INFO LINK UNIVERSITY COLLAGE

DEPARTMENT OF ACCOUNTING AND FINANCE

EFFECTIVENESS OF INVENTORY MANAGEMENT PRACTICE (IN CASE

STUDY ON WOLAITA SODO REVENNUE ASSOSOCION)

A RESEARCH PROPOSAL SUBMITTED TO DEPARTMENT OF

ACCOUNTING AND FINANCE FOR THE REQUIREMENT OF PARTIAL
FULFILLMENT OF (BA) DEGREE IN ACCOUNTING AND FINANCE

By:- ELSABET WANSARA

Advisor፡-

JUNE 2018
HAWASSA ETHIOPIA
 TABLES OFCONTENTS
CONTENTS PAGE
CHAPTER ONE
1 INTRODUCTION……………………………………………………………………….1
1.1 Background of study………………………………………………………………...1
1.2 Background of organization ………………………………………………………...1
1.3 Statement of problem………………………………………………………………..2
1.4 Objectives of study…………………………………………………………………..2
1.4.1 General objectives……………………………………………………………3
1.4.2 Specific objectives……………………………………………………………3
1.5 Significance of the study ……………………………………………………………3
1.6 Scope of study ………………………………………………………………………3
1.7 Limitation of the study ………………………………………………………………….3
CHAPTER TWO
2. Review Literature ………………………..……..……………………..………….......4
1.8 Definition of Inventory…………………….………………………………………..….…..4
1.9 Function of inventory management ………………………………….……………..………4
1.10The need for inventory……………………………………………….………………...……5
1.11Inventory stores …………………………………………………….………………..….…..5
1.12Aims of inventory management ………………………………………………..…….……..5
1.13Significance of Inventory………………………………………………………..….……….5
1.14Type of Inventory …………………………………………………………….………..……6
1.15Relevant Inventory costs …………………………………………………..………….……..6
1.16Alternative Inventory system………………………………………………………………...7
1.17Inventory costing methods …………………………………………………..……….……...8
1.18Inventory decision…………………………………………………………….…………..….8
1.19Tools of Inventory management……………………………………………..…………….…8
1.20What is Inventory control?… ………………………………………………….…….………9
1.21Inventory control techniques……………………………………………….…………..…….9
1.22Economic order Quantity ………………………………………………….………….……..9
1.23 Stock taking………………………………………………………………..…………………9
1.24Re- order level……………………………………………………………………………….10
 CHAPTER THREE

3. RESEARCH METHODOLOGY………………………….………………………11
3.1 The study area and population ……………………………………………………………..11
3.2 Nature of data ……………………………………………………………………………...11
3.3 Methods of data collection……………………………………………………………………
3.4 Sample size and sampling technique …………………………………………………………
3.4.1 Sample size………………………………………………………………………………….
3.4.2 Sampling technique…………………………………………………………………………
3.5 Methods of data analysis & presentation……………………………………………………

CHAPTER ONE

1, INTRODUCTION

1.1 Background Study

The research would be conducted on the assessment of inventory management practice in

Hawassa chip wood factory company PLC. The research provides academic knowledge of
conducting research and to give solutions for the company affecting inventory management of
the company. Inventory is the stock of any items of resources in company where as inventory
management is the process f reducing inventory costs, keeping inventory from under or
overstocking and determining order and recorder points in order to achieve organizational goals.
Most study shows that in the company constitutes the major category of assets on the balance
sheet. The main objectives of this study are to assess the inventory management practice of
Hawassa chip wood factory PLC.

1.3 Statement of the problem

Inventory management functions “the integrated process that operation, the firms and the
value chains inventory policy” the reactive or pull distribution channel. An alternative
philosophy is planning and through the productivity schedules products movement and
allocation thought the channel according to the demand and product availability. Generally
 poor inventory management practices are overstocking; under stocking bad issuing system
and absence of stock taking are main causes.
Overstocking is storing materials over the needed quantity. And it may result in damage of
materials because of limited place to keep it. Under stocking on the country is maintaining
small number of materials below the demand of the company it has the negative impact on
the over work of the campus to achieve its goals goal. Bad issuing sometimes also is sending
the materials from store without keeping the requisition of user department. If the materials
at certain area cannot be controlled it is difficult to properly record incoming and outgoing
materials

The study would assess the overall activity of company management section and also the
research will answer.

