INVENTORY CONTROL AND PROFITABILITY IN AN ORGANIZATION: A CASE

STUDY OF LABOREX (U) LTD EURAPHARMA

BY

NAKAMANYA REHEMA

07/U/11919/EXT

A RESEARCH REPORT SUBMITTED TO MAKERERE UNIVERSITY IN PARTIAL

FULFILLMENT FOR THE AWARD OF A BACHELOR OF COMMERCE

DEGREE OF MAKERERE UNIVERSITY

AUGUST, 2011

DECLARATION

I, Nakamanya Rehema, declare that the work presented in this dissertation is entirely my original

work and that it has never been submitted elsewhere for academic award or any other purpose.

Signature………………………… Date:………………………..

NAKAMANYA REHEMA

07/U/11919/EXT

ii

APPROVAL

I the undersigned supervisor of this research paper accept that it is adequate for the ward of a

Bachelor of Commerce degree of Makerere University.

Signature……………………………………. Date ……………………..

MS. MBATUDDE SHEILA

SUPERVISOR

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DEDICATION

Praise is to ALLAH, the most glorified, who has blessed me with His endless mercy throughout

the period of compiling this work. The piece of work is dedicated to my family members

especially to my dear parents Mr. and Mrs. Byambi Ahmed who time and again encouraged me

to work hard and strive for success, may ALLAH grant them paradise.

To my dear Auntie Hajat Hadija Byambi, brothers Abaas Mawanda and Kiyimba Umar for both

financial and moral support throughout my education may ALLAH reward them abundantly.

iv

ACKNOWLEDGEMENT

The successful completion of this study was as a result of a number of people who I am greatly

indebted.

I express my sincere thanks to my supervisor Mrs. Mbatudde Sheila for her tireless efforts in

guiding and supervising me during the research to see this work through. Her constructive

criticism, encouragement, patience and understanding turned what seemed mountains to a

platform, enabling me to accomplish this study successfully.

I am greatly indebted to Laborex (U) Ltd Eurapharma management who has given me vital

information regarding the topic under study.

Further appreciation goes to my dear friends Ismael, Abdul who have helped to guide me

whenever necessary during the pursuit of my academics.

My special thanks go to my best friends Najjuuko Aisha, Ishaq Ssekiziyivu and my dear

nephews Rayan Mayanja and Bakunda Imran who have been a source of joy whose love has kept

me going.

My heart felt thanks to my Uncle Ismail Mulaala for his love and daily prayers that he prayed for

me during his time may his soul rest in eternal peace.

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LIST OF ABBREVIATIONS AND ACRONYMS

A – Agree

D – Disagree

EOQ – Economic Order Quantity

JIT – Just in Time

SA – Strongly Agree

SD – Strongly Disagree

vi

TABLE OF CONTENTS

DECLARATION ii

APPROVAL iii

DEDICATION iv

ACKNOWLEDGEMENT v

LIST OF ABBREVIATIONS AND ACRONYMS vi

TABLE OF CONTENTS vii

LIST OF TABLES x

ABSTRACT xi

CHAPTER ONE 1

1.0 Introduction 1

1.1 Background 1

1.2 Statement of the problem 3

1.3 Purpose of the study 3

1.4 Objectives of the study 3

1.5 Research questions 4

1.6 Scope of the study4

1.7 Significance of the study 4

CHAPTER TWO 5

LITERATURE REVIEW 5

2.0 Introduction 5

2.1 Inventory control techniques 5

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2.2 Determinants of profitability 15

2.3 Relationship between inventory control and profitability 22

2.4 Conclusion 25

CHAPTER THREE 26

METHODOLOGY 26

3.0 Introduction 26

3.1 Research design 26

3.2 Sampling population 26

3.3 Sampling method 27

3.4 Sampling size 27

3.5 Sampling procedure 27

3.6 Sources of data 27

3.7 Data collection procedures 28

3.8 Data collection tools 28

3.9 Data analysis and processing 29

3.10 Problems encountered 29

CHAPTER FOUR 30

DISCUSSION AND INTERPRETATION OF FINDINGS 30

4.1 Introduction 30

4.2 Findings from General Information 30

4.3 Findings on objective one: To find out the various inventory control techniques in place

32

viii

4.3 Findings on objective two: To establish factors that determines the level of profitability at

Laborex. 36

CHAPTER FIVE 39

DISCUSSION, CONCLUSION AND RECOMMENDATION 39

5.1 Introduction 39

5.2 Discussion of research findings 39

5.3 Conclusions 41

5.4 Recommendations41

5.5 Areas for further research 42

REFERENCES 43

APPENDIX 1 46

QUESTIONNAIRE 46

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LIST OF TABLES

Table 1: Finding on sex of respondents.........................................................................................30

