Assessment of Inventory management in Textile Industry

( A case study of KK Textile Industry)

A research Report Submitted to Accounting department in

Partial Fulfillment of The Requirement For

B.A Degree in

Accounting.

Prepared by : Abdulkerim Bireda

Advisor : Mr. Muhammed Aragie

Department of Accounting
College of Business and Economics
Jimma University

May, 2012
Jimma, Ethiopia

Abstract
This research paper

tried to

assess inventory managements of KK textile

Industry. It addressed four basic research questions designed to assess

inventory management performance of the industry.

For this study the

researcher used both primary and secondary data, but much focused on in the
primary data in which more information could be obtained by conducting
unstructured interview and structure questionnaires.
Specifically the study tried to examine the industry inventory management in
appropriate way, to compare and contrast the actual practice of KK textile
industry inventory management with the theoretical aspects of inventory
management, and to determine the industry strength and weaknesses with
regarding to inventory management system. Accordingly, the study will have a
relevance

at least for the organization to identify problems and strengths

related to its inventory management and practice, to look as any opportunity

and treat and in turn to have a good inventory management and practice.
The interpretation focus on the result of prevalent data under consideration.
Relevant recommendation that helps the industry to redesign the current
system and other areas the industry should give specials attention will be
made.

Acknowledgement

In the first and the most great would like thanks for my Allah, he give the
persistence of to accomplish this paper.
Next, I would like to express out appreciation and indebtedness to my advisor
Muhammed Aragie, who contribute to me necessary information as well as
giving advise to done this paper. And also, I would like thanks Jimma
university especially college of Business and Economics for designing this
program through that students develop their knowledge.

Finally, I would like to sincere thanks the employees of KK textile Industry, who
were willing to respond to my interview and thanks for my friends and my
family who helped me done this paper.

Content

IITable of

Abstract ------------------------------------------------------------------------------ I
Acknowledgement ------------------------------------------------------------------ II
Table of content -------------------------------------------------------------------- III
Chapter One : Introduction
1.1.
1.2.
1.3.
1.4.

1.5.
1.6.
1.7.
1.8.
1.9.

Background of the study --------------------------------------------------- 1

Background of the organization ------------------------------------------- 2
Statement of the problem -------------------------------------------------- 4
Objective of the study -------------------------------------------------------5
1.4.1. General objective ---------------------------------------------------- 5
1.4.2. Specific Objective ---------------------------------------------------- 5
Research Question ---------------------------------------------------------- 5
Significance of the study --------------------------------------------------- 6
Scope of the study -----------------------------------------------------------6
Limitation of the study ----------------------------------------------------- 6
Structure of the study ------------------------------------------------------ 7

Chapter two : Literature Review

2.1. Definition of inventory management -------------------------------------8
2.2. Nature of inventories --------------------------------------------------------9
2.3. Why inventory hold by organizations --------------------------------------9
2.4. Type of inventory ----------------------------------------------------------- 10
2.5. Requirement for effective inventor management ----------------------- 11
2.6. Inventory management techniques --------------------------------------- 12
2.7. Inventory control procedures ---------------------------------------------- 16

III

Chapter Three : Research Methodology & Design

3.1. Data type -------------------------------------------------------------------- 19
3.2. Subject of the study
---------------------------------------------------- 19
3.3. Source of data Collection -------------------------------------------------- 19

3.4.
3.5.
3.6.
3.7.
3.8.

Method of data collection ------------------------------------------------- 19

Sample size ----------------------------------------------------------------- 20
Sampling technique -------------------------------------------------------- 20
Data processing and Analyzing ------------------------------------------- 20
Method of presenting the out come ---------------------------------------21

Chapter Four : Data presentation , Analysis and Interpretation

4.1. Respondents personal information ----------------------------------------- 22
4.2. Nature of inventory management of the organization ------------------- 24
4.3. The Policies and procedures of inventory management ---------------- 25
4.4. Inventory control system ----------------------------------------------------- 27
4.5. Inventory management techniques of the organization ----------------- 29
4.6. Five years data of inventory activity --------------------------------------- 31
Chapter Five: Summary, Conclusion and Recommendation
5.1. Summary of Findings -------------------------------------------------------- 34
5.2. Conclusion --------------------------------------------------------------------- 35
5.3. Recommendation -------------------------------------------------------------- 37
Reference ----------------------------------------------------------------------- 39
Appendix ---------------------------------------------------------------------- 40

IV

Chapter One : Introduction

1.1. Background of the study
Inventory consists of the most important element of any system dealing with
the supply, manufacture and distribution of goods and service. The concept of
inventory management is very old but it came in light when harrie F.W,
published his work on classical order size model and the work was extended by
raymend F.F (1991) and Wilson R.M (1934). But only after the second world

war with the development of operational research and computer technology

that the theoretical concepts got a practical application.
Holding inventory is often interpreted as carrying an asset, but also means
carrying risk in terms of obsolescence deterioration axed quality faults in
financial terms inventory impacts the balance sheet, cash flow, profit and loss
account. Operationally inventory affects production efficiency and on time
delivery (coldratte, 1999) identifies inventory a key component for measuring
business performance in manufacturing environment. Thus good management
of inventory, essential to achieving business objective and building competitive
advantage. Inventory management refers to the events or activities that affect
inventory during the process of trans transferring in put resources and
material to put goods. Achieving inventory management is a precursor to
inventory management which is concerned with the means used to balance
inflicting organizational objectives on the over all level of stock held to
determine optimum inventory level for each (Dabbker, 1982).

1.2.

Background of the organization

KK private limited company was established in 1992 by Mr, Ketema Kebede, a

pioneer in the economic policy of Derge Regime debilitated. In view of the in
adequate of its initial assets the company adopted for the short term a strategy
of engaging in the business that requires minimum resources both in cash and
in kind. It merely stated as distribution of imparted and locally manufactured
textile products, as well as an exporter of agricultural commodities.

