AN ANALYSIS OF THE CONNECTION BETWEEN INVENTORY MANAGEMENT AND ORGANIZATIONAL PROFITABILITY IN CAMEROON
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AN EXAMINATION OF THE RELATIONSHIP BETWEEN INVENTORY MANAGEMENT AND ORGANIZATIONAL PROFITABILITY IN CAMEROON
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CHAPTER ONE
INTRODUCTION
Background of the study
Inventory is a vital component of current assets, making up around 60% of their total composition. Every organization needs inventory to operate efficiently, as it serves as the link between production and distribution. Being a key element of current assets, inventory falls under the domain of inventory management, which is a crucial aspect of working capital management. Inventories represent the largest portion of current assets held by a business and are essential for the smooth functioning of business operations. A substantial portion of many corporations’ total asset investments is directed towards commodity stocks (Ololade, 2018). As a result, it is expected that the efficiency of inventory management will influence both operational outcomes and the financial returns of shareholders. Industrial companies typically hold inventories that include finished products, semi-finished goods, and raw materials. The inventory of finished products acts as a buffer between production and sales, allowing the company to maintain stock levels that reduce the interdependence between purchasing, selling, and production activities. Assets intended for sale during the regular course of business also fall into this category. According to Aquilano in Williams (2019), reserves are a collection of specific items deemed crucial for any organization. Typically, these inventories make up 20% to 30% of a firm’s total investment and represent idle resources with monetary value. Vrat (2014) suggests that these strategies can be beneficial for a firm’s long-term profitability, either by mitigating the effects of industry inflation or by strengthening the firm’s competitive position in response to customer preferences and demand. Working capital management is closely tied to inventory management, as it directly influences both short-term solvency and profitability. Effective inventory management is essential for the seamless operation of a business. It not only aims to reduce the costs associated with holding excessive inventory but also strives to optimize the use of the company’s resources by ensuring an adequate supply of materials for the production process (Earl, 2019). Additionally, inventory management is vital for avoiding the allocation of redundant and unproductive funds. Strategic decisions in inventory management should help achieve a balance between excessive and insufficient inventory levels. By implementing efficient management practices, the inventory manager can improve operational performance and reduce working capital costs. Consequently, accurate inventory management plays a key role in aligning the firm’s risk exposure with its liquidity. According to Macey (2018), the goal of inventory management is to strike a balance between the benefits and costs of holding inventory. The decisions made by the inventory manager are influenced by the firm’s strategic objectives, aiming either to maximize profits or minimize costs while still meeting customer demands. This approach should position the organization within an optimal replenishment framework.
Baird (2021) explains that inventory management within an organization involves accurately identifying each individual stock item. The primary objective is to determine both the quantity and location of stocked products, whether within a single facility or across multiple points in a supply network. Effective inventory management is crucial for ensuring the continuous and planned flow of production, safeguarding against disruptions caused by material or product shortages. The ability of an organization to optimize its profits relies heavily on the implementation of efficient inventory management practices. Profit maximization depends on both minimizing costs and maximizing revenue (Baird, 2021). The efficient concept of maximization involves increasing revenue without requiring additional resource consumption. Inventory management plays a crucial role in ensuring that a company’s capital isn’t unnecessarily tied up in physical goods, which could otherwise create opportunities for fraud and theft. In other words, management aims to minimize stock losses that can occur during store operations. This makes inventory a vital factor in an organization’s profitability.
Fluctuations in inventory, such as unsold or overstocked items, can threaten a company’s survival. A shortage of critical inventory items can lead to production stoppages. Therefore, the effective management of inventory, often referred to as inventory management, is essential for the economic stability of the business (Aloza, 2020). Given that inventory constitutes a significant portion of a company’s total investment, the importance of effective inventory management cannot be overstated. Proper management of inventory is vital for ensuring the continued growth and profitability of the organization. The manner in which a company handles its inventory can be a determining factor in its overall success or failure. Ineffective inventory management can lead to stock shortages, which in turn may cause a decline in customer loyalty and goodwill. This erosion of trust and satisfaction can result in a noticeable decrease in the organization’s profitability, potentially jeopardizing its long-term viability. Therefore, conducting this study is of paramount importance, as it aims to address these critical issues and contribute to the development of strategies that ensure the efficient management of inventory within organizations.
1.2 Statement of the problem
Managers have a deep understanding of the vital roles that inventory plays in the smooth functioning of organizational operations. Because substantial funds are allocated to inventory, direct materials can constitute up to 50% of the total cost of production in many companies. As a result, this significant portion of costs has a profound impact on the organization’s overall profitability (Emile, 2019). However, there are instances when organizations fail to maintain proper control over their inventory levels. This lack of oversight can lead to insufficient stock, which, in turn, may prevent the organization from starting production as planned. Such disruptions can severely affect the efficiency and effectiveness of the organization, undermining its operational performance.
On the other hand, ineffective inventory management by executives can result in extended inventory conversion periods and increased costs associated with maintaining inventory. These issues can severely restrict the organization’s capacity to reinvest funds, ultimately leading to adverse effects on both profitability and liquidity. Many business failures have been attributed to management’s failure to adequately strategize and regulate inventory conversion periods and inventory levels, highlighting the critical importance of effective inventory management (Allwell, 2018).
In the context of Cameroon, there has been a notable lack of comprehensive research concerning inventory management practices within profit-driven organizations. This study seeks to address this gap by investigating the relationship between inventory management practices and organizational profitability specifically within the Cameroonian business environment.