Table 2: Education level................................................................................................................31

Table 3: Response on professional qualification...........................................................................31

Table 4: Respondents’ qualifications.............................................................................................32

Table 5: Results on just in time technique.....................................................................................33

Table 6: Results on Economic Order Quantity..............................................................................34

Table 7: Results on ABC Analysis................................................................................................35

Table 8: Results on factors that determine profitability................................................................36

Table 9: Correlation.......................................................................................................................37

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ABSTRACT

The study intended to find out the relationship between inventory control and profitability in an

organization. The study objectives included: to find out the various inventory control techniques

in place, to establish factors that determines the level of profitability at Laborex and to establish

a relationship between inventory control and the level of profits in an organization.

A combination of descriptive, analytical and cross sectional survey design was used and this

helped in collection of enough opinions from the respondents to achieve the objectives of the

study. The study involved 5 respondents from the management level, 15 respondents who were

the principal medical representatives, 20 respondents from the sales department and 10

respondents from the ware house (stores) who were expected to respond on behalf of the firm.

Purposive sampling method was used in such a way that respondents from Laborex were chosen

according to the departments they work with. Convenience sampling method was also used in

order to arrive at respondents who were readily available. The sources of data were categorized

into primary and secondary. Research analysis involved sorting an arranging of the data into

respective groups and tables using frequencies and percentages to enable easy analysis. This also

enabled the researcher to analyze responses from the respondents to be analyzed using statistical

package for social science (SPSS) to establish the relationship between the two variables.

It was concluded that; respondents were in disagreement that the control techniques in place

were adequate, majority of the respondents were in disagreement that the level of profitability at

Laborex (U) Ltd was satisfactory, there was a strong positive correlation between inventory

control and the level of profits in an organization (r = 0.553** P < 0.01).

It was recommended that management should adopt practical and adequate inventory control

techniques to establish, maintain and control the levels of inventory techniques, management

should ensure that it earn a return on investment in the company through positive gains from an

investment or business operation after subtracting for all expenses, management at Laborex (U)

Ltd should adopt adequate inventory control techniques so as to enhance the level of profits.

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CHAPTER ONE

1.0 Introduction

This chapter looks at the background of the statement of the problem, purpose of the study,

objectives, research questions, scope and the significance of the study.

1.1 Background

Inventory control refers to the techniques used to ensure that stock of raw materials or other

supplies, work in progress and finished goods are kept at levels which provide maximum service

levels at minimum costs (Lysons, 2000). Inventory control and management also involves the

supervision of the supply and storage and accessibility of items in order to ensure adequate

supply without excessive over supply. It is concern of inventory control therefore to minimize

inventory costs.

On the other hand, profitability has been defined as the ability to earn a return on investment in a

business, Wood and Sangster (2002). Also Don (2006), defined profitability as either accounting

profits or economic profits, therefore, all firms are set with certain objectives which all need to

be met, for such a firm to continue in full operation. The return on investment has been referred

to by the American Management Association (AMA) as a Gross Margin and has been defined as

the percentage of profit general from the sale

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of inventory after deducting the cost of sales (American Management Association Journal 2000,

p.17).

Gross profit ratios henceforth indicate the average gross margin on sales of goods. A high

percentage however does not necessarily result in large absolute figures of gross profit unless it

is accompanied by a large sales volume. Gross profit is therefore the difference between sales

and cost of goods sold. Cost of goods sold includes manufacturing costs, transportation and

storage costs (Ray Wild, 2002).

Profit is a function of a variety of factors affected by the changes in sales volume, costs and

price. Profit may also be affected by either increase or decrease in selling price, volume of sales,

variable and fixed costs or a combination of all (Pandey, 2004). There are several factors which

motivate a firm to hold inventory, different economists have talked about different motives for

holding inventory such as to get cost advantage or price advantage or both and eventually a

return on such an investment in inventory. The dilemma of how much inventory to maintain to

avoid wastage of resources and obtain a higher return varies from one organization to another in

different industries.

To achieve a high return on an investment is desirable, however not easily attainable yet a

relatively low return on investment in inventory may indicate ineffective inventory control

practices. This is normally associated with holding costs that may increase the overall operating

costs of a firm (Ray Wild, 2002).