Simultaneously, it sought to promote its business connections and diversify its

operations to improve its financial and human resources. After two years in the
business, the company was able to register a definite sign of growth. It leased
and completely furnished a two room office space, employed one qualified
secretary and two salesmen.
The company principles are credo, charter, vision and mission is based on
long- lasting core values and clear strategic framework. The company strategy
builds up on this strong foundation with a focus on continued successful
development of the company. All these principles set district standards of
behavior and provide a high degree of transparency, therefore giving life to the
spirit of private limited company.
The company vision aspire to see the KK private limited company attained a
significant position in the regional and international trading house, in
supplying and rendering a wide range of commodities and services respectively,
and there by, gain a strong presence in the world wide business area. We will
earn our customers enthusiasm

through contionus improvement driven by

the integrity, team work and innovation of KK private limited company people.
The mission of the company is together with our customers and partners, we
develop, manufacture, supply and render commodities and services which
acquire, transmit, control and record precess information enabling our
customer to operate and manage processes in a safe reliable economical
profitable and environmentally responsible manner.
The company mainly purchase its raw materials and other trading items for its
textile factories from well known suppliers in Korea, Indonesia, and Chaina.
Chemicals and other dyestuffs are acquired from European countries like

Germany,

Switzerland,

Spain,

and

Belgium.

The

company

sales

and

distributions are composed of five sales shops within the capital, Addis Ababa,
two branch offices in Shashemene, Dessie, three big ware houses, about ten
delivery trucks and competent personnel and more than 100 well known
distributors through out the nation.
One of the most produce in KK private limited company blankets these item the
major institutional buyers are ministry of defense, federal polices and Addis
Ababa police, Ethiopian red cross, Oxfam, trade union, associations and other
regional offices. The company of facilitate its business activity and fulfill its
working capital requirement has relation ship with the well known financier of
Ethiopia, these are commercial bank of Ethiopia, Abyssinia bank, Awash
international bank and united bank.
The management and organizational structure of KK private limited company
has been characterized by several district trends interms of its organizational
evaluation. As most of the private business companies KK private limited
company used to be managed by the far-signted and visionary owner Mr.
Ketema Kebede. But due to the increase in the volume of business transaction
and the size of workable, the need to compete with huge local and forign
multinational business company it came to believe that it is necessary to have
well-organized and staffed organizational structure.

1.3. Statement of the problem

As the researcher browse the website related to inventory management, hold
the following facts that necessitate for this study to be conducted which has a
research topic of assessment of inventory management in textile industry,
particularly KK textile industry. In the first place inventory management is the
process of tracking product orders keeping adequate amount of products on
hand and organizing products in warehouse and retail location. And also
inventory management is the active control program which allows the
management

of

sales,

purchases

and

payments

with

good

inventory

management, companies are able to monitor what shipments they have coming
in and going out to customer, allowing them to keep just enough inventory in
stock to meet demand.
Then inventory management lets companies enjoy many benfits which include
achieving inventory balance, using resource wisely, cutting costs, saving time
and becoming more effient and planning a head for seasonal changes in
demand.
According to these evidence this study is emphasize on how KK textile industry
performs the activity to come up with a good result along with attaining the
main objective of the industry.

1.4.

Objective of the study

1.4.1. General Objective

The main objective of the study is to assess the inventory management of KK
textile industry.
1.4.2. Specific Objectives
- To examine the industry inventory management in appropriate way.
- To compare and contrast the actual practice of KK textile industry
inventory

management

with

the

theoretical

aspects

of

inventory

management.
To determine the industry strength and weaknesses with regarding to

inventory management .
To give some constructive suggestions and recommendation based on the
fact of the study.

1.5.

Research questions

1. Does the industry manage its inventory in appropriate way?

2. Does

the

industry

inventory

management

policy,

procedure

and

techniques are to maintain the optimum level?

3. Does the industry very carful to buy the right items, at the right price
and in the right quantity?
4. Does the industry interrelated

theoretical

aspects

of

inventory

management with the actual practice of inventory management?

1.6. Significance of the study

The researcher has an expectation, the study will provide a clear picture
about the value or importance of inventory management in

KK textile

industry and to identify problem concerning inventory management. It is

believed that the study was clearly reflect, what to see any opportunities to
utilize, to give relevant recommendation, suggestion and solution that help top
management as well as the organization to make good decision concerning
about inventory management and help in designing a better systematic form
for inventory management system. In addition, to give an overview of the
factory use of inventory management industry to external bodies.

1.7. Scope of the study

Since the main objective of the study is the assessment of inventory
management in textile industry

particularly, KK textile industry, the study

delimited

department,

to

examining

store

production

department

and

purchasing department of the industry in order to investigate the issue

indeapth and to make the study manageable.

1.8. Limitation of the study

The research face a problem of time to collect all necessary data from
employees of the industry and some respondents are involuntary to give
available information. In addition, the employer is involuntary to tell the real
information regarding the inventory management of the organization.

1.9. Structure of the study

The study was arranged in four chapters. The first chapter deals with the
introductory part mainly about back ground of the study, background of the
organization, statement of the problem, objective of the study, significance of
the study, scope of the study and limitation of the study. The second chapter
concerned with related literature review describes the detail theoretical aspect
of the study.The third chapter deals with data collection methods and
methodology and the fourth chapter provide data presentation, analysation and
interpretation. Finally, the last chapter provide
recommendations.

summary, conclusion and

Chapter Two: Literature Review

Literature review means locating literature in variety of sources reading it
carefully and thoroughly organizing it information themes along with the line of
investigation. These purpose is literature review to establish a familiarity with a
body of knowledge and establishes credibility. A review tells a reader that
researcher knows the research in an area and knows the major issue and also
to show the path of prior research and how a current project is linked to it. So
the review shows application of inventory management which is given the
information for use in conducting the textile industry about inventory
management and out lays in accordance with accounting principle.
2.1. Definition of Inventory Management
The word inventory has been defined in many ways. Generally three definitions
have been chosen which to be more appropriate to the topic developed in this
study.
Inventory are stock of raw materials, work in process and finished good. That
appear at numberous points throughout a firms production and logistic
channel (Ballsu 2004, p.326). According to chase Jocobs and Aquilando (2004,
p.545) inventory is the stock of any item or resource used in an organization.
Where as Mosich (1988 p.396) inventory is can be defined as the amount of
raw materials, finidhed goods and work in process to be stocked for the smooth
running of a plants operation. So a manufacture company will hold stocks as
the adequate amount of material resource in a transformation system. Many

