ. Under such conditions, the reorder point is that inventory
level which will be mentioned for consumption during the lead-time and reorder period. It is
therefore set after considering that: the expected usage or rate of consumption, the time interval
between initiating and order and receipt, referred to as lead-time and the minimum inventory or
safety stock.
Minimum stock level or safety is maintained to prevent stock outs. It represents the quantity
below which the stock of an item should not be allowed to fall. It is essentially a safety or buffer
stock, which acts as a cushion against stock outs. This safety stock should be used only in
abnormal circumstances. If usage pattern is known with certainty and the lead-time is also
known accurately, then no safety stock would be needed. However, if either usage or lead-time is
subject to variation then it is necessary for business firms to maintain safety stock levels equal to
the difference between the expected usage over lead-time and the maximum usage over lead time
that the firm feels is necessary for cost minimization. It is important to note that in order to
minimize costs; the amount of safety stock to be maintained should cause costs exactly.
Therefore, Minimum stock level/safety stock = Reorder level – average rate of consumption x
average lead time (Barrat & Mark Whiteland, 2004).
Maximum stock level, this represents the uppermost amount of stock the company can maintain
at any time. Maximum level indicates the level above which stock should not be allowed to rise.
Fixation of maximum level requires the consideration of factors like: rate of consumption
materials, reorder quantity, availability of storage and cost of storing including insurance costs,
price fluctuations and risk of obsolescence.
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Therefore, Maximum stock level = Reorder level + EOQ – (minimum usage x minimum lead
time) (Barrat & Mark Whiteland, 2004).
Danger level is that level below which the minimum/safety stock level. It represents a stage
where immediate steps are taken for getting stock replenished. The moment stock reaches this
level, it is a sign that if no emergency steps are taken to replenish the stock stores will be
completely exhausted which results in production stoppage.
A graph showing a summary of stock levels
The time between A and B represents the lead time. This represents the time between the orders
to be purchased is placed and the time when the items ordered have been received.
2.1.6 Just in time (JIT) Techniques
Just in time is defined as the processing of items for customers in the quantities required just in
time for production efficiency (Wild, 2002). Further Edward, Ronald & Eric (2007) add that this
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Time (weeks)
Minimum level
Reorder level
Maximum levelQuantity (Units)
AB
is a purchasing and control method in which materials are obtained just in time for production to
provide finished goods in time for sale. A just in time manufacturing technique requires making
goods or service only when a customer, internal or external, requires it. JIT requires better
coordination with suppliers so that materials arrive immediately prior to their use. Where this
technique is applied, there is no need to have stores or ware houses and hence the costs
associated with storage are saved. The fundamental objectives of JIT are to produce and deliver
what is needed, at all stages in the production process (Van Weele, 2009).
Wild (2002) states that one of the prerequisites for effective implementing of JIT is
vendor/supplier reliability. JIT involve the pursuit of low or zero inventory so that incoming
goods and inventory items are of particular importance. This however, inventory to note that
unless regular timely supplies of requisite items is coupled with consistent quality can be
assured, JIT is impossible.
Lysons (2000) says that conditions such as close and long-term relationship with few
suppliers/vendors, and the establishment of interdependence in the vendor-consumer relationship
are necessary for JIT to effectively implement. Further, effective JIT within an organization
depends on the organization’s supplier also adopting the JIT philosophy. The willingness to
supply smaller quantities of items more frequently with assured quality is the principle
requirement. To this end, organizations have often found it necessary to help suppliers develop
JIT system of their own and management systems (Pandy, 1995).
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2.1.7 Order cycling system
Order cycling system is a method in which a review of materials on hand on a regular basis or
periodic cycle is done. For example, materials inventory might be reviewed every two weeks.
This will vary depending on the materials being reviewed. Essential items have a shorter review
cycle than less important items say in a pharmaceutical distribution company, drugs for
epidemics, vaccines and chronicle diseases cure are given priority over the other drug items
(David, Goetsch & Stanlley, Davis 2003).
2.1.8 Inventory turnover ratio
Business firms can analyze the turnover of different items of stock to find out which stock are
slow moving. Inventory turnover ratio enables the management to avoid capital being locked up
in undesirable stocks. The stock turnover ratio is calculated as follows;
Stock/inventory = cost of materials consumed ÷ average stock of materials held during the
period. The average stock is taken to be the average of opening and closing stocks. According to
the turnover rate of different items, materials can be classified into five categories which include
fast-moving materials, materials with average turnover, slow moving materials, dormant
materials (materials that have no recurring use but may be required in future) and obsolete
materials (materials which are no longer used due to reasons like substitution by another
materials, change in product line. Obsolete materials should be disposed off.