1.3 Objectives of the Study
The primary objective of this study is to thoroughly investigate the relationship between inventory management and organizational profitability in Cameroon. To achieve this goal, the study aims to:
Evaluate the extent to which inventory management practices have a significant impact on the profitability of organizations operating in Cameroon.
Examine how various inventory management strategies and practices affect organizational profitability within the specific context of Cameroonian businesses.
Identify and analyze the various challenges and obstacles faced in inventory management and assess how these issues influence the profitability of organizations in Cameroon.
1.4 Research Questions
The study will seek to answer the following research questions in detail:
To what degree does inventory management influence the overall profitability of organizations operating in Cameroon? This question aims to determine the extent of the impact that effective or ineffective inventory management can have on financial outcomes for these businesses.
What are the specific effects of inventory management practices on the profitability of organizations within the unique context of Cameroon? This question focuses on understanding how different approaches to managing inventory can affect the financial performance of Cameroonian enterprises.
What are the various challenges and difficulties associated with inventory management that impact organizational profitability in Cameroon? This question aims to identify and analyze the obstacles faced by businesses in managing their inventory and how these challenges affect their profitability.
1.5 Research Hypothesis
The study will test the following null hypothesis:
Ho1: Inventory management does not have a significant impact on the profitability of organizations operating in Cameroon. In other words, it posits that changes or variations in inventory management practices will not lead to meaningful differences in the financial performance of these organizations within the Cameroonian context.
1.6 Significance of the study
This study will offer valuable insights to a range of stakeholders, including inventory managers, senior executives, competitors, suppliers, and customers. For inventory managers, the research will be particularly advantageous in identifying optimal stock replenishment levels and strategies. It will help them understand when it is appropriate to replenish inventory, when to hold off on restocking, and how to effectively manage inventory levels to maintain operational efficiency. By applying these findings, inventory managers can make more informed decisions about stock management, ultimately enhancing their ability to align inventory practices with organizational goals and market demands.
Additionally, senior management will gain insights from the study into how their high-level decisions and policies impact the firm’s operations and overall performance. Competitors will be able to understand the risks and returns associated with inventory control practices and techniques used by firms. Suppliers will learn how deficiencies in supplying necessary raw materials can affect the industry and the production of finished goods. Customers will acquire a clearer understanding of how their demand influences the profitability or potential losses of the company.
1.7 Scope of the study
The study seeks to thoroughly examine the relationship between inventory management practices and organizational profitability specifically within the context of Cameroon. It aims to empirically investigate the extent to which inventory management practices impact the financial performance of organizations operating in this region. The study will assess whether inventory management significantly affects organizational profitability and will also explore the various challenges associated with inventory management that could influence a company’s profitability.
This research will be conducted within the geographical and economic context of Cameroon, focusing on how inventory management practices play a role in the financial outcomes of Cameroonian businesses.
1.8 Limitation of the study
The researchers faced some challenges while conducting the study. A major limitation was the limited availability of literature on the topic, particularly concerning the relationship between inventory management and organizational profitability in Cameroon. This scarcity of resources resulted in increased financial costs and required a substantial amount of time to find relevant materials, literature, and information. Consequently, during the data collection process, the researchers decided to limit the sample size to only include residents of Cameroon due to these constraints. As a result, the findings of this study may not be suitable for generalizing to other regions within Cameroon. The specific context and limitations of this research may not extend beyond the geographic scope covered. Additionally, the researcher’s simultaneous engagement in other academic projects could potentially restrict the amount of focus and commitment devoted to this particular study. Despite these challenges, considerable efforts were made to address and minimize the impact of these constraints. The researcher took steps to ensure that the study was conducted thoroughly and with a high level of effectiveness, striving to achieve successful outcomes despite the limitations encountered.
1.9 Definition of terms
Inventory: This term refers to the collection of goods, materials, or products that a company has stored in its warehouse or storage facilities. It encompasses all items that are available for sale, use in production, or distribution, and includes raw materials, work-in-progress, and finished goods.
Inventory Techniques: These are systematic methods and strategies employed to manage, coordinate, and optimize the use of stock within an organization. Such techniques are designed to ensure that inventory is handled efficiently, with the aim of maintaining balance between supply and demand while minimizing excess stock and related costs.
Stock Control: This process involves a range of activities and practices focused on managing inventory levels to ensure that the quantities of raw materials, supplies, or finished products are adequate to meet customer demand and service requirements. It aims to maintain an optimal level of stock that supports effective operations and service delivery, all while keeping holding costs to a minimum.
Stock Holder: This term describes an individual or entity that owns or controls a specific type of stock. This can include wholesalers who possess large quantities of manufactured goods for distribution or resale, as well as retailers or other businesses that maintain inventory for their own operational needs.
Stock Level (Inventory Level): This refers to the quantity of inventory that is kept on hand to fulfill current and anticipated sales orders. It represents the amount of stock maintained to meet customer demands and ensure smooth operational processes, balancing between having enough inventory to avoid stockouts and not overstocking, which could lead to excess holding costs.
Stock Out: This term refers to a situation where a company has depleted its inventory of goods or materials. For example, this can involve costs related to renting storage space, paying a storekeeper’s wages, or maintaining stock records.
Profitability: This refers to the financial gains or returns that a company earns from its production activities. It represents the extent to which a firm is able to generate profit from its various stages of production.
Inventory Management: Inventory management is the process of overseeing and controlling a company’s inventory, including raw materials, components, and finished products. It involves activities such as ordering, storing, and utilizing inventory to ensure efficient operation and to meet production and sales needs.