Effective inventory management in small to medium-sized enterprises / by Charl Dumas
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We live in the age of the informed consumer creating a business climate of increasing competition, which implies that all companies need to be as efficient as possible at every level, and this includes inventory management. For many businesses, inventory is the largest asset on the balance sheet at any given time and therefore needs to be efficiently managed. A large amount of a company's costs can be attributed to the amount it invests in inventory and associated holding, transportation, and management costs; management of inventory is thus critical to an SME's profitability. Therefore, it is important to investigate the models for effective inventory management in SMEs. Inventory management entails more than simply the forecasting and replenishment of inventory; it also demands the management of inventory to optimise services and profit. The main objective of the study was to investigate the standard inventory theories and models used to help management in small to medium-sized enterprises in keeping costs down while still meeting customer service requirements. Organisational effectiveness was defined in terms of the effectiveness of the internal processes of an organisation. While accountants and senior managers tend to measure results of most, if not all, organisational activities in monetary terms, so it is no surprise that many organisations rely on financial measures such as ROI or ROA to measure effectiveness. However, effectiveness was defined as the ability to achieve stated inventory levels, judged in terms of financial measures like inventory turnover for this study. This study posits that the effectiveness of a given SME may be ascertained from the effectiveness of the inventory management decisions made by its management. Modern inventory management systems are based on well-recognised inventory models and even though the methods were developed many years ago they still perform well from a theoretical point of view. Inventory models like economic order quantity (EOQ), activity-based costing (ABC), analysis for inventory and just-in-time (JIT) that form the bases of modern inventory systems are still commonly used in the industry today. Modern inventory management systems like MRP/MRPII and ERP systems offer a complete inventory management system to SMEs, but despite the rapid development of ERP systems, little research can be found in evaluating the extent to which ERP could create a competitive advantage for SMEs. Safety inventory protects against inventory uncertainty by ensuring there are enough products available to maintain desired service levels. Based on this, safety inventory can be expressed as the quantity of inventory that has to be reserved in order to protect the system from random variables such as inventory-outs, which may occur as a result of either forecast errors or deviations from normal demand during average lead times. Supply chain management (SCM) is a set of approaches utilized to effectively incorporate suppliers, manufacturers, logistics, and consumers to place the right amount of inventory at the right places at the right time. Since inventories represent a significant investment by many businesses, the challenge, however, is to determine the lowest amount of inventory required to accomplish all of the service-level targets. Inventory costs are relevant to most liquidity, asset management and liability management ratios and only once a balance is found between service levels, costs of holding inventory and cost of manufacture, which, once achieved, will it lead to increased profitability. Inventory is a measure of both liquidity and in -service efficiency just like receivable turnover. These methods produce an overall level of inventory that senior management typically judges in terms of an inventory turnover ratio (annual sales / average inventory) or a total asset level. A literature study was conducted with the aid of a computer-based search, using the keywords identified, databases and search engines such as Google Search, Google Scholar, Business Source Premier, Emerald and EBSCO Host. The empirical research describes a process whereby data or facts on a specific issue were gathered and analysed. Both qualitative and quantitative research methods were employed to gather information from the defined population for this study. This study used a structured questionnaire as well as an open-ended and semi-structured interview with some of the population sample to collect empirical data. The sample tested consisted of 60 managers, owners or responsible persons for inventory management in small to medium enterprises in Gauteng, South Africa. The results of the questionnaires were submitted for statistical analyses at the Statistical Department of the North-West University. The results of the statistical analysis were interpreted by closer investigation of the correlations, cross tabulations and frequency analysis done with the aid of SSPS. After the statistical analysis the conclusion could be drawn that more than half of all questioned SMEs in the study were not effective in their inventory management and this is most probably the result of most respondents' lack of theoretical knowledge about inventory management theories. Furthermore, it was concluded that most small and medium businesses have experienced inventory shortages as a result of JIT ordering, but still chose not to hold safety inventories because of the cost associated with holding inventories. This also made them and their customers reliant on their suppliers' supply chain management for efficient service delivery. Furthermore, it was also found that ERP systems like SAP were too expensive to implement in small and very small businesses. Therefore, many small and medium businesses adopt the Pastel solution at a fraction of the price of the standard ERP systems to manage their inventories.
- ETD@Vaal Triangle Campus