authors have defined the word management in different ways. Plunket and
Ather 1986 defined management as the process of setting and achieving goals
through the execution of five basic management functions (Planning,
organizing, staffing, directing and controlling that utilize human, Financial and
material resource. Therefore, inventory management is the process of tracking
product orders keeping adequate amount of products on hand and organizing
products in Warehouse and retail location. And also inventory management is
the active control program which allows the management of sales, purchases
and payments.
2.2. Nature of inventories
Inventories consists of good held for sale to customers, partially completed
goods, and material and supplies to be used in production. Inventory items are
acquired and sold continuing by a merchandising enterprise or acquired,
placed in production, converted to a finished product, and sold by a
manufacturing enterprise. The sale of merchandise or finished products is the
primary source of revenue for most non service business enterprises (Mosich
1988 p.397).
2.3. Why inventory hold by Organizations
Particularly stevenson (1999 p.77) the reason for hold inventories are discussed
in detail in the following paragraphs.
First, inventory helps to project against stock outs, delayed delivers and
expected increase in the risk of shortages lays can occurs because of weather
conditions, supplies stock outs, delivers of wrong materials, quality problem
and soon. The risk of shortage can be reduce by holding safety stock which are

stocks in excess of average demand to compensate for variability in demand

and lead time.
Second, to decuple perations, historically manufacturing firms have used
inventories as buffers between successive operation to maintain continuity of
production that would other wise distributed by events such as breakdown of
equipment and accidents

that cause apportion at operation to shutdown of

temporarily. The problem is resolved, firms have used buffers from supplies
and finished goods inventory to buffer sale operation from manufacturing
descriptions more recently, company have taken a closer book at buffer
inventories recognizing the

cost and spaces they require and realizing that

finding and eliminating sources of description can greatly decreased the need
for decoupling operations.
Third, it also helps to smooth product requirements in a firm may experience
seasonal patterns in demand often build up inventories during at seasonal
periods to meets very high requirement during certain period.
2.4. Type of Inventory
Regarding types of inventory different literatures provide different description
of inventory type based on their own task objective. However, for this study the
researcher favour the inventory type provided by Stock and Manbert (2001, p
232-235)
Cycle stock is inventory that results from the replenishment process and is
required in order to meet demand under condition of certainty that is when the
firm can predict demand and rends times almost perfectly.

Inventories in transit are items that are in routs from one location to other.
They may be considered parts of cycle stock even through they are not
shipment until after they arrive at the destination.
Safety or buffer stock is held in excess of cycle stock because of uncertainty in
demand or lead time. The notation is that a portion inventory should be
devoted to cover short range variation in demand and lend time.
Seasonal stock is a form of respective stock that involve that accumulation of
inventory before a reason begins in order to maintain as table labour force and
stable in runs or in the case of agricultural products, inventory accumulated
as the result of a growing season that limits availability through out the years.
Dead stock is inventories that no one want at least immediately. The question is
why any organization would incur the costs associated with holding these item
rather than simply disposing of them. One reason might be that management
expected demand to resume at some point in the future.
2.5. Requirement for effective inventory management
Regarding

requirements

for

effective

inventory

management

different

literatures describe in different ways based on their own task objective, but for
this study the researcher favor particularly Stephenson (1999, p.561-562)
describe in his book about requirements for effective inventory management in
to four distinct mechanisms that are:2.5.1. Inventory count (keep track) the inventory
This mechanisms to control the inventory, physical count has to be conducted.
This count enables to the manager to determine the quantity on hand. Then

the manager estimate how much will be demand period prior to the next
delivery periods and bases the order quantity on that information.
2.5.2. Demand for cast and lead time information
Inventories are used to satisfy demand requirement. So, it is essential to have
reliable estimate of the amount and timing of demand. Similarly, it is essential
to know how long it will take for order to be diverse. In addition, manager need
to know the extend to which demand and lead time (the time between
submitting and order & receiving it might vary the greater the potential
variability the great or the need for additional stock to reduce the risk of
shortage between delivers. Thus, there is critical link between forecasting and
inventory management.
2.5.3. Cost information holding inventories
Invites three basic cost holding transaction

ordering and shortage costs

holding or carrying costs relates to physically having items in shortage costs.

2.5.4. Ordering cost
Are the cost of ordering and receiving inventory they are the cost that vary with
the actual placement on order. These includes determining how much is
needed, preparing invoices, shipping costs, inspecting goods up on arrival for
quality and quantity and motive goods to temporary storage ordering cost are
generally expressed as fixed dollar amount per order regardless of order size
shortage costs result when demand exceed the supply of inventory on hand.
2.6. Inventory management Techniques

Different literatures provide different description of inventory management

techniques based on their own task objective. However, for this study the
researcher favor the inventory management techniques provided by J.Gitman
(1997, p.797-802).
2.6.1 Economic order quantity
One of the major inventory managements problem to be resolved is how much
inventory should be added when inventory replaced, if the firm is buying raw
material. It has to decide lost in which it has to be purchased on replacement.
If the firm planning a production run the issue is how much production to
schedule (how much to make) these problems are called order quantity
problems. And the task of the firm is to determine the optimum or economic
order quantity (or economic /of size) determining on optimum inventory low
involve two types of costs. i.e ordering cost and caring cost.
Economic order quantity is that inventory level that minimize the toal ordering
and caring cost.
Economic order quantity is that inventory level that minimize the total ordering
cost and caring (holding) cost. Ordering cost increase with the number of
orders thus the more frequently inventory, on other hand it the firm maintain
large inventory levels there will be few orders placed and ordering cost will be
relatively small thus ordering costs decrease with increasing size of inventory.
Caring cost vary with inventory size. This behavior is control to that of ordering
costs which decline with increase in inventory size, the economic size of
inventory would thus depend on trade off between caring costs and ordering
costs.