For example, Laborex (U) Eurapharma Ltd today is about to burn drugs worth one billion

shillings (Audit report 2008-2009). This has been due to many drugs expiring before they are

2

sold out and this has been blamed on inventory control practices. On top of the expired drugs the

organization has to incur an extra expense of burning such drugs since it is a condition for

National Drug Authority (NDA) to execute such an activity. Given such occurrences, profit

levels of the organization have been adversely affected. It is upon this background therefore that

a study should be carried out to investigate inventory control and the level of profitability of

Laborex (U) Eurapharma.

1.2 Statement of the problem

Inventory control involves the techniques used to ensure that stock of raw materials or other

supplies, work in progress and finished goods are kept at levels which provide maximum service

levels at minimum costs (Lysons, 2000). However, despite such great benefits, Laborex (U) has

failed to achieve high profit levels given the sophisticated inventory control system in place,

there is evidence that Laborex (U) has lost of money approximately two billions (Audit Report,

2008-2009) in stock theft, expired drugs, drugs recalled from the market and under stocking.

There is concern to investigate whether the inventory control techniques employed and

procedures in place are effective, and whether inventory control has a relationship with profit

levels.

1.3 Purpose of the study

The study intended to find out the relationship between inventory control and profitability in an

organization.

3

1.4 Objectives of the study

i. To find out the various inventory control techniques in place.

ii. To establish factors that determines the level of profitability at Laborex.

iii. To establish a relationship between inventory control and the level of profits in an

organization.

1.5 Research questions

i. What inventory control techniques are in place?

ii. What factors determine the level of profitability at Laborex?

iii. What is the effect of inventory control on the profitability levels of Laborex?

1.6 Scope of the study

The study investigated inventory control and profitability of Laborex (U) Eurapharma, therefore,

the researcher interviewed management and staff of the organization and the results from

therefore was taken conclusive from 2009 to date.

1.7 Significance of the study

The study is expected to be used as reference by other students who will be researching on a

related topic.

The study will also help management explain why it has suffered such a loss and suggest ways

how to mitigate such risks.

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CHAPTER TWO

LITERATURE REVIEW

2.0 Introduction

Inventory control refers to the techniques used to maintain the stock of raw materials or supplies,

work in progress and finished goods are kept at levels, which provide maximum service levels at

minimum costs (Lyson, 2000).

Inventory control techniques refers to methods employed by a firm to establish, maintain and

control the levels of inventory items kept in the stores (Max Muller, 2003). The main aim of

inventory control techniques is to ensure that costs associated with materials/stock are

minimized. Among such costs include holding/carrying costs, ordering costs and purchase costs

which sum up stock cost (Lalla, 2000). Handling and ordering costs can be kept at minimum

amounts or controlled if the techniques in place could enable the organization to overcome the

problems of overstocking and under stocking of material items.

Different business concerns may apply different inventory control techniques to meet specific

requirements and circumstances; however, firms for inventory control (Horngrens et al, 2001)

commonly use the following techniques.

2.1 Inventory control techniques

2.1.1 Two bin inventory system

This is a fixed order size system and is commonly used when materials are relatively inexpensive

or non-essential. The material inventory is divided and placed in two separate compartments or

5

bins. The first bin contains quantity of items that will be used between the time an order is

received and the next order is placed. The second bin contains enough stock to cover the usage

between to cover the usage between the dates of placing an order to the date of delivery

(Hammurabi, 2001). New supply is ordered as soon as the first bin is empty. Wild (2002)

observes that a two bin system helps reduce paper work as records are not maintained for each

transaction, the reorder point can further be determined by visual observation, that is to say when

stock in one bin is depleted, an order is initiated and demands are then filled from the second bin.

Further, the system facilitates single bin usage since an order ca be triggered when the inventory

level reaches a physical mark such as a painted line or a given volume level (for gasoline and

other liquids) (Wild, 2002).

2.1.2 ABC Analysis/classification

This technique categorizes inventory/material items in three groups basing on value and

materiality of inventory items that is A, B and C (Lysons 2000, Wild, 2002, Lalla, 2000).

Group A, this group represents a substantial amount of funds invested in inventory items of this

group. The items in this group are critical to the functioning and operation of an organization and

because of this, their level inventory levels must be monitored carefully. Wild (2002) observes

that items in this category are usually relatively few but account for a relatively large portion of

inventory cost or value.

Group B, the items in this group are important to the firm but they are not too critical, thus it may

not be necessary to constantly monitor the level of all these items of inventory. Group B items

are slightly larger in number however account for a smaller percentage of the total costs.

