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International Journal of Scientific and Research Publications, Volume 5, Issue 5, May 2015ISSN 2250-31531An Analysis of the Effects of Inventory Management onthe Performance of the Procurement Function of SugarManufacturing Companies in the Western Kenya SugarBeltCynthia Mito Mukopi1, Dr. Amuhaya Mike Iravo21Master of Science in Procurement and Logistics, Jomo Kenyatta University of Agriculture and Technology2Supervisor, Jomo Kenyatta University of Agriculture and TechnologyAbstract- The research project examined the effect of inventorymanagement on performance of the procurement function ofsugar manufacturing companies in the western sugar belt. Thefirst objective established the significance of a lean inventorysystem on the performance of the procurement function of sugarmanufacturing companies in the western sugar belt. The secondobjective found out how strategic supplier partnerships ininventory management affect the performance of theprocurement function of sugar manufacturing companies in thewestern sugar belt. The third objective investigated the effect ofinformation technology in inventory management on theperformance of the procurement function of sugar manufacturingcompanies in the western sugar belt. The fourth objectiveexamined the effect of the legal policies on inventorymanagement in the sugar industry on the performance of theprocurement function of sugar manufacturing companies in thewestern sugar belt. Descriptive research design, specifically asurvey study was employed in carrying out the research. Thetarget population of the study consisted of a sample ofprocurement personnel of Mumias Sugar Company, West KenyaSugar Company, Nzoia Sugar Company and Butali Sugar Millswhich was 30 procurement personnel out of the total targetpopulation that was 100 procurement personnel. The researchinstrument was structured questionnaires that were selfadministered to the respondents. Data was analyzed using SPSSand presented in tables and charts. The response rate was 87%.The ANOVA result for all variables indicated that there was ahighly significant relationship between the variables at F 2.727and P 0.000. This means that there is a strong relationshipbetween the four variables; lean inventory systems, strategicsupplier partnerships, information technology, legal policies andthe effect of inventory management on performance of theprocurement function of sugar manufacturing companies in thewestern sugar belt.Index Terms- Inventory management, Procurement Function,PerformanceI. INTRODUCTIONInventory management is a critical management issue formanufacturing companies. Inventories are vital to thesuccessful functioning of manufacturing organizations.According to Buffa and Sarin (2007) there are several reasons forkeeping inventory. Too much stock could result in funds beingtied down, increase in holding cost, deterioration of materials,obsolescence and theft. On the other hand, shortage of materialscan lead to interruption of products for sales; poor customerrelations and underutilized machines and equipments.Inventories may consist of raw materials, work-in-progress, spareparts/consumables, and finished goods. It is not necessary that acompany has all these inventory classes. But, whatever may be,the inventory items, need management as, generally, a substantialshare of an Organization’s funds is invested in them. Differentdepartments within the same organization adopt different attitudetowards inventory. For example, the sales department mightdesire large stock in reserve to meet virtually every demand thatcomes. The production department similarly would ask for stocksof materials so that the production system runs uninterrupted. Onthe other hand, the finance department would always argue for aminimum investment in stocks so that the funds could be usedelsewhere for other better purposes, (Vohra, 2008:427).Inventory represents an important decision variable at all stagesof product manufacturing, distribution and sales, in addition tobeing a major portion of total current assets of manyorganizations.The procurement function is responsible for managing thepurchasing activity for the company (Lysons, 2012). There aretwo types of purchasing or procurement departments: centralizedand decentralized. In a centralized model, all requests formaterials or goods are center to this department. In adecentralized model, individual departments can process theirown purchases. Regardless of the organizational model usedprocurement is subject to more scrutiny and review than anyother process. The use of company resources to purchase goodsand services must be based on adherence to specific policies andprocedures to reduce the chance of fraud and theft. The mainpurpose of the procurement function is to manage the processused for the purchase of goods and services by the organization.Inventory Management encompasses processes that ensureproduct availability while reducing investment costs (Krautter,2009; Schroeder, 2000). For most companies, there are twoforms of inventory: Physical and Logical. Physical inventoryincludes all the materials that are tangible and required tofabricate the final product (Toomey, 2000). On the other hand,examples of logical inventory are databases, inventory trackingwww.ijsrp.org
International Journal of Scientific and Research Publications, Volume 5, Issue 5, May 2015ISSN 2250-3153software, et al. Proper synchronization of these two inventories isessential for proper management of company assets. Inventorymanagement also involves identifying the most effective sourceof supply for each item in each stocking location. Forecastingand replenishment are also integral to inventory management.Koumanakos (2008) studied the effect of inventory managementon firm performance 1, 358 manufacturing firms operating inthree industrial sectors in Greece, food textiles and chemicalswere used in the study covering 2000 – 2002 period. Thefindings suggested that the higher the level of inventoriespreserved by a firm, the lower the rate of return. Agus and Noor(2006) did measure the perception of managers about the impactof inventory management practices on financial performance ofmanufacturing firms in Malaysia. However, circumstances inMalaysia could be different from those in Kenya.In the past, inventory management was not seen to benecessary. In fact excess inventories were considered asindication of wealth. Management by then considered overstocking beneficial. But today firms have started to embraceeffective inventory management (Susan & Michael, 2000).Managers, now more than ever before, need reliable andeffective inventory control in order to reduce costs and remaincompetitive (Closs,1989).According to Dobler and Burt (2006),inventory alone account for as much as 30% of the organizationinvested capital. It’s for this reason that the Government ofKenya through its Supplies manual (2007) instituted proceduresand techniques for the purpose of effective inventorymanagement.There are 3 sugar belts in Kenya, namely the Nyando, theWestern sugar belt and the South Nyanza sugar zone. Thewestern sugar belt occupies the western part of Kenya