Economic order quantity =

0 where C= Caring cost

C

O= ordering cost

Thus the formula to determine the recording point when safety stock is
maintained as follows:
Reorder point = lead x average usage safety stock

2.6.2. Stock level

Is one of material cost management techniques. In order to saved over stocking
or under stocking most of the larger companies adapt scientific approach of
fixing stock level. Under stock is when the material in stock is below the
required amount over stocking is when excess materials are held in store by the
business organization. Therefore each item of materials should be kept with in
the appropriate level of materials by fixing stock level. The stock level are re
order level, minimum level, maximum level and economic order quantity or re
order quantity.
Maximum level is the material at the lowest rate of consumption which could
be expected, if delivery was received in shortest possible time.
The additional of the reorder quality shows the highest point of material which
would be allowed the formula that determine maximum level is as follows.
Maximum level is as follows:
Maximum level = reorder +
Level

reorder =
quantity

minimum x minimum
consumption reorder

Reorder point is the problem how much to order is solves by descrmining the
economic order quantity. Yet the answer should be thought to the record
problem when to order. This is the problem of determining the reorder point.
The reorder point is that inventory level at which on order should be placed to
replenish the inventory. To determine the order point under certainty to be
should know lead time, average usage and economic order quantity.
Lead time is the normal takes in replenishing inventory after the order has
been placed by cersainty that means usage and lead time do not fluctuate
under such a situation reorder point is simply that inventory level which will
be:Reorder point:- Lead x average usage safety stock. It is difficult to redicate
usage and lead time accurately. The demand for materials may fluctuate from
day to day or from week to week. Similarly the actual delivery time may be
different the delivery problem of stock out. Some minimum or buffer inventory
as cushion against un expected increased and delayed on delivery time.
Record level is the level of materials at which purchase requisition is inittated
for fresh supplies this level is fixed by reordering when materials fail to the
minimum. The formula is :Minimum level = reorder Level

minimum
x
minimum
consumption
reorder period.

2.6.3. Proper storage

In the internal procedure for purchasing materials are matched by similar
procedures for storing and issuing material in order to safeguard the

investment. The procedure include storage and ionsurance materials must be

carefully identified stored. Reordered and preserved by the store room clerk.
Material requision is prepared by the factory supervisor and indieates the
quantity job number description etc. when the materials are transferred fom
the store room.

2.6.4. Just in-time inventory control:The just-in-time inventory control is more just on inventory control system, it is
a production and management system. Not only is inventory cut down to
minimum, but the time and physical distance between the various production
operation are also reduced. In addition management is unwilling to trade off
costs to develop close relation ship with suppliers and promote speedy
replenishment of inventory in return for the ability to hold less safety stock
(pewon p. 728). The just in time inventory system depends on how well
companies manage in suppliers the

system

puts tremendous pressure on

suppliers. They will have to develop adequate system and procedures to

satisfactory meet the need of manufactures.
2.6.5. Out sourcing
A few years ago there was atendency on the part of many companies to
manufacture all components in house now more and more companies are
adopting the practice out sourcing.
Out sourcing is a system of giving attention to materials according to the
degree of their importance. It is not desirable take some degree of control on all
the items. The firm should pay maximum attention to those items whose value

is highest for this purpose the item will be dried in there catagories A,B and C
the higher value items are classified as A items and would be under the
highest control C item represent relatively least value and would be under
simple control B items fall in between these categories and require reasonable
attension of management. The A, B, C analysis can contracts on important
items and also known as control by importance and exception.
The following steps are involved in implementing the A,B,C analysis classify the
items of inventories determining the expected use in units and the price per
unit for each item.
1. Determine the total value of each item by multiplying the expexted units
by its units price.
2. Rank the item in according with the total value giving first rank to the
item, with highest total value.
3. Combine items on the basis of their relative value to form three
categories A, B, and C (impandey p. 633)
2.6.6. Inventory turnover
The inventory turn over ratio indicate the efficiency of the firm in producing
and selling its product. Its product calculated by:Inventory turnover = Cost of good sold
Average inventory

Generally a high inventory turnover is indicate of good inventory management.

If the absolute inventories have to be written off this will adversely affect the
working capital and liquidity position of the firm. A high inventory turn over
may be the result of over low level of inventory replacements are costly for the

firm thus to high and too low inventory turnover ratios should be investigated
further (impandey, p.123-125).
2.7. Inventory control procedures
One of the most effective of ensuring out investment in inventory under control
is to check all item inventory on regular basic once physical check has been
carried the result can to be compared with theoretical or book inventories any
discrepancies noted and acted on there are two chief method of inventory
checking (Willamson, 1998). These are discussed in detail in the following
subsection paragraph.

2.7.1. Perpetual inventory

Is concerned with the recording at they occur of inventory in either quantity or
quality and value. The item perpetual inventory usually refers to a system of
inventory monitor control rather than an inventory taking procedure with
prefectural inventory every item at inventory usually has it own stores ledger
card as any transaction affecting on item take place the store ledger card is up
dated wheather it be an issue or receipt or goods at any time there fore the
balance in inventory at the item is know and can simple be read from the
stores ledger card.
2.7.2. Periodic inventory
This is the process of counting valuing , selected item at different items on
routing basis. In this way every inventory item has an equal chance of being

checked at any time and in the long will be checked at least once run all item in
addition to the use of random numbers entering that all item are checked at
least once in accounting periods. In this way not only can the physical and the
theoretical balance be checked against each others , but also any discrepancies
can be corrected for after all investigation are carried out in to how they
occurred any discrepancies that arise must be reported and depict with
immediately, the more serious discrepancies may be a matter for a change of
policy or policy action. Annual inventory check it is a periodic inventory check
and is most usually carried out as part of the annual audit all items is most
usually carried out as part of the annual inventory checked carried at one time
because the annual inventory checked usually carried out at part at the
annual audit there will usually be an external auditors in attendance at
inventory check which insure that the results obtained are open to
independent security.
Analysis of investment in inventory it is a major responsibility of the finical
manager to over see the movement of inventory is an investment decision. The
analysis should therefore, involve an evaluation of the profitability of
investment decision. The goal of the inventory policy will maximize the firm
value at a point the inventory policy will maximize at which intermental or
margional return from the investment in inventory equals the incremental or
marginal cost of funds used to finance the investment inventory.
The incremental analysis should be used to compute the value of operating
profit investment, inventory rate of return and cost of funds. A change in
inventory policy is describe if the incremental rate of return exceeds the
required rate of return.