1. What is the strength of the existing inventory management system?

2. What is the weakness of the firm’s inventory management professionals?
3. Did the company have inventory management professionals?
4. What type of inventory control system the company used?
5. What factors affect effective inventory management of the company?
6. What are the tools and techniques of inventory control system?
7. What inventory costing methods are used by the company?
8. What type of the stock taking system the company uses?
9. How can the company determine the re-order level and order level?
1.4Objectives of the study
The study has general and specific objectives.
1.4.1 general objectives
General objectives of the study is to assess inventory management practice of wolaita
sodo revenue association , and provide possible solutions for the problems that would be
identified.
1.4.2 Specific objectives
o The followings are some of the specific objectives,
To identify the types of inventory control systems applied wolaita sodo revenue
association
 To examine how inventory management function is critical for the firm.
To investigate how the existing inventory management system of the company support
the management and financial accounting practice of the firm.
To examine the company affecting inventory management practice of the company. 1.5

significance of the study

The research was believed to have the following importance

 The study will show the overall inventory management system of the company.
 The study will suggest solution for the problem related to inventory management function in
company.
 It enables employees of inventory management evaluate themselves.
o It would indicate the strengths and weakness of the firm inventory management practice.

1.6 Scope of study

The study was limited to access the inventory management practice at specific area
wolaita sodo revenue association. The time duration of this research would be from
March up June 2018
1.7 limitation of the study
The study was estimated encounter the following constraints,
- The company chief execute manager who concern the study may not be volunteer to respond
the needed information in depth.
- Complexity of inventory system is to the difficulty of gathering information

CHAPTER TWO

2 LITERATURE REVIEW

2.1 Definition of inventory

 Inventory can be defined as follow

Inventory refers to any kind of resources having economic value and is maintained to full fill the
present and future needs of the company.
-     Inventory is a physical stock of items that business or production enterprise keeps in hand for
efficient running of affairs or its production.
-     Inventory is the quantity of goods, raw materials or other resources that are idle at any given
point of time.
-    Inventory control is the means by which materials of the correct quantity and quality is made
available as a when required with due regard to economy in storage and ordering costs and
working capital.
-     It is also defined as the systematic location, storage and recording of goods in such a way that
desired degree of service can be made to the operating shops at a minimum ultimate cost” (S.C
Sharma (1999). P. 509, 512). Inventory and its management are related both to materials
management and physical distribution management. Material management and physical
distribution management together constitute logistics management, the process of management
both he movement and storage of materials and materials from their source to the point of
ultimate consumption ysons (2006b). P. 315).

2.2. Functions of inventory management

 Inventory management cover wide variety of activities in the in venture management there is
some functions the function are
 To carry adequate stock to avoid stock out
  To ensure optimum level of stock so that total inventory cost is minimized (Nair, 2002, PP 575-
576)
  To bay the right quantity of perishable items so that loss in cured by unsold items are minimized.
  To order sufficiently higher quantity at a time so that repeated ordering and costs incurred in such
manner can be reduced.

2.3. The need for inventory

Inventory is essential for everything to get their resources efficiently and effectively.
 To gain economies in purchasing beyond current requirements.
 To maintain service stock while replacement stocks are in transit.
To protect against variations in demand. (S. C. Sharma (1999), P. 509)

2.4. Inventory stores

The words inventory and stores  are sometimes confused these must therefore be clearly under
stood  stores means all those articles which are kept in stores while inventory comprise stores as
well as materials in transit materials in products finished products and stocking company’s
shows rooms and distribution centers which have not been sold out. (S.C Sharma (1999), P 509)

2.5 Aims of inventory management

 There are aims for everything to do something. Therefore the aims of inventory management are:
-   Provide both internal and external customers with required service levels interims of quantity and
order rate fill.
-    Ascertain present and future requirements for all types of inventory and to avoid stocking while
avoiding bad in production.
-     Keeps cost to minimum by variety reduction economical lot sizes and analysis of costs incurred
in obtaining and carrying inventories.
-    Provide upstream and downstream inventory visibility to the supply chain.

2.6 Significance of inventory

The word inventory refers to any stock on hand at a given time. If materials is held for future use
in an idle or unproductive sate waiting its intended purpose.

The relative importance’s of inventory management to an organization can be arrange by the

overall investment in inventory and the magnitude of materials costs for all products. Inventory
so late one part of the system from the next to allow each work independently absorb the stock of
for cost errors, and permit the effective utilization of inventory management to control the lot
sizes to that the overall costs associated with the purchase or manufacture are at a minimum
(Terisine, R.J. 1994. 20-2)

Poor inventory management implies having enough item available when needed but not so much
that an unnecessarily cost surplus incurred inventories are assort of lubrication for the supply
production supply distribution system that protects it from excessive friction.