15
2.2 Determinants of profitability
Profitability has been defined as the ability to earn a return on investment in a business, Wood
and Sangster (2002).
Also Don (2006), defined profitability as either accounting profits or economic profits. Don
further observes that profit can represent a positive gain from an investment or business
operation after subtracting for all expenses.
The ACCA study text (2003) observes that profit is a best known measure of the success of an
enterprise, it is the surplus remaining after total costs are deducted from total revenue, and the
basis on which tax is computed and dividend is paid. Profit is reflected in reduction in liabilities,
increase in assets, and/or increase in owners’ equity. It furnishes resources for investing in future
operations, and its absence may result in the extinction of the firm.
Wood and Sangster (2002) observe that the cost of production and volume of sales are the
interdependent determinants of profit. The analysis of cost behavior in relation to the changing
volume of sales and its impact on profit is very important to determine the break even level of a
firm. The level at which total revenue equals total costs, is said to be the break even level of a
firm. The level at which total revue equals total costs, is said to be the break even level where
there is no-profit or no-loss. Sales beyond break-even volume bring in profits. Generally
production is preceded by the process of demand forecasting, to decide on the volume of
production, the produce of which will be absorbed by the market. Pricing and promotions come
at a later stage. Costing is done to predict the costs of production and resultant profit at various
levels of activity.
16
In addition, Ballou (2002) suggests a CVP analysis or Cost-volume profit analysis helps a firm to
study the interrelationship between these three factors and their effect on clean profit. The
process also includes an analysis about the external factors that affect the volume of production,
such as market demand, competitor threat and internal factors such as availability of
infrastructure, capital and labor force.
The ACCA study text (2003 adds that pricing is the most important factor that makes firms
product competitiveness. The costs of production can be classified into fixed costs, variable costs
and semi variable costs. Fixed costs remain constant and tend to be unaffected by the changes in
volume of output. Whereas variable costs vary directly with the volume of output and semi
variable as the name implies are partly fixed and partly variable. Cost accountants of the modern
era fully support variable costing for the purpose of cost accounting, listing its merits as follows:
Variable costing talks about contribution margin, which is the excess of sales over
variable costs. If this is going to be high, sufficient to cover the fixed costs, then profit is
assured for the firm. It is a key factor to determine the percentage of profit.
Variable costing assigns only those costs to a product that varies directly with the
changing levels of production, which is helpful in making a distinction of profit made
from sales and those resulting from changes in production and inventory.
Segregating the costs into fixed and variable is done for the purpose of providing
information to reflect cost-volume-profit relationships and to facilitate management
decision making and control
Flexible budgeting and cost control are possible by variable costing technique and the striking
feature is the treatment given to fixed costs, where it is treated as a period cost and not
17
apportioned among all the departments and products that enable the firm to understand the
movement of profits in the same direction as that of the sales. Although considered to be a
controversial technique and weighed against the conventional methods of costing such as
absorption costing, it is believed that it is to stay and exist as the next step in the evolutionary
method of cost accounting (Pandey, 2004).
From the economics point of view, the firm’s primary objective in producing output is to
maximize profits. The production of output, however, involves certain costs that reduce the
profits a firm can make. The relationship between costs and profits is therefore critical to the
firm’s determination of how much output to produce.
Explicit and implicit costs, a firm’s explicit costs comprise all explicit payments to the factors of
production the firm uses. Wages paid to workers, payments to suppliers of raw materials, and
fees paid to bankers and lawyers are all included among the firm’s explicit using the firm’s own
resources costs (Mutenyo and Birungi, 2007).
A firm’s implicit costs consist of the opportunity costs of without receiving any explicit
compensation for those resources. For example, a firm that uses its own building for production
purposes forgoes the income that it might receive from renting the building out. As another
example, consider the owner of a firm who works along with his employees but does not draw a
salary; the owner forgoes the opportunity to earn a wage working for someone else. These
implicit costs are not regarded as costs in an accounting sense, but they are a part of the firm’s
18
costs of doing business, nevertheless. When economists discuss costs, they have in mind both
explicit and implicit costs (Mutenyo and Birungi, 2007).