Chapter Three: Research methodology and Design

This refer to the variables over which the data for the study has been collected
and the method that used in the data collection, analysis and interpretations.
3.1. Data type
The researcher tried to study about inventory management in KK textile
industry. The data gathered for study are both primary and secondary data.

3.2. Subject of the study

The researcher tries to study about inventory management for the achievement
of the objective of the study, the researcher used descriptive analysis of data.
3.3. Source of data collection
The researcher used the primary data and secondary data sources but more
focus on primary data because obtained enough information in great depth,
avoid on interpretation of the answer for the question. And also, avoid refusal
to give the right information as well as it is flexible. The primary data source of
this study included the employees and the related departments such as,
purchasing department, production department , store department and also
the management. Besides of primary data source, secondary data source and
also included in this study. These information has been obtained through last
five years for financial statement.
3.4. Method of data collection
The data were obtained from two types of source. These are primary and
secondary data source. The researcher used the primary data collection
technique in order to get first hand information from the respondents. And the
primary data can be collected by preparing a questionnaire. The questionnaire
types which the researcher used is structured questionnaire. These types of
questionnaire was used to in value a close ended questions and open ended
questions. And also the researcher widely used direct observation and
unstructured interview method in order to get reliable information because
flexibility of questions to questioning

and the researcher is allowed to much

freedom. The researcher in addition used the secondary data collected from
the consecutive last five years (2007-2011) financial statement of the industry.
3.5. Sample size
Using all population for data collection is difficult for one researcher. As
sampling is using small part of large population to make conclusion about the
whole population. The researcher selected 20 respondents from different
department such as store department, production department and purchase
department through establishing judgmental sampling technique..
3.6. Sampling technique
In this study the sampling method used to acquire the respondents was nonprobability judgmental sampling technique. This technique has been
sampling method, because to selected respondents that

have

used

the expected

good knowledge about the inventory management in the industry as well as the
researcher permit to have complete freedom of selecting individual who can
provide relevant data and to chose sample element according to the researcher
wish/desire.
3.7. Data Processing and Analyzing
After the necessary data has been collected from both primary and secondary
sources, the next assignment had data processing and analyzing. Thus, the
researcher was used tabulation and percentage which helps the researcher to
present all the collected information in the simplest form to arrive at effective
conclusions and possible recommendations. Data processing is an activity
which involves editing, coding and classifying

data to make it suitable for

further analysis, then the compiled data has processed. After all the relevant

data has been collected and processed, then they have been analysis has
further transformation of the processed data groups. Finally, the out cocme of
the project would be presented on written material and detailed oral
presentation.
3.8. Method of presenting the outcome
Once the analysis process is completed, the interpretation of all data was
follows, it has been presented using different tools such as table and
percentage to make clear the relation among variable. Finally, the analyzed
data has been presented in easy understand way to draw conclusion and find
out the major factors that affect inventory management.

Chapter Four : Data Presentation, Analysation and Interpretation

Primary data analysis are collected from the KK textile industry employees on
the basis of structure questionnaire and unstructured interview data. The
respondents was selected based on their employment status who controls
inventory from store department, production department and purchase
department.
Secondary data are collected from secondary resources such as financial
statement of the company (balance sheet and income statement) for the last five
years (2007-2011). Cost of good sold and finished goods inventory are required
on the income statement to calculate stock turn over of the past five years.
4.1. Respondents Personal Information
In this point of the study the data gathered from primary sources are analysis
and interpret. A total of 16 questions were distributed to the employee of KK
textile company and all respondents are returned.
4.1.1. Respondents Sex distribution
Sex
No
Percentage
Male
12
60%
Female
8
40%
Total
20
100%
Table 4.1: Respondents Sex distribution
Source: Questionnaire

As its can been seen from the above information the respondents 60% are
males and 40% are females. From this table the researcher gets that most of
the employees are males.

4.1.2. Respondents educational level

Alternative
No
Percentage
Degree and above
6
30%
Diploma
8
40%
Other specify
4
20%
Experience
2
10%
Total
20
100%
Table 4.2: Respondents educational level
Source: Questionnaire

As it can been seen from the above information 30% of the respondents have
degree and above 8(40%) diploma 4(20%) other specify and 2 (10%) have
experience. From this information, the researcher gets the organization more
employee by they have diploma and degree and above. Hence, most of the
employees are educated. So that the companies internal control over inventory
is strong.
4.1.3. Respondents age distribution
Age
18 25
26 35
36 41
42 66
Total
Table 4:3: Respondents

No
Percentage
2
10%
12
60%
6
30%
0
0%
20
100%
age distribution

Source: Questionnaire

According to this table information 10% of the employees are found at the age
of between 13-25, 60% of age between 26-35, 30% of age between 36-41 and
0% of age between 42-66. as the researcher get the organization is more
employees by age between 26-35. Hence, most of the employees of the company
are young. From this, the researcher conclude that the company have strong
labor force in order to achieve its objective.
4.2. Nature of inventory management of the Organization
A manufacturing enterprise has several types of inventories, raw materials,
factory supplies, good in process and finished goods are basic commodities or
other products obtained directly from natural resources or acquired from
others, which will be incorporated physically in to a finished product factory
supplies are similar to material, but their relation to the end product in
indirect. Goods in process consists of partially completed products and
includes the cost of direct material, direct labor, and factory over head.
Finished goods are items that are complete and ready for sale and include the
same cost elements as those in good in process.
Response
Yes
Do you known the term

No

Total
inventory management?
Table 4.4: the term inventory management
Source: Questionnaire

No
16

Percentage
80%

20%

20

100%

Show in table 4.4 16(80%) respondents, response that yes the tem inventory
management question and 4(20%) respondents response do not know the term
inventory management. From this information, the researcher can conclude
that there is inventory management in the industry.