2.7 Types of inventories

It is very important to classify inventory in to different type and classification so as to help or to

make easy in managing or control of inventory at every stage (levels). There are four basic type
of inventories
I. Raw materials
-        These are items purchased from supplier to be used as in put to the production process.
-        They will be modified or transformed to the finished goods.
 II. Finished goods
Are final product available for sale distribution or storage
III. Goods in process
-        Are partially? Completed products that are still in the production process. They represent the
materials waiting fur there processing.
IV. Supplies
-        Are inventory items consumed in the normal function of thecompany .That are not part of the
final product. (Tersine. R.J. 1994 P.P. 3.4)

 2.8. Relevant inventory costs

The objectives of materials management were to minimized inventory investments. To

maximized customer service. It is a plan to see that, the goals cam be inconsistent or even
indirect conflicts the role of the materials management is thus to balance the objective in relation
to the existing conditions and environmental limitations. The basic object of inventory
management is to maximize customer service through maintaining appropriate amount of
inventory with minimum possible cost. Inventory costs are costs associated with the operation of
an inventory system. Thus the relevant costs included inventory are
a) The purchase cost (P)
The purchase costs of an item are the unit purchase it is obtained from an  external source or the
unit production costs it is produced internally. For the purchase items it is the purchase costless
modified for different quantity levels manufacturing items the unit cost include direct labor or
company overhead.  
b) Ordering or set up cost (C)
This is the cost of placing an order. This cost directly with the number of order or setups placed
and not at all weigh the size of the order. The ordering cost included making analyzing materials
inspecting materials follows up orders and doing the processing necessary to complete the
transaction.
c) Carrying costs or holding costs (H)
There are costs of items (inventories) in storage. This cost vary with the level of inventory and
occasionally with the length of item an item is held. The greater the level of inventory overtime.
The higher the caring cost caring casts can be included the costs of losing the use of funds field
up in inventory like storages casts such as rent of building heating cooling righting security,
record keeping, deprecation obsolescence, product deterioration etc.
d) Stock out cost (shortage cost)
This is the cost as a result of not having items in a storage. This can bring looses of good will
profit loss of incur back order cost and delay in the customer service. Establishing the correct
quantity to order from vendors or the size of lots submitted to the firms productive facilities
involves a search for the minimum total cost resulting from the combined effects of fewer
individual costs holding costs, setup costs ordering costs and storage costs (Tersine, R.J, 1994.
PP. 13-15)

2.9. Alternative inventory system

There are two types of inventory systems that aid to control inventory in stock
A)   Perpetual system
Maintenance a continua’s record of the physical quantities inventory. It records the purchase of
each item of inventory. This system is essential if adequate management planning and control
over inventory are to be maintained and stock outs avoided. A firm uses this system must have
physical count at least once a year or to confirm the balance in the inventory account.   
B) Periodic inventory system
A company using a periodic system doesn’t maintain continues record of the physical quantities
of inventory on hand. It takes physical counts periodically.

2.10 Inventory costing methods

There are three methods of inventory costing method. These are:-

1. First – in first – out (Fifo)
This method is based on the assumption that costs should be computed out in the order in which
incurred.  Inventories are thus stated in terms of recent costs.
2. Last – in first – out (Llfo)
Is a method based on the assumption that goods should be charged our the latest cost be the latest
cost be the first that are charge out. Inventories are thus stated in terms of earliest cost.
3. Weighted average method
 Is a method based an the assumption that goods should be charged out at an average cost such
average being influenced by the number of unites acquired at the price. Inventories are stated at
the same weighted average cost. 

2.11 Inventory decision

In the inventory management decision encompasses the principles procures and techniques for
deciding what to order, haw much to order, when it is needed and how and where to store if there
decisions at each of these levees should be consistent with decision at the other level and should
support the company objective by achieving desired level of customer crevice and achieving in
venture inventory objective (Black store Hoffman 1991).
2.12 Tools of inventory management
There are four tools of inventory management these are
1.     ABC – analysis
2.     Bar-coding
3.     Radio frequency identification (RFID)
4.     Inventory soft ware

2.13 What is inventory control?

Inventory, control may be said to be planned method where by investment in inventories held in
stocks is maintained in such a manner that it ensures proper and smooth flow of materials needed
for production operations as well as sales while at the same time, the total costs of investment in
inventories is kept at minimum (A.K. Data (2002 ). P. 108).