Accounting profits, economic profits, and normal profits. The difference between explicit and
implicit costs is crucial to understanding the difference between accounting profits and economic
profits. Accounting profits are the firm’s total revenues from sales of its output, minus the firm’s
explicit costs. Economic profits are total revenues minus explicit and implicit costs.
Alternatively, stated economic profits are accounting profits minus implicit costs. Thus, the
difference between economic profits and accounting profits is that economic profits include the
firm’s implicit costs and accounting profits do not (Nkudabanyaga, 2004).
A firm is said to make normal profits when its economic profits are zero. The fact that economic
profits are zero implies that the firm’s reserves are enough to cover the firm’s explicit costs and
all of its implicit costs, such as the rent that could be earned on the firm’s building or the salary
the owner of the firm could earn elsewhere. These implicit costs add up to the profits the firm
would normally receive if it were properly compensated for the use of its own resources hence
the name, normal profits (Mutenyo and Birungi, 2007).
Fixed and variable costs, in the short-run, some of the input factors the firm uses in production
are fixed. The costs of these fixed factors are the firm’s fixed costs. The firm’s fixed costs do not
vary with increases in the firm’s output (Randall, 2001). The firm also employs a number of
variable factors of production. The costs of these variable factors of production are the firm’s
variable costs. In order to increase output, the firm must increase the number of variable factors
19
of production that it employs. Therefore, as firm output increases, the firm’s variable costs must
also increase (Randall, 2001).
A total and marginal cost, the firm’s total cost of production is the sum of all its variable and
fixed costs. The firm’s marginal cost is the per unit change in total cost that results from a
change in total product. The concepts of total and marginal cost are illustrated in table 1. The
sixth column of this table reports the firm’s total costs, which are simply the sum of its variable
and fixed costs. The seventh column reports the marginal cost associated with different levels of
output (Mutenyo and Birungi, 2007).
Marginal cost and marginal product, the fir’s marginal cost is related to its marginal product. If
one calculates the change in total cost for each different level of total product reported and
divides by the corresponding marginal product of labour reported, one arrives at the marginal
cost figure. The marginal cost falls at first, then starts to rise. This behavior is a consequence of
the relationship between marginal cost and marginal product and the law of diminishing returns.
As the marginal product of the variable input-labour-rises, the firm’s total product increases at a
rate that is greater than the rate of new workers hired. Consequently, the firm’s marginal costs
will be decreasing. Eventually, however, by the law of diminishing returns, the marginal product
of the variable factor will begin to decline; the firm’s total product will increase at a rate less
than the rate at which new workers are hired. The result is that the firm’s marginal costs will
begin rising (David, 2005).
20
Scholars like Karl (1997), Kahara (1998), Bhats (2000), Nkundabanyanga (2004) present other
factors that may determine the firm’s profitability and these have been presented below as
follows.
The degree of competition a firm faces is important if a firm has monopoly power then it has
little competition, therefore demand will be more inelastic. This enables the firm to increase
profits by increasing the price. However, government regulation may prevent monopolies
abusing their power (Bhats, 2000).
If the market is very competitive then profit will be low. This is because consumers would only
buy from the cheapest firms. Also important is the idea of contestability. This is how easy it is
for new firms to enter the market. If entry is easy, then firms will always face threat of
competition, even if it is just “hit and run competition”, this will reduce profits. Firms may seek
to create barriers to entry. The most common is creating brand loyalty through advertising
(Nkundabanyanga, 2004).
The strength of demand is very important for example, demand will be high if the product is
fashionable, e.g. mobile phone companies have been very profitable. However, in recent months
profits for mobile phone companies have fallen because the high profit encouraged over supply.
Products, which have falling demand like perishables, will lead to low profit for the company
(Kahara, 1998).
21
A successful advertising campaign can increase demand and make the product more inelastic;
however, the increased revenue will need to cover the costs of the advertising. Sometimes the
best methods are word of mouth.
Substitutes, if there are many substitutes or substitutes are expensive then demand for the
product will be higher. Similarly, complementary goods will be important for the profits of a
company.
The other aspect of profitability is the degree of costs. An increase in costs will decrease profits,
this could include labour costs, raw material costs and cost of rent. For example a devaluation of
the exchange rate would increase cost of imports therefore companies who imported raw
materials would face an increase in costs. Alternatively, if the firm is able to increase
productivity by improving technology then profits should increase. If a firm imports raw
materials, the exchange rate will be important yet depreciation makes imports more expensive.