4.3. The policies and procedures of inventory management

Does your industry has

policies and procedures
to keep inventory that

Response
Yes
No
Total

No
16

Percentage
80%

20%

20

100%

avoid excess inventory

Table 4.5: the industry policies & procedures
Source: Questionnaire

Shown in table 4.5, 16(80%) respondents response that KK textile industry has
does polices and procedure to keep inventory that avoid excess inventory and
4(20%) respondents said that the industry does not polices and procedure to
keep inventory level that ensure not going out of excess inventory. Hence, the
researcher conclude that, the industry has policies and procedures to keep
inventory that avoid excess inventory.

Is there optimal level of

Response
Yes

No
16

Percentage
80%

inventory management in No

20%

the industry?
Total
20
Table 4.6: The industry regarding optimal level of inventory.
Source: Questionnaire

100%

As can be observed from table 4.6, 16 out of 20 or 80% respondents respond

that textile industry has optimal inventory and 4 out of 20 or 20% of
respondents respond that the industry has excess inventory or stocking. From
this information the researcher conclude that there is optimal level of inventory
management, particularly from table 5 the industry follows inventory
management policies, procedures and techniques.

Is

there

department
finished
inventory?

production
delivery

Response
- Delivery on time
-

Percentage
90%

Some time there late

delivery

goods

No
18

10%

0%

Does not delivery on

time

Total

20

100%

Table 4.7: Time delivered finished goods

Source: Questionnaire

As can be table 4.7, (90%) respondent that the industry in production

department delivery finished goods inventory delivery on time, 2(10%)
respondents that some time late delivery and no any one responds does not
delivery on time the industry. Hence, the researcher conclude that there is
enough working capital because of its cash is not hold by inventory as well as

the industry was not face problem of inventory obsolescent due to the fact that
the inventory is delivered on time.
Is

there

the Response
- There is strong coordination
coordination
among
- There is satisfactory
production department,
coordination
store department and
- There is weak coordination
purchase department of
- There is low coordination
the industry?
Total
Table4. 8: Coordination among department
Source: Questionnaire

No
14

Percentage
70%

30%

0%

0%

20

100%

As shown table 4.8, 14 out of 20 or 70% respondents, response that

coordination among production, store and purchase departments are strongly
coordinated

and

6(30%)

of

respondents

response

that

the

industry

departments are satisfactory coordinated. No any one response that industry

department weak and low coordination for the question .
Due to respond of the respondents, there is strong coordination among the
departments of the industry. Therefore, the researcher conclude that the work
of the industry is performed on time and the customer orders satisfied on time.
As a result, the level of sales inventory is increased as well as its profit
increase.
4.4. Inventory control system

Which inventory control

Response
Perpetual

No
0

Percentage
0%

system

does

the

industry use?
Table 4.9: Control system
Source : Questionnaire

Periodic

20

100%

0%

Both

As shown in table 4.9, 20 out of 20 or 100% respondents response that the

industry use Periodic inventory system. But the industry of 0% response the
industry use perpetual inventory system. As per the response of respondents
the industry recorded inventory when it occur and every item has its own store
ledger card and inventory counted periodically. The researcher understand that
on KK textile industry there is a huge quantities and low unit price of its
inventory.

How

many

industry

time

count

its inventory?

the

(check)

Response
Quarterly

No
18

Percentage
90%

Semi annually

10%

Annually

0%

20

100%

Total
Table 4.10: Checking inventory items
Source: Questionnaire

As can be shown from table 4.10, 18 out of 20 or 90% respondents respond

that industry count in quarterly 2(10%) respondents response that the
industry count its inventory in semi annually. From the above information, the
researcher conclude that the industry used periodic inventory system.

How often is inventory

returned by customers a
result of defect?

Response
Always
Most often

No
0

Percentage
0%

0%

Few

13

65%

None

35%

20

100%

Total
Table 4. 11: Inventory returned by customer
Source: questionnaire

As can be observed from table 4.11, 0 out of 20 (0%) respondents response that
the inventory returned by customers as a result of defect the question for
always and most often, 13 out of 20 or 65% that respondents respond
inventory returned by customer as a result of defect for the question. Few and 7
out of 20 or 35% the respondents respond inventory returned by customer as a
result of defect for the question none. Hence, the researcher understand that
there is a problem of production efficiency in the production department.

4.5. Inventory management techniques of the organization

Which type of inventory

management

technique

does the firm follow?

Response
-Economic order quantity

Percentage
25%

- Just in time

20%

- ABC

20%

- Stock level

35%

- All of the above

0%

20

100%

Total
Table 4.12: Inventory management technique

No

Source: Questionnaire

As can be seen from table 4.12, 5 out of 25% respondents respond the industry
follow economic order quality. This inventory management technique determine
that how mach inventory is add. When inventory replaced and when to order
determine that the recorder point at which an order should be placed an
inventory. 4 out of 20 or 20% respondents respond the industry follow just in
time, and ABC technique, 7 out of 20 or 35% respondents respond the industry
follow stock level its technique in order to guard over stocking or under stock
kept material with the appropriate level of the material by fixing stock level,
0(0%) the inventory management technique follow economic order quantity,
ABC techniques stock level and just in time.
From this information, the researcher understand that the industry follow good
inventory management techniques because in stock level technique there are re
order level, minimum level maximum level and economic order quantity or
reorder quantity.

Does

the

industry

manage its inventory in

Response
Yes
No

Total
appropriate way?
Table 4.13: managing inventory
Source: Questionnaire

No
18

Percentage
90%

10%

20

100%

Shown in table 4.13, 18 out of 20 or 90% respondents response that KK textile

industry has manage its inventory in appropriate way and 2 out of 20 or 10%
the industry is does not manage its inventory in appropriate way. Hence, the
researcher understand that the industry minimize cost and obsolescent
inventory because of the industry manage its inventory in appropriate way.
Does the industry very Response
Yes
carful to buy the right
No
item, at the right price
Total
and
in
the
right

No
20

Percentage
100%

0%

20

100%

quantity?
Table 4.14: Purchased inventory
Source: questionnaire

As can be observed from table 4.14, 20(100%) respondents respond that the
industry apply very carful to buy the right item, at the right price and in the
right quantity. So, not any one response (0%) respond. The industry is nothing
to done this question. Hence, the researcher conclude that the industry
purchased the right items and the right quantities. Thus, help to minimize
wastage inventory additionally, industry purchased at the right price that help
to minimize production cost.