2.14. Inventory control techniques

There are a number of techniques which play an important role in the inventory control program.
These techniques are very helpful in rationalization of inventory control approach and assist in
formulation of inventory control policies.
The following are the important tools and techniques as inventory control: these are
-        Determination of stock level
-        Determination of safety stock
-        Determination of economic order quantity
-        Just in time.
-        Stock cared and bin card etc.

 2.15 Economic order quantity (EOQ)

EOA model as a mathematical tool for determining the order quantity that minimize the cast of
ordering and holding of inventory.
EOQ is the size of order which gives maximum economy in purchasing any material and
ultimately contributed as to wards maintaining the material the optimum level and at minimum
cost. Which setting EOQ ordering cost and carrying casts are taken in to account.At EOQ level.
Ordering cost and cost of carrying are equal when total of these two casts are lowest. 
2.16 Stock taking
Stock taking refers to the process of testing or checking the stores record with the actual items
stocked in the store. The store received at any time should Shaw the exact potential quantity of
raw materials and parts which are available for use. Stock taking which enables to know whether
there are any discrepancies between actual count and record (i.e. It could be shortage of overage)
in the postings, whether any pilferage is taking place, and whether the materials are good in
condition.
Stocktaking is also sometimes called internal audit of stores usually external activity is a must
for any organization for conducting check on the account.

2.17 Re-order level

The replenishment order is given either on outside firm or to the production department. At the
time of issue replacement order stock should be sufficient for each item so that demand (ether
per raw materials by production shops or of finished goods by customers) can reasonably be met
from the stock until replenishment this stock level when replenishment order is issued is known
as re-order level.
This level is determined for each item by compromising between the cost of maintaining these
stocks and the disservice to the customer if this demand is not met in time.
 CHAPTER THREE

3. RESEARCH METHODOLOGY

3.1. The study area and population

The research was targeted to study inventory management practice of wolaita sodo revenue
association. The company especially inventory management and other treated department in
estimated to have 145 employees (population size)thus the sample is estimated to 21% of total
population,(145×21%=30)

3.2. Nature of data

There are two types of data that would be used for this study
1.  Primary data is the data that would be collected mainly from employees of inventory
management and related departments of the company.
2.  Secondary data is the data that would be gathered from written materials of the company and
others
Like - books
-   Other researcher
-   Internets   

3.3. Method of data collection

To collect primary data (from primary sources) the searchers is going to use
o Observation
o Questionnaire
o Structured and unstructured interview questions.
To get secondary data, different documents from concerned bodies of the company would be
referred and in addition other secondary sources like books, internets and other researches would
be used.

3.4. Sample size and sampling technique

3.4.1. Sample size

Even though almost all employees in the company uses materials to perform their responsibility,
because of cost and time constraints the sample would be selected mainly from inventory
management section and related department of the main campus. Thus the sample size is
estimated to be 21% the total population, (145×21%=30)

3.4.2. Sampling techniques

To select the needed number of individuals from employees’ convenience sampling of non-
probability sampling would be used. This technique permits the research to have complete
freedom of selecting individual who can provide relevant data.

3.5 Method of data analysis & presentation

 After collecting data the collected data would be processed and it would be further described by
using tabulation percentage and graphs so that finding would be easy to be understood by
everyone.
Finally the outcome of the project would be presented on written material and detailed oral:
presentation .

REFERENCE
A.K: 2000 Inventory Materials Management 3rd edition.
Arora: 2003, Material Management and Material Management system, 7th edition, Golden
House, Daryagoj.
BanteworkuEtal: 2005, Introduction to Management 1st edition.
Biruk s: 2005 Material Management 2nd edition, Addis Ababa University.
Donaldw.Doblor 2002 Inventory Management 8th edition Cornell University.
Gopalakishman and Sanderson: 1990 Purchasing and Material Management 3rd edition,
Colorado University.
Hilton: 2000 Inventory Management 7th edition, Tata McGraw – Hill Company.
N.K Nair 1980 Purchasing Material Management 2nd edition.
Internet
N.K Nair 1980 Purchasing Material Management 2nd edition Rs-410.
Hilton: 2000 Inventory Management 7th edition, Tata McGraw-hill Company.
Text book 1237 pages
Other related written documents.