6

Group C, items in this category are not very important to the operations of the firm but still

necessary. These items constitute the lowest of the total inventory and therefore a simple control.

A graphical representation of the ABC technique of inventory control.

Adapted from Operations Management by (Ray Wild 2002)

Although high usage rate does not necessarily mean high stock levels, fast moving items, that is

to say, those which the usage rate is high and expensive items are likely to incur greater stock

costs than slow moving inexpensive items. Consequently, we should aim to aim fast

moving/expensive items since by doing so greater potential savings are possible (Ray, 2002).

2.1.3 Materials requirement planning (MRP)

This is a production planning technique that spells out or provides a list of materials that will be

required at different production stages. It is an approach for coordinating the planning of material

acquisition and production. MRP is a flow control system in the sense that it orders only what

components are required to maintain the manufacturing flow. The approach begins by

establishing the quantity and timing of finished goods demanded and then bases on this to

determine the material units that will be needed at different stages in the production process. The

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Group A

Group B

Group C

master production schedule provides the list of finished goods that will be demanded at different

periods. The production schedule therefore, enhances the production of the materials requirement

plan. This control approach helps managers not replenish raw materials when they are not

actually desired (Dury, 2000). The system functions by working backwards from the scheduled

completion dates of the end products or major assemblies to determine the sates and the

quantities of various components parts and materials that are to be ordered. The works well when

a specific demand for a product is known in advance, the demand for items tied I a predictable

fashion to the demand for other items (Michael, 2001).

The MRP technique is summarized in a diagram below

Adapted from Lysons Kenneth & Michael Gillingham (2001): Purchasing and Supply chain

Management

2.1.4 Economic Order Quantity (EOQ) or Re-order quantity

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Master production schedule

Customer order Forecast

Engineering changes MRP package Inventory transactions

Inventory status file Schedule reports Bill of materials

Lysons (2000) defines EOQ as the optimal ordering quantity for an item of stock that minimizes

costs. According to Bernard (2003), it is the quantity point at which carrying and ordering costs

are not only minimum but also are equal. One of the major problems of inventory control is how

much inventory of an item should be added when inventory is replenished. If the firm is buying

raw materials, then it has to decide the lots in which it has to be purchased on each time of

replenishment.

Brian Marchant (2003) while addressing the problems of procurement of the quantity and the

time to buy, if more units are ordered at one time, fewer orders will be required in a year. This

will mean a reduction in the total ordering costs. However, when fewer orders are placed, larger

average stocks must be maintained, which leads to an increase in carrying costs/holding costs.

The problem is therefore, one of trading off the costs of carrying large against the costs of

placing more orders. The optimum order size will help in minimizing such costs. The optimum

order size is therefore, the order quantity, which will result in the total amount of ordering and

carrying costs being minimized. The optimum size in this case is known economic order

quantity.

Lysons (2000) observes that for the EOQ to work effectively the following assumptions have to

work side by side.

Demand for the item is uniform, that is, certain and continuous over time

The lead time is constant and certain

The cost of planning an order is independent of size of the order. The delivery charge is

also independent of the quantity ordered.

The cost of holding a unit of stock does not depend on the quantity in stock

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All prices are constant and certain

Exactly the same quantity is ordered each time a purchase is made

From the above assumptions therefore, it is clear that the ordering cost per order is known and

also the carrying cost per unit is known and fixed, thus this situation leads us to a graphical

representation below.

Figure 1: Showing graphical representation when price, carrying and holding costs are constant

Q represents the quantity order and used in a given period of a month. Since receipt of stock is

stantaneous, at the end of each month, the depleted stock will be immediately replenished. The

organization will have ample stocks during the month, which are replaced without delay at the

end of the month. The EOQ can also graphically be found by plotting order quantity on the

horizontal axis and costs on the vertical axis.

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Time

Inventory in Units

Average inventoryQ/2

Figure 2: Deriving EOQ by plotting cost against quantity

Adapted from Cost and Management Accounting by (Kamukama, 2006)

Inventory costs are minimized where the total cost curve meets the ordering cost curve. The

optimum quantity (EOQ) that should be purchased is determined at that level (Kamukama,

2006). Pandey (2004) says the total cost of inventory is incentive to moderate changes in order

and it may be appropriate to say that there is an economic order range. If total costs do not

change, then the firm can change EOQ within the same range without suffering significant

losses.