4.6. Five years data of inventory activity

4.6.1. Inventory Turn Over

To determine how effectively the firm managing inventory and also to gain an
indication of liquidity of inventory, we compute the inventory turn over ratio.
Inventory turn over is one aspect of ration analysis which measure how
effectively managing its inventories.
Inventory turn over =

cost of goods sold

Ending finished goods inventory

This ratio tell as how many time inventory is turned over in to receivable
through sale during the year. The higher the inventory turnover, the more
efficient the inventory management of the firm. The following schedules show
the industry is turn over ratio (actual)
Year

Cost of good sold Ending finished Inventory

goods inventory
2,107,259
2,001,351
13,749,285
16,742,453
12,279,605

turn

over
1.53
1.37
1.46
3.09
3.95

2007
3,232,472
2008
2,732,310
2009
20,095,293
2010
51,728,976
2011
48,314,651
Table 4.15: Inventory turn over
Source: Financial statement of the industry from 2007-2011

The above table shows the inventory turn over ratio of the industry. The turn
over of inventory in the industry varies from year to year. The inventory turn
over ratio in 2007 was 1.53 times. In 2008 the industry turnover ratio shows in
1.37 times and it is the lowest ratio compared with the rest four years turn over
ratio. Hence, inventory interface with operating efficiency and customer service
additionally, the inventory sold before an expiration date.

4.6.2. Inventory turnover in days

It tells how many days on average, before inventory is turned in to account
receivable through sale.
Average age of inventory = Day in the year
Inventory turn over
Year

Cost

of Ending

finished Inventory

goods sold
goods inventory
2007
3,232,472
2,107,259
2008
2,732,310
2,001,351
2009
20,095,293
13,749,285
2010
51,728,976
16,742,453
2011
48,314,651
12,279,605
Table 4.16: Average of inventory
Source: financial statement of the industry

turn over
1.53
1.37
1.46
3.09
3.93

Average
inventory
235
262
246
116
96

Table 4.16 shown that inventory turn over rate and the average of inventory on
the industry are inversely proportion. The higher the inventory turn over ratio,
the lower inversely stay in the industry. In 2008 the industry is stock is turned
with in 262 days and its the largest days an inventory stay in the industry
relative to the succeeding for years. In the 2007, the improve in turn over
became apparent which reduce the average age of inventory in industry to 235
days. In 2009, the inventory average age of inventory 246 days.
The industry experienced high average age of inventory on 2007, 2008 and 246
are with 235,262 and 246 days respectively, this shows that there was saw
stock turnover according to the data obtained from the industry. To the current
year average age of inventory is more better than in which the industry enjoy

high profit resulted from large sale volume. From this information, the
researcher conclude that the amount of holding inventory decrease due to the
increasement of inventory turn over.
In the year 2009 turn over was increases on preceding year and its was 1.46
times. In the two years 2010 and 2011 turn over ratio is 3.09 and 3.93
respectively.
As it is in dedicated in table above the inventory of five years fluctuated with
large variance. The inventory ratio of 2011 was better that indicates the
effective and efficient control of inventory in the industry. But in all the
preceding year the industry experience with relatively low inventory turnover.
The turnover in 2011 indicates the cost of goods sold in above 3.93% times
finished goods inventory on other hands the lowest turn over ratio in 2008
show that finished goods inventories recycled 1.37 time with respect to cost of
goods old. Although the inventory turn over of the past three years fit the
standard of the industrys inventory turnover indicate the factory had high,
stock of inventory.
Generally, both the inventory turnover and overage age of inventory point that
there was slow moving items in industry which is turn result a cost problem
lived storage and depreciation in the past four years. Conversely the industrys
present performance in inventory control is better than the past years, hence
turn over is increased and it derive the inventory interface with operating
efficiency and customer services. The more the numbers of days the inventory
study in the industry, the less the inventory is turned count receivable. This
may arise storage and depreciation cost that will be change against the profit of
the industry perishable goods and age controls must sold before an expiration

date. The usual simplifying assumptions made in inventory controls that

holding cost are proportional to the size of inventory investment

Chapter Five: Summary, Conclusion and Recommendation

In this section the researcher conclude the major finding of the study focusing
on the existing strengths and weaknesses of inventory management in KK
textile industry. And also on the basis finding the researcher give suggestions
and recommendations to maintain the strengths and to tackle or reduce the
problem are forwarded.
5.1. Summary of Findings
To sum up, inventory management is basically defined as the active control
program which allows the management of sales, purchases and payments with
good inventory management, companies are able to monitor what shipments
they have coming and the going out to customer, allowing them to keep just
enough inventory in stock to meet demand. The researcher motivated in this
finding for the purpose of knowing the inventory management system and
evaluating efficiency and effectiveness of KK textile industry.
The main objective of the finding is to assess the crucial problems currently
prevailing in KK textile industry. In KK textile industry there is an effective and
efficient inventory management. The industry has implemented various
technique of control system in controlling raw material in progress and finished
goods inventory. Particularly finished goods are controlled by the concept stock
level item the industry selected this technique in such way that high value item

are strongly controlled and great emphasis is given than lower level items. The
industry selected this method for cost consideration. There are also scientific
technique made by the industry cyclical and fixed order quantities. The former
concept has been developed for consume able materials which are required by
production section to smoother out of the production activity, while the later
system has been used the control high value items closely to maintain
relatively low investment in inventory.
Store department is responsible for receiving and issuing of materials in KK
textile industry, like raw material, finished goods etc represent a very

large

investment. The main objective of store room is to reduce loss and detoration
of materials. Accordingly the interview methods, the store department the
following procedure to receipt the raw material that reach at the industry site.
The store department maintain appropriate accounting for inventory control
purpose. some of these are physical count and bin care.
In the reorder point of inventory level are determine how many inventory are
reorder for a selling and production activity. The industry used the minimum
inventory level used for each store departments and its important the supplier
are leads that products.
The inventory turnover ratio of the five years periods fluctuation was large
variance, the inventory turnover of 2010 (3.93) it indicate the industry effective
and efficient control on inventory. But proceeding years inventory turnover, the
industry experience with relative low turn over. The decline in turn over
indicates the industry has high stock inventory. Generally both the inventory
turn over and the average value show that there was slow moving items in the
industry in turn result a cost problem such as storage and depreciation cost in
the past four years.