However, depreciation of the exchange rate is good for exporters who will become more
competitive.
A firm with high fixed costs will need to produce a lot to benefit from economies of scale and
produce on the minimum efficient scale, otherwise average costs will be too high. For example
in the steel industry, we have seen a lot of rationalization where medium sized firms have lost
their competitiveness and had to merger with others (David, 2005).
2.3 Relationship between inventory control and profitability
Excessive inventories are the enemy of retail profitability. For inventory to be an effective
profitability tool, corporate culture must ensure that employees are empowered to make it
22
successful (Alde & Greg, 2002). Because inventory depends heavily on sales, a firm should have
inventory at hand to make sales and hence profits (Musomeno, 2001).
Drury (1995) says that inventory control ensures quality products, avoids delays, contributes to
meeting, deadlines and finally contributes to profits. Misstating physical inventory will misstate
the amount of inventory shrinkage, which will in turn mistake the cost of items sold, and as a
result therefore, gross profit, net income, retained earnings and stockholders equity will be
misstated.
Ballou (2000) states that inventory control is an important tool of financial control, which is
often, neglected not knowing that a small percentage saving on costs will represent millions of
dollars on national scale. Further inventory control is associated with costs such as ordering,
carrying costs and stock out costs, these reduce the level of profits if not monitored closely. The
writer notes that a manager is faced with a need to drive down costs associated with inventories.
This will lead to improved delivery performance decreased stock outs and earning cost. This will
eventually improve on the firm’s profitability.
According to Lynch (2005), the main objective of inventory control is to minimize the total cost
of relevant costs to ensure profitable operations. Because of the value attributed to inventory
control, two cardinal decisions must be faced if inventory control system is to ensure profitable
operations, and these are: how much to buy at a time and when to buy.
23
According to Pandey (2005), in many cases where inventory management decisions have been
effective, inventory planning models have been developed and implemented focusing especially
on two problems of inventory size and timing. Usually, inventory control models are designed to
achieve a balance between cost of acquiring and holding inventory. These costs are the ones that
affect profitability of a firm (Kahuru, 2001). These models are developed in order to help
management maintain inventories at optimal levels that will help organizations realize profits.
2.3.1 Relationship between economic order quantity and profitability
According to Horngren (2000), economic order quantity is the quantity of inventory that should
be ordered at once, it affects inventory ordering and holding cost and will ultimately have a
bearing on profitability. For example, a few large orders are placed, annual ordering costs will be
low but annual holding costs will be high, however it is worth noting that large purchases attract
huge discounts which will compensate the much lost in holding costs.
On the other hand, if many small orders are place over all ordering costs will be high but annual
holding costs will be low. To be profitable, it is necessary to determine if increasing the order
size to obtain large value discount and slightly lowering costs will be more offset at a higher
holding cost. Profitability will thus only be achieved at optimum level of relevant cost that is
holding costs and ordering costs.
2.3.2 Relationship between re-order point and profitability
According to Lynch (2005), re-order point is the level at which an order for additional inventory
should be placed. Because inventory cannot be ordered and received instantly, orders for
24
additional inventories should be placed before current stocks are depleted. The reorder point
must consider both the lead time as required to replenish stocks after an order is placed and
inventory demand during the lead time.
Lyson (2000) further observed that because of the variation in lead time and the daily demand for
inventory, inventories are a cushion to prevent stock out and the resulting loss of sales. As
already noted above, stock out costs, include the extra costs of processing back orders and
opportunity cost of lost sales. While the opportunity of sales lost is frequently specified as the
selling price less the invoice price opportunity, costs are considered greater if dissatisfied
customers subsequently patronize other firms. In this case, the profitability of an organization
remains fragile if no proper control measures are considered.
2.4 Conclusion
The available literature suggested that inventory control has an influence on organizational
profitability. Further literature also suggested that profitability can only be guaranteed at an
optimum level of inventories. The scholars however indicated that it is not always easy to
determine the optimum level of inventories.
25
CHAPTER THREE
METHODOLOGY
3.0 Introduction
This chapter covers the research design, survey population, sampling, sampling methods, sample
size, sampling procedure, sampling design, sources of data, method of data collection, tools of
data collection, data collection procedures, data analysis tools and data presentation.