2.1.5 Re-order level

Once a firm has calculated and established its EOQ, it must determine when to place an order

(David, Goetsch & Stanley, Davis 2003). The reorder point is that inventory level at which an

order should be placed to replenish the inventory. Because of uncertainty in determining the

lead-time and usage, the firm to guard against stock out situations should keep a buffer

inventory. Pandey (2004) looks at the reorder point as a point when replenishment should be

ordered with minimum risk of incurring costs associated with inventory. To determine the

reorder point under certainty, that is say usage and lead-time, do not fluctuate, we should know

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Quantity

Ordering cost

Minimum cost

Total cost

Carrying cost

Costs

EOQ

the lead-time, average usage and EOQ. Under such conditions, the reorder point is that inventory

level which will be mentioned for consumption during the lead-time and reorder period. It is

therefore set after considering that: the expected usage or rate of consumption, the time interval

between initiating and order and receipt, referred to as lead-time and the minimum inventory or

safety stock.

Minimum stock level or safety is maintained to prevent stock outs. It represents the quantity

below which the stock of an item should not be allowed to fall. It is essentially a safety or buffer

stock, which acts as a cushion against stock outs. This safety stock should be used only in

abnormal circumstances. If usage pattern is known with certainty and the lead-time is also

known accurately, then no safety stock would be needed. However, if either usage or lead-time is

subject to variation then it is necessary for business firms to maintain safety stock levels equal to

the difference between the expected usage over lead-time and the maximum usage over lead time

that the firm feels is necessary for cost minimization. It is important to note that in order to

minimize costs; the amount of safety stock to be maintained should cause costs exactly.

Therefore, Minimum stock level/safety stock = Reorder level – average rate of consumption x

average lead time (Barrat & Mark Whiteland, 2004).

Maximum stock level, this represents the uppermost amount of stock the company can maintain

at any time. Maximum level indicates the level above which stock should not be allowed to rise.

Fixation of maximum level requires the consideration of factors like: rate of consumption

materials, reorder quantity, availability of storage and cost of storing including insurance costs,

price fluctuations and risk of obsolescence.

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Therefore, Maximum stock level = Reorder level + EOQ – (minimum usage x minimum lead

time) (Barrat & Mark Whiteland, 2004).

Danger level is that level below which the minimum/safety stock level. It represents a stage

where immediate steps are taken for getting stock replenished. The moment stock reaches this

level, it is a sign that if no emergency steps are taken to replenish the stock stores will be

completely exhausted which results in production stoppage.

A graph showing a summary of stock levels

The time between A and B represents the lead time. This represents the time between the orders

to be purchased is placed and the time when the items ordered have been received.

2.1.6 Just in time (JIT) Techniques

Just in time is defined as the processing of items for customers in the quantities required just in

time for production efficiency (Wild, 2002). Further Edward, Ronald & Eric (2007) add that this

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Time (weeks)

Minimum level

Reorder level

Maximum levelQuantity (Units)

AB

is a purchasing and control method in which materials are obtained just in time for production to

provide finished goods in time for sale. A just in time manufacturing technique requires making

goods or service only when a customer, internal or external, requires it. JIT requires better

coordination with suppliers so that materials arrive immediately prior to their use. Where this

technique is applied, there is no need to have stores or ware houses and hence the costs

associated with storage are saved. The fundamental objectives of JIT are to produce and deliver

what is needed, at all stages in the production process (Van Weele, 2009).

Wild (2002) states that one of the prerequisites for effective implementing of JIT is

vendor/supplier reliability. JIT involve the pursuit of low or zero inventory so that incoming

goods and inventory items are of particular importance. This however, inventory to note that

unless regular timely supplies of requisite items is coupled with consistent quality can be

assured, JIT is impossible.

Lysons (2000) says that conditions such as close and long-term relationship with few

suppliers/vendors, and the establishment of interdependence in the vendor-consumer relationship

are necessary for JIT to effectively implement. Further, effective JIT within an organization

depends on the organization’s supplier also adopting the JIT philosophy. The willingness to

supply smaller quantities of items more frequently with assured quality is the principle

requirement. To this end, organizations have often found it necessary to help suppliers develop

JIT system of their own and management systems (Pandy, 1995).

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2.1.7 Order cycling system

Order cycling system is a method in which a review of materials on hand on a regular basis or

periodic cycle is done. For example, materials inventory might be reviewed every two weeks.