5.2. Conclusion
Concerning the application of inventory management in KK textile industry
most of managing attempt to apply, like:Regarding to delivering finished goods there is enough working capital because
of its cash is not hold by inventory as well as the industry was not face problem
of inventory obsolescent, due to the fact that the inventory is delivered on time.

Regarding coordination among departments, the work of the industry is

performed on time and the customer orders satisfied . As a result, the level of
sales inventory is increased as well as its profit increase.
Regarding to purchased inventory, the industry purchased the right items and
the right quantities. Thus, help to minimize wastage inventory. Additionally,
industry purchased at the right price that help to minimize production cost.
Regarding to policies and procedures of inventory management, the industry
was follows policies and procedures to keep inventory that avoid excess
inventory, that attain optimal level of inventory management. Where as,
regarding to inventory control system the industry used periodic inventory
system that control huge quantities and low unit price of inventory. Finally,
regarding to inventory turn over there increasing inventory turn over through
2007-2011. so there is effective inventory management in the industry.
Based on information gathered from interview questioner and secondary data
analysis the following paragraphs are discussed the strength and weakness of
the industry.

First, there is strong coordination among department of the industry. Thus,

help

to facilitate the operational activities and the industry can maintain

optimal level of inventories due to avoid excessive inventories. .

Second, there is qualified man power, good inventory management polices and
procedures and the industry carefully purchased raw materials select the right
items, the right quantity and the right price that are help to attain its own
objective.

Finally, the industry are weak practice in producing department because

inventory is returned by customers as a result of defect and to redesign on
inventory should rest with to top management of the industry.

5.3. Recommendation
Based on the finding and conclusion the following recommendation are for
ward in order to solve the problems identified and strength the existing section
for effective inventory management. To solve the problem should take the
following major action.

The management of the factory should give attention for material

displaced a very where in the department of the industry. That is they
should prepare appropriate storage area, so that deprecation, this can be
minimize.

Quantity and quality of goods received should be specified before

payment is authorized.

Proper authorization exists for inventory quantity removed from stock.

Inventory issues should be valued according to an acceptable method

and the costs should be accounted for in a manner that provides
adequate information for management including variance from standard.

There should be fully accountability for both units and birr for inventory
quantity received on hand and issued or sold.

Difference between book and physical inventories are as certained

differences adjusted and the amount of over age or shortage should be
properly accounted for.

Incoming shipment should be accepted only if the receiving department

has authorization in the form of a copy of purchase order.

All transactions pertaining to the issue of sales of inventories quantity

should be accounted for and entered in the controlling period.

Terms, prices, and clearical accuracy of redors invoice should be correct

before payment is all authorized.

Inventory quantity should be adequately protected against losses from

theft, spoilage, unauthorized withdrawal by employee.

The industry should use material requirement plan since its fastness
system thinking and become the corner stone of production system with
the limit of its metrology, if will review what is needed, how many needed,
when they are needed and when they should be order.

Reference
Duncan Williamson (1998), Cost and management accounting, 6th ed.
New delhi prentice Hal india .
Mosich A.N (1988),

Intermediate Accounting. 6th ed. United state of

America.
Stephen A. Ross etal (1998), Fundamental of corporate Finance, 6th ed.
United state of Amercia. Van. Hoftman.

Lawrence J.Gitman (1997), Financial management, 8th ed. United state

of America.
Willaistevensson (1999),

Operational management. 6th edn. Bitson Mc

Graw hill .
Internet Web sites
Http://www. Inventory Management. Com. Accessed 03/03/2012.
www. Fishbowl. Inventory management. Com . Accessed 05/03/2012

Appendix
Jimma University
Collage of Business and Economics
Department of accounting

Dear respondents
The purpose of this questionnaire is to collect data for the thesis project tin
requirement for partial fulfillment of B.A degree in accounting in Jimma
University. You genuine response for the following questions is extremely
important for the successful completion of this paper, the information your
provide is used only for the purpose indicated and will be kept highly
confidential.

I would like to thank you in advance for your cooperation and for invuable time.

Part one general information

Education status
Diploma
Degree
Other specify
Experience
Age 18 25
26 35
36-42
42- 66
Sex : Male
Female
Part two
Questions regarding to inventory management in KK textile industry
Instructions
Wherever there is alternative answer tick in the box
If the question require open ended answers write briefly
1. Do you known the term inventory management?
Yes
No
2. Does your industry has policies and procedures to keep inventory level

3.
4.
5.

6.

that avoid excess inventory?

Yes
No
Is there optimal level of inventory management the industry?
Yes
No
Does the industry have control inventory in using inventory procedure?
Yes
No
Is the production department delivery finished goods inventory?
Delivery on time
Some time there is late delivery
Does not delivery on time
Is there the coordination among production department, store
department, and purchase department of the industry?
There is strong coordination
There is satisfactory coordination
There is weak coordination

There is low coordination

7. Your answer for the above question 6 other than strong coordination
state the reason
--------------------------------------------------------------------------------8. Which inventory system procedure does the industry use?
Perpetual procedure
Periodic procedure
Both
9. How many time the industry count/check its inventory?
Monthly
Semiannually
Annually
10. How often is inventory returned by customer as result of defect?
Always
Most often
Few
None
11. Which type of inventory management technique does the industry follow?

Economic order quantity

Just in time
ABC technique
Stock level
All the above
12. Does the industry manage its inventory in appropriate way?
Yes
No
13. Does the industry very carful to buy the right item, at the right price
and in the right quantity ?
Yes
No
14.
If
no
question
no.

13

to

specify

the

reason?

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