formerlythe western province of Kenya in the counties of Kakamega,Bungoma and Busia. The sugar manufacturing companies in theWestern Sugar belt are Mumias sugar company, West KenyaSugar Company, Nzoia Sugar Company and Butali Sugar Mills.Mumias Sugar Company Limited is the largest sugarmanufacturer in Kenya producing about 250, 000 metric tonnes(42%) of the estimated 600, 000 metric tonnes annual nationaloutput. The company maintains is located in the town ofMumias, in Kakamega County, near the sugar plantations.West Kenya Sugar Company Limited is the fastest growingsugar company in Kenya located in Shamberere along theKakamega –Webuye road in Kakamega County. West Kenya, thesecond largest sugar producer in the country after Mumias,crushes 3,000 metric tonnes of raw cane daily. Nzoia SugarCompany Limited is one of the key players in Kenya’s SugarIndustry. Nzoia Sugar Company is located in Bungoma County.The company serves over 67, 000 farmers in the larger Bungoma,Kakamega, Lugari and Malava Districts. Butali Sugar Companyis an ultra modern sugar factory sugar factory within the heart ofKakamega County in the Western part of Kenya. The company isset in a rural peasant community. Its major objective is topromote and represent the interests of sugarcane farmers withinthe Butali sugar zone in the larger Western sugar belt.A study on the effect of inventory management onperformance of the procurement function of sugar manufacturingcompanies cannot be overlooked. Problems of inventorymanagement and control in the procurement function have beenaround for a very long time. We usually think of stocks being2held by organizations to allow efficient and continuousoperations. Procurement managers are aware of the vital rolesinventory plays in the activities of the purchasing function inorganizations. Effective inventory management is essential in theoperation of any business (Bassin, 2014). It is therefore veryimportant for the procurement function in a company tosuccessfully manage their inventory and use all techniques thatthey see fit for their type of business. By doing this they canlower overhead costs and increase their customer satisfaction byhaving goods available when the customer demands them thusimproving the performance of their procurement function. BothPhysical and Logical inventory needs to be assessed andmanaged in a way in which the information is true and accurateso that there is no overstocking and minimal shortages arerealized. Good inventory management by the procurementfunction also means having accurate forecasting and accuratelytimed replenishments (Onwubolu & Dube, 2006). In mostcompanies, inventories represent up to 50% of the total productcost, the money entrusted on inventory, thereby affecting theperformance of the procurement function and the overallperformance of the company.Sugar manufacturing companies do not manage and controltheir inventory holding, resulting in under stocking of the canecausing the companies to stay off production and stock outs ofthe sugar thereby resulting to poor performance of theprocurement function. This therefore creates relationshipproblems between inventory management and the performanceof the procurement function. The inventories under study are theraw materials: cane and the finished goods: sugar. The aim ofthis study will be to establish the effect of inventory managementon the performance of the procurement function of sugarmanufacturing companies in the western sugar belt.The general objective of this study was to examine the effectof inventory management on the performance of the procurementfunction of sugar manufacturing companies in the western sugarbelt. The specific objectives were to establish the significance ofa lean inventory system on the performance of the procurementfunction of sugar manufacturing companies in the western sugarbelt, to find out how strategic supplier partnerships in inventorymanagement affects the performance of the procurement functionof sugar manufacturing companies in the western sugar belt, toinvestigate the effect of information technology in inventorymanagement on the performance of the procurement function ofsugar manufacturing companies in western sugar belt and toexamine the effect of the legal policies on inventory managementin the sugar industry on the performance of the procurementfunction of sugar manufacturing companies in the western sugarbelt.The findings of the study on the effect of inventorymanagement on the performance of the procurement function ofsugar manufacturing companies will be quite significant since itis hoped that it will provide sugar manufacturing companies witha better understanding of inventory management and itsrelationship to the performance of the procurement function.The findings will assist the management of sugarmanufacturing companies in Mumias, West Kenya, Nzoia andButali sugar mills in ensuring effective inventory management atall times as it will aid those entrusted with decision making toformulate strategies of combating the persistent problem ofwww.ijsrp.org
International Journal of Scientific and Research Publications, Volume 5, Issue 5, May 2015ISSN 2250-3153inventory control and better performance of the procurementfunction in the sugar manufacturing companies. Inventorymanagement will result to prudent utilization of resourcesresulting to improved services to the stakeholders by theprocurement function. This will improve the economy of thecountry and also improve the people’s standard of living. Theresearcher will not only fulfill the partial requirement for theaward of a degree of Masters of Science in Procurement andLogistics but will also serve as a basis for further research in thefield of inventory management in relation to the performance ofthe procurement function.The research focused on the effect of inventory managementon performance of the procurement function of sugarmanufacturing companies in the Western sugar belt. The studyinvolved procurement officers of Mumias Sugar Company, WestKenya Sugar Company, Nzoia Sugar Company and Butali SugarCompany.II. LITERATURE REVIEW2.1 Theoretical FrameworkThis will give an evaluation of the research by other scholarsand will help make logical sense of the relationship betweeninventory management and the performance of the procurementfunction in sugar manufacturing companies.2.1.1 Economic Order Quantity TheoryEconomic order quantity is the cost of inventory thatminimizes the total cost of inventory management. Dave Plasecki(2001) defines Economic Order Quantity as an accountingformula that determines the point at which the combination oforder costs and inventory costs are the least. Economic orderquantity is the number of units that a company should add toinventory with each order to minimize the total cost of inv
Problems of inventory management and control in the procurement function have been around for a very long time. We usually think of stocks being held by organizations to allow efficient and continuous operations. Procurement managers are aware of the vital roles inventory plays in the activities of the purchasing function in organizations. Effective inventory management is essential in the .