This will vary depending on the materials being reviewed. Essential items have a shorter review

cycle than less important items say in a pharmaceutical distribution company, drugs for

epidemics, vaccines and chronicle diseases cure are given priority over the other drug items

(David, Goetsch & Stanlley, Davis 2003).

2.1.8 Inventory turnover ratio

Business firms can analyze the turnover of different items of stock to find out which stock are

slow moving. Inventory turnover ratio enables the management to avoid capital being locked up

in undesirable stocks. The stock turnover ratio is calculated as follows;

Stock/inventory = cost of materials consumed ÷ average stock of materials held during the

period. The average stock is taken to be the average of opening and closing stocks. According to

the turnover rate of different items, materials can be classified into five categories which include

fast-moving materials, materials with average turnover, slow moving materials, dormant

materials (materials that have no recurring use but may be required in future) and obsolete

materials (materials which are no longer used due to reasons like substitution by another

materials, change in product line. Obsolete materials should be disposed off.

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2.2 Determinants of profitability

Profitability has been defined as the ability to earn a return on investment in a business, Wood

and Sangster (2002).

Also Don (2006), defined profitability as either accounting profits or economic profits. Don

further observes that profit can represent a positive gain from an investment or business

operation after subtracting for all expenses.

The ACCA study text (2003) observes that profit is a best known measure of the success of an

enterprise, it is the surplus remaining after total costs are deducted from total revenue, and the

basis on which tax is computed and dividend is paid. Profit is reflected in reduction in liabilities,

increase in assets, and/or increase in owners’ equity. It furnishes resources for investing in future

operations, and its absence may result in the extinction of the firm.

Wood and Sangster (2002) observe that the cost of production and volume of sales are the

interdependent determinants of profit. The analysis of cost behavior in relation to the changing

volume of sales and its impact on profit is very important to determine the break even level of a

firm. The level at which total revenue equals total costs, is said to be the break even level of a

firm. The level at which total revue equals total costs, is said to be the break even level where

there is no-profit or no-loss. Sales beyond break-even volume bring in profits. Generally

production is preceded by the process of demand forecasting, to decide on the volume of

production, the produce of which will be absorbed by the market. Pricing and promotions come

at a later stage. Costing is done to predict the costs of production and resultant profit at various

levels of activity.

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In addition, Ballou (2002) suggests a CVP analysis or Cost-volume profit analysis helps a firm to

study the interrelationship between these three factors and their effect on clean profit. The

process also includes an analysis about the external factors that affect the volume of production,

such as market demand, competitor threat and internal factors such as availability of

infrastructure, capital and labor force.

The ACCA study text (2003 adds that pricing is the most important factor that makes firms

product competitiveness. The costs of production can be classified into fixed costs, variable costs

and semi variable costs. Fixed costs remain constant and tend to be unaffected by the changes in

volume of output. Whereas variable costs vary directly with the volume of output and semi

variable as the name implies are partly fixed and partly variable. Cost accountants of the modern

era fully support variable costing for the purpose of cost accounting, listing its merits as follows:

Variable costing talks about contribution margin, which is the excess of sales over

variable costs. If this is going to be high, sufficient to cover the fixed costs, then profit is

assured for the firm. It is a key factor to determine the percentage of profit.

Variable costing assigns only those costs to a product that varies directly with the

changing levels of production, which is helpful in making a distinction of profit made

from sales and those resulting from changes in production and inventory.

Segregating the costs into fixed and variable is done for the purpose of providing

information to reflect cost-volume-profit relationships and to facilitate management

decision making and control

Flexible budgeting and cost control are possible by variable costing technique and the striking

feature is the treatment given to fixed costs, where it is treated as a period cost and not

17

apportioned among all the departments and products that enable the firm to understand the

movement of profits in the same direction as that of the sales. Although considered to be a

controversial technique and weighed against the conventional methods of costing such as

absorption costing, it is believed that it is to stay and exist as the next step in the evolutionary

method of cost accounting (Pandey, 2004).

From the economics point of view, the firm’s primary objective in producing output is to

maximize profits. The production of output, however, involves certain costs that reduce the

profits a firm can make. The relationship between costs and profits is therefore critical to the

firm’s determination of how much output to produce.

Explicit and implicit costs, a firm’s explicit costs comprise all explicit payments to the factors of

production the firm uses. Wages paid to workers, payments to suppliers of raw materials, and

fees paid to bankers and lawyers are all included among the firm’s explicit using the firm’s own

resources costs (Mutenyo and Birungi, 2007).