3.1 Research design
A combination of descriptive, analytical and cross sectional survey design was used and this
helped in collection of enough opinions from the respondents to achieve the objectives of the
study which are: find out the various inventory control techniques in place, inventory control
methods/systems in place, establishing factors that determine the level of profitability at Laborex
(U) Ltd and further establish a relationship between inventory control and the level of profits in
an organization. This helped the researcher in reaching an appropriate conclusion on the
relationship between inventory control as an independent variable and profitability as dependent
variable.
3.2 Sampling population
The study involved 5 respondents from the management level, 15 respondents who were the
principal medical representatives, 20 respondents from the sales department and 10 respondents
26
from the ware house (stores) who were expected to respond on behalf of the firm since the study
was using Laborex (U) Ltd the case study.
3.3 Sampling method
Purposive sampling method was used in such a way that respondents from Laborex were chosen
according to the departments they work with. This was because the method was convenient and
it enabled the researcher to collect the necessary data from the respondents. Convenience
sampling method was also used in order to arrive at respondents who were readily available. This
was in the interest of saving time and labour. Double sampling was also used especially on
respondents who appeared to have a clear insight of the problem and this involved asking
additional questions relating to the research problem. This was intended to add more value to the
findings.
3.4 Sampling size
The sample size was 50 respondents, which was an average of all the respondents used by other
researchers on different and other related topics.
3.5 Sampling procedure
Using purposive sampling method, the researcher selected 50 respondents from Laborex (U) Ltd.
These were selected carefully to reduce on the bias and enabled the generation of the findings.
The respondents were given a questionnaire to attempt a few questions relating to their business.
3.6 Sources of data
The sources of data were categorized into primary and secondary.
3.6.1 Primary source
27
Primary data was collected from respondents through questionnaires and face to face interviews
that helped in collecting data from those who were too busy to tick questionnaires.
28
3.6.2 Secondary source
The secondary data was collected from both internal and external sources; the internal sources
included data collected from the firm whereas the external sources included the internet,
journals, newspapers, magazines and textbooks.
3.7 Data collection procedures
The researcher obtained an introduction letter from the faculty, which she presented to the
concerned authority at Laborex (U) Ltd seeking to be authorized officially to use the firm as a
case study for the study.
The researcher then distributed the structure questionnaires to the respondents seeking for
answers to the questions in the questionnaires and the researcher found the questions easy since
they were open ended.
After obtaining the answers, the researcher used Social Package for Social Sciences (SPSS) to
interpret, analyze and present the findings to the supervisor for review.
3.8 Data collection tools
3.8.1 Questionnaires
The researcher designed structured questionnaires that helped her to gather information from
respondents. The questionnaires were self administered and the respondent was required to give
personal attitudes and information pertaining to the operations. A likert scale was used to
develop a questionnaire, where the respondents views were graded ranging from strongly agree,
agree, disagree and strongly disagree represented on the scale as SA, A, D and SD respectively.
29
3.9 Data analysis and processing
This involved sorting an arranging of the data into respective groups and tables using frequencies
and percentages to enable easy analysis. This also enabled the researcher to analyze responses
from the respondents to be analyzed using statistical package for social science (SPSS) to
establish the relationship between the two variables, and with the help of frequencies,
percentages, tables, graphs and pie charts the researcher was able to reach a conclusion of the
study.
3.10 Problems encountered
i. The researcher faced financial constraints. This was because the researcher was self
funded yet stationary, transportation, typesetting, information required are remarkably
expensive.
ii. The time allocated to the study was not enough to cover all the necessary ends of the
research needed by the researcher and the respondents.
iii. There was a problem of language barrier since some of the respondents were not
comfortable with some languages.
30
CHAPTER FOUR
DISCUSSION AND INTERPRETATION OF FINDINGS
4.1 Introduction
This chapter presents the results of the study according to research objectives. These findings
were obtained from both primary and secondary sources. They were presented and analyzed
using frequency tables and finally a relationship between the variables was established with the
aid of a computer program called Statistical Package for Social Scientists.
4.2 Findings from General Information
For the research to know about the characteristic of the sample that was used during this study,
background information in section one of the questionnaire was sought. The results are presented
below.
Table 1: Finding on sex of respondents
Sex Frequency Percent
Male 25 50.0
Female 25 50.0
Total 50 100.0
Source: primary data
31
Results in table 1 show that both genders where represented equally with a (50%). This implies
that Laborex (U) Ltd is gender sensitive through giving equal opportunity to both sexs.