A firm’s implicit costs consist of the opportunity costs of without receiving any explicit

compensation for those resources. For example, a firm that uses its own building for production

purposes forgoes the income that it might receive from renting the building out. As another

example, consider the owner of a firm who works along with his employees but does not draw a

salary; the owner forgoes the opportunity to earn a wage working for someone else. These

implicit costs are not regarded as costs in an accounting sense, but they are a part of the firm’s

18

costs of doing business, nevertheless. When economists discuss costs, they have in mind both

explicit and implicit costs (Mutenyo and Birungi, 2007).

Accounting profits, economic profits, and normal profits. The difference between explicit and

implicit costs is crucial to understanding the difference between accounting profits and economic

profits. Accounting profits are the firm’s total revenues from sales of its output, minus the firm’s

explicit costs. Economic profits are total revenues minus explicit and implicit costs.

Alternatively, stated economic profits are accounting profits minus implicit costs. Thus, the

difference between economic profits and accounting profits is that economic profits include the

firm’s implicit costs and accounting profits do not (Nkudabanyaga, 2004).

A firm is said to make normal profits when its economic profits are zero. The fact that economic

profits are zero implies that the firm’s reserves are enough to cover the firm’s explicit costs and

all of its implicit costs, such as the rent that could be earned on the firm’s building or the salary

the owner of the firm could earn elsewhere. These implicit costs add up to the profits the firm

would normally receive if it were properly compensated for the use of its own resources hence

the name, normal profits (Mutenyo and Birungi, 2007).

Fixed and variable costs, in the short-run, some of the input factors the firm uses in production

are fixed. The costs of these fixed factors are the firm’s fixed costs. The firm’s fixed costs do not

vary with increases in the firm’s output (Randall, 2001). The firm also employs a number of

variable factors of production. The costs of these variable factors of production are the firm’s

variable costs. In order to increase output, the firm must increase the number of variable factors

19

of production that it employs. Therefore, as firm output increases, the firm’s variable costs must

also increase (Randall, 2001).

A total and marginal cost, the firm’s total cost of production is the sum of all its variable and

fixed costs. The firm’s marginal cost is the per unit change in total cost that results from a

change in total product. The concepts of total and marginal cost are illustrated in table 1. The

sixth column of this table reports the firm’s total costs, which are simply the sum of its variable

and fixed costs. The seventh column reports the marginal cost associated with different levels of

output (Mutenyo and Birungi, 2007).

Marginal cost and marginal product, the fir’s marginal cost is related to its marginal product. If

one calculates the change in total cost for each different level of total product reported and

divides by the corresponding marginal product of labour reported, one arrives at the marginal

cost figure. The marginal cost falls at first, then starts to rise. This behavior is a consequence of

the relationship between marginal cost and marginal product and the law of diminishing returns.

As the marginal product of the variable input-labour-rises, the firm’s total product increases at a

rate that is greater than the rate of new workers hired. Consequently, the firm’s marginal costs

will be decreasing. Eventually, however, by the law of diminishing returns, the marginal product

of the variable factor will begin to decline; the firm’s total product will increase at a rate less

than the rate at which new workers are hired. The result is that the firm’s marginal costs will

begin rising (David, 2005).

20

Scholars like Karl (1997), Kahara (1998), Bhats (2000), Nkundabanyanga (2004) present other

factors that may determine the firm’s profitability and these have been presented below as

follows.

The degree of competition a firm faces is important if a firm has monopoly power then it has

little competition, therefore demand will be more inelastic. This enables the firm to increase

profits by increasing the price. However, government regulation may prevent monopolies

abusing their power (Bhats, 2000).

If the market is very competitive then profit will be low. This is because consumers would only

buy from the cheapest firms. Also important is the idea of contestability. This is how easy it is

for new firms to enter the market. If entry is easy, then firms will always face threat of

competition, even if it is just “hit and run competition”, this will reduce profits. Firms may seek

to create barriers to entry. The most common is creating brand loyalty through advertising

(Nkundabanyanga, 2004).

The strength of demand is very important for example, demand will be high if the product is

fashionable, e.g. mobile phone companies have been very profitable. However, in recent months

profits for mobile phone companies have fallen because the high profit encouraged over supply.

Products, which have falling demand like perishables, will lead to low profit for the company

(Kahara, 1998).

21

A successful advertising campaign can increase demand and make the product more inelastic;

however, the increased revenue will need to cover the costs of the advertising. Sometimes the

best methods are word of mouth.

Substitutes, if there are many substitutes or substitutes are expensive then demand for the

product will be higher. Similarly, complementary goods will be important for the profits of a

company.