Table 2: Education level
Level Frequency Percent
O’ Level 10 20.0
A’ Level 40 80.0
Total 50 100.0
Source: primary data
Results in table 2 indicate that the 80.0% of the respondents had an A level education while the
rest had O level education (20%), implying that most probably all employees at Laborex (U) Ltd
have gone to school and many reached higher education (A level). Thus able to provide
information that is reliable basing on the study.
Table 3: Response on professional qualification
Frequency Percent
Yes 35 70.0
No 15 30.0
Total 50 100.0
Source: primary data
Findings in table 3 indicate that most (70%) of Laborex (U) Ltd employees have professional
qualification. However, the 30% do not have professional qualification.
32
Table 4: Respondents’ qualifications
Qualification Frequency Percent
CIPS 5 16.7
ACCA 10 33.3
CPA (U) 10 33.3
Other 5 16.7
Total 30 100.0
Source: primary data
Results in table 4 indicate that, 33.3% of the respondents had a CPA(U) and ACCA qualification,
16.7% were qualified in CIPS while others (16.7%) had different qualifications. Majority had
CPA(U) and ACCA qualification, thus had adequate knowledge of the items in the question
concerning each variable under study.
4.3 Findings on objective one: To find out the various inventory control techniques in place
Objective one of this study aimed at finding out the various inventory control techniques in
place. To this effect, respondents were set questions to answer in a self administered
questionnaire and here below are the results.
33
Table 5: Results on just in time technique
N Minimum Maximum Mean Std.
Deviation
Your system is designed to enable JIT
inventory control technique
50 1.00 4.00 3.0000 1.01015
You have a small store since you apply
JIT
50 2.00 4.00 3.0000 .63888
Your suppliers produce and deliver
exactly what you need
50 1.00 3.00 2.1000 .54398
You maintain low inventory levels
because your vendors are reliable
40 2.00 4.00 3.1250 .60712
There is long-term relationship between
your organisation and the JIT vendors
50 1.00 4.00 2.5000 1.03510
Following the likert scale ranging from strongly agree to strongly disagree, the analysis in tbale 5
above revealed that respondents agreed that they maintain low inventory levels because their
vendors are reliable with a mean value of (3.1250). It was further found out that respondents
were not sure that their system is designed to enable JIT inventory control technique with a mean
value of (3.0000) and also having a small store since they apply JIT with mean of (3.0000).
However, respondents disagreed that there is long-term relationship between their organisation
and the JIT vendors with a mean (2.5000) and also suppliers produce and deliver exactly what
they need with a mean of (2.1000).
34
Table 6: Results on Economic Order Quantity
N Minimum Maximum Mean Std.
Deviation
You maintain low inventory levels
because your vendors are reliable
40 2.00 4.00 3.1250 .60712
You procure large amounts of items in
your inventory is certain and
continuous
50 1.00 2.00 1.6000 .49487
The demand for some items in your
inventory is certain and continuous
50 1.00 3.00 2.2000 .75593
The ordering and carrying costs are
known and fixed
45 1.00 4.00 2.7778 1.24113
The lead time is certain and you exactly
order the same quantity at every
purchase
50 2.00 4.00 3.0000 .90351
The analysis in table 6 revealed that respondents agreed that they maintain low inventory levels
because their vendors are reliable with a mean value of (3.1250). It was further found out that
respondents were not sure that the lead time is certain and they exactly order the same quantity at
every purchase with a mean value of (3.0000). However, respondents disagreed that the ordering
and carrying costs are known and fixed with a mean (2.7778) and also they procure large
amounts of items in their inventory is certain and continuous with a mean of (1.6000).
35
Table 7: Results on ABC Analysis
N Minimum Maximum Mean Std.
Deviation
You maintain different classes of items
in your inventory
50 1.00 3.00 1.2000 .60609
Fast moving items have larger stock
levels in your store
50 1.00 2.00 1.4000 .49487
You closely monitor items that are
critical to the operation and functioning
of the organization
50 1.00 3.00 1.7000 .64681
Purchase decisions depend on the
materiality and value of inventory items
45 1.00 2.00 1.4444 .50252
The ABC analysis is the most effective
inventory control technique any
company should adopt
50 1.00 4.00 2.9000 1.14731
In table 7 above, the analysis revealed that all respondents disagreed that they maintain different
classes of items in their inventory with a mean value of (2.9000), they closely monitor items that
are critical to the operation and functioning of the organization with a mean value of (1.7000)
and also they maintain different classes of items in their inventory with a mean value of (1.2000).
36
4.3 Findings on objective two: To establish factors that determines the level of profitability
at Laborex.
Objective two of this study aimed at establishing factors that determines the level of profitability
at Laborex. To this effect respondents were set questions to answer in a self administered
questions and here below results.
Table 8: Results on factors that determine profitability
N Minimum Maximum Mean Std.
Deviation
The company has been making profits
on a progressive level
50 1.00 4.00 2.3000 .78895
Costs have a big impact on the
company's balance sheet
50 1.00 3.00 2.0000 .63888
The company is able to meet its
expenses and liabilities
50 1.00 3.00 1.8000 .60609
The company is grossly affected by the
unstable foreign currency since it relies
heavily on imported products
40 1.00 3.00 1.6250 .70484
Political atmosphere has an effect on
business of the company
45 1.00 2.00 1.5556 .50252
37
Stiff competition has been a threat to
the company's sales revenue
45 1.00 3.00 2.1111 .57296
Following the likert scale ranging from strongly agree to strongly disagree, the analysis in table 8
revealed that respondents disagreed that the company has been making profits on a progressive
level with a mean value of (2.3000), costs have a big impact on the company's balance sheet with
a mean value of (2.0000), the company is able to meet its expenses and liabilities with a mean
value of (1.8000) and also political atmosphere having an effect on business of the company with
a mean value of (1.5556).
4.4 Findings on objective three: To establish a relationship between inventory control and
the level of profits in an organization.
For the researcher to establish the relationship above, Pearson correlation was used and findings
are presented in the table below.
Table 9: Correlation
Correlations
Inventory Control Techniques Profitability
Inventory Control Techniques Pearson Correlation 1 .553**
Sig. (2-tailed) .000
N 50 50
Profitability Pearson Correlation .553** 1
Sig. (2-tailed) .000
38
N 50 50
**. Correlation is significant at the 0.01 level (2-tailed).
There is a strong positive correlation between inventory control and the level of profits in an
organization (r = 0.553** P < 0.01). This implies that 55.3% is the contribution of inventory
control towards the level of profits in Laborex (U) Ltd. Other factors not considered in this study
contribute 44.7% to the level of profits. These findings are in line with studies by Lyson (2000)
who observed that because of the variation in lead time and the daily demand for inventory,
inventories are a cushion to prevent stock out and the resulting loss of sales. As already noted
above, stock out costs, include the extra costs of processing back orders and opportunity cost of
lost sales. While the opportunity of sales lost is frequently specified as the selling price less the
invoice price opportunity, costs are considered greater if dissatisfied customers subsequently
patronize other firms. In this case, the profitability of an organization remains fragile if no proper
control measures are considered.
39
CHAPTER FIVE
DISCUSSION, CONCLUSION AND RECOMMENDATION
5.1 Introduction
This chapter presents discussion, conclusion and recommendations according to research
objectives in chapter one and these included; to find out the various inventory control techniques
in place, to establish factors that determines the level of profitability at Laborex and to establish
a relationship between inventory control and the level of profits in an organization.
5.2 Discussion of research findings
5.2.1 To find out the various inventory control techniques in place
Results revealed that respondents were in disagreement that the control techniques in place were
adequate. These findings are accredited to the methods employed by the firm to establish,
maintain and control the levels of inventory techniques, that is, Two bin inventory system, ABC
Analysis/classification, Materials requirement planning (MRP), Economic Order Quantity
(EOQ) or Re-order quantity, Re-order level, Just in time (JIT) Techniques, Order cycling system
and Inventory turnover ratio. Findings are also commensurate with works of Pandey (2004) who
says the total cost of inventory is incentive to moderate changes in order and it may be
appropriate to say that there is an economic order range. If total costs do not change, then the
firm can change Economic Order Quantity within the same range without suffering significant
losses.
40
5.2.2 To establish factors that determines the level of profitability at Laborex
Results revealed that majority of the respondents were in disagreement that the level of
profitability at Laborex (U) Ltd was satisfactory. Findings concur with studies by Wood and
Sangster (2002) who observed that the cost of production and volume of sales are the
interdependent determinants of profit. The analysis of cost behavior in relation to the changing
volume of sales and its impact on profit is very important to determine the break even level of a
firm. The level at which total revenue equals total costs, is said to be the break even level of a
firm. The level at which total revue equals total costs, is said to be the break even level where
there is no-profit or no-loss. Sales beyond break-even volume bring in profits. Generally
production is preceded by the process of demand forecasting, to decide on the volume of
production, the produce of which will be absorbed by the market. Pricing and promotions come
at a later stage. Costing is done to predict the costs of production and resultant profit at various
levels of activity.