The other aspect of profitability is the degree of costs. An increase in costs will decrease profits,

this could include labour costs, raw material costs and cost of rent. For example a devaluation of

the exchange rate would increase cost of imports therefore companies who imported raw

materials would face an increase in costs. Alternatively, if the firm is able to increase

productivity by improving technology then profits should increase. If a firm imports raw

materials, the exchange rate will be important yet depreciation makes imports more expensive.

However, depreciation of the exchange rate is good for exporters who will become more

competitive.

A firm with high fixed costs will need to produce a lot to benefit from economies of scale and

produce on the minimum efficient scale, otherwise average costs will be too high. For example

in the steel industry, we have seen a lot of rationalization where medium sized firms have lost

their competitiveness and had to merger with others (David, 2005).

2.3 Relationship between inventory control and profitability

Excessive inventories are the enemy of retail profitability. For inventory to be an effective

profitability tool, corporate culture must ensure that employees are empowered to make it

22

successful (Alde & Greg, 2002). Because inventory depends heavily on sales, a firm should have

inventory at hand to make sales and hence profits (Musomeno, 2001).

Drury (1995) says that inventory control ensures quality products, avoids delays, contributes to

meeting, deadlines and finally contributes to profits. Misstating physical inventory will misstate

the amount of inventory shrinkage, which will in turn mistake the cost of items sold, and as a

result therefore, gross profit, net income, retained earnings and stockholders equity will be

misstated.

Ballou (2000) states that inventory control is an important tool of financial control, which is

often, neglected not knowing that a small percentage saving on costs will represent millions of

dollars on national scale. Further inventory control is associated with costs such as ordering,

carrying costs and stock out costs, these reduce the level of profits if not monitored closely. The

writer notes that a manager is faced with a need to drive down costs associated with inventories.

This will lead to improved delivery performance decreased stock outs and earning cost. This will

eventually improve on the firm’s profitability.

According to Lynch (2005), the main objective of inventory control is to minimize the total cost

of relevant costs to ensure profitable operations. Because of the value attributed to inventory

control, two cardinal decisions must be faced if inventory control system is to ensure profitable

operations, and these are: how much to buy at a time and when to buy.

23

According to Pandey (2005), in many cases where inventory management decisions have been

effective, inventory planning models have been developed and implemented focusing especially

on two problems of inventory size and timing. Usually, inventory control models are designed to

achieve a balance between cost of acquiring and holding inventory. These costs are the ones that

affect profitability of a firm (Kahuru, 2001). These models are developed in order to help

management maintain inventories at optimal levels that will help organizations realize profits.

2.3.1 Relationship between economic order quantity and profitability

According to Horngren (2000), economic order quantity is the quantity of inventory that should

be ordered at once, it affects inventory ordering and holding cost and will ultimately have a

bearing on profitability. For example, a few large orders are placed, annual ordering costs will be

low but annual holding costs will be high, however it is worth noting that large purchases attract

huge discounts which will compensate the much lost in holding costs.

On the other hand, if many small orders are place over all ordering costs will be high but annual

holding costs will be low. To be profitable, it is necessary to determine if increasing the order

size to obtain large value discount and slightly lowering costs will be more offset at a higher

holding cost. Profitability will thus only be achieved at optimum level of relevant cost that is

holding costs and ordering costs.

2.3.2 Relationship between re-order point and profitability

According to Lynch (2005), re-order point is the level at which an order for additional inventory

should be placed. Because inventory cannot be ordered and received instantly, orders for

24

additional inventories should be placed before current stocks are depleted. The reorder point

must consider both the lead time as required to replenish stocks after an order is placed and

inventory demand during the lead time.

Lyson (2000) further observed that because of the variation in lead time and the daily demand for

inventory, inventories are a cushion to prevent stock out and the resulting loss of sales. As

already noted above, stock out costs, include the extra costs of processing back orders and

opportunity cost of lost sales. While the opportunity of sales lost is frequently specified as the

selling price less the invoice price opportunity, costs are considered greater if dissatisfied

customers subsequently patronize other firms. In this case, the profitability of an organization

remains fragile if no proper control measures are considered.

2.4 Conclusion

The available literature suggested that inventory control has an influence on organizational

profitability. Further literature also suggested that profitability can only be guaranteed at an

optimum level of inventories. The scholars however indicated that it is not always easy to

determine the optimum level of inventories.

25

CHAPTER THREE

METHODOLOGY

3.0 Introduction

This