5.2.3 To establish a relationship between inventory control and the level of profits in an
organization
There was a strong positive correlation between inventory control and the level of profits in an
organization (r = 0.553** P < 0.01). This implies that 55.3% is the contribution of inventory
control towards the level of profits in Laborex (U) Ltd. Other factors not considered in this study
contribute 44.7% to the level of profits. These findings are in line with studies by Lyson (2000)
who observed that because of the variation in lead time and the daily demand for inventory,
inventories are a cushion to prevent stock out and the resulting loss of sales. As already noted
above, stock out costs, include the extra costs of processing back orders and opportunity cost of
41
lost sales. While the opportunity of sales lost is frequently specified as the selling price less the
invoice price opportunity, costs are considered greater if dissatisfied customers subsequently
patronize other firms. In this case, the profitability of an organization remains fragile if no proper
control measures are considered.
5.3 Conclusions
It was concluded that respondents were in disagreement that the control techniques in place were
adequate.
It was concluded that majority of the respondents were in disagreement that the level of
profitability at Laborex (U) Ltd was satisfactory.
It was concluded that there was a strong positive correlation between inventory control and the
level of profits in an organization (r = 0.553** P < 0.01). This implies that 55.3% is the
contribution of inventory control towards the level of profits in Laborex (U) Ltd.
5.4 Recommendations
It was recommended that management should adopt practical and adequate inventory control
techniques to establish, maintain and control the levels of inventory techniques.
It was recommended that management should ensure that it earn a return on investment in the
company through positive gains from an investment or business operation after subtracting for
all expenses.
42
It was recommended that management at Laborex (U) Ltd should adopt adequate inventory
control techniques so as to enhance the level of profits.
5.5 Areas for further research
The study did not exhaust all the dependent variables that influence profits thus the need for
other researchers to conduct an exhaustive study on variables here below:
5.5.1 Product quality and level of profits
5.5.2 Organizational learning and level of profits
5.5.3 Management style and level of profits
43
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Horngren (2000) Inventory Management Techniques
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46
APPENDIX 1
QUESTIONNAIRE
I am a student of Makerere University undertaking a Bachelor of Commerce degree. Currently I
am carrying out a research study on inventory control and profitability, a case study of Laborex
Uganda. Please spare me a few minutes to help me answer this questionnaire.
SECTION A: Demographic characteristics
1. Gender: Male Female
2. Level of Education: Primary O’ Level A’ level
University degree Other……………………..
3. Do you have any professional qualification?
Yes No
4. If yes which of the following qualifications do you have?
CIPS
ACCA
CPA (U)
Other (please specify)
In the following sections, SA- Strongly agree, A-Agree, D-Disagree and SD-Strongly disagree
47
SECTION B: Inventory control techniques
SA A D SD
1) The company employs the following techniques of inventory control
a) Just in time
i) Your system is designed to enable JIT inventory control
technique
ii) You have a small store since you apply JIT
iii) Your suppliers produce and deliver exactly what you need
iv) You maintain low inventory levels because your vendors are
reliable
v) There is a long-term relationship between your organization and
the JIT vendors
b) Economic Order Quantity
i) You maintain an established and known minimum order quantity
ii) You procure large amounts of items to reduce orders you make
per year
iii) The demand for some items in your inventory is certain and
continuous
iv) The ordering and carrying costs are known and fixed
v) The lead time is certain and you exactly order the same quantity
at every purchase
c) ABC Analysis
48
i) You maintain different classes of items in your inventory
ii) Fast moving items have larger stock levels in our store
iii) You closely monitor items that are critical to the operation and
functioning of the organization
iv) Purchase decisions depend on the materiality and value of
inventory items
v) The ABC analysis is the most effective inventory control
technique any company should adopt
SECTION C: Factors that determine profitability
SA A D SD
i) The company has been making profits on a progressive level
ii) Costs have a big impact on the company’s balance sheet
iii) The company is able to meet its expenses and liabilities
iv) The company is grossly affected by the unstable foreign since it
relies heavily on imported products
v) Political atmosphere has an effect on business of the company
vi) Stiff competition has been a threat to the company’s sales
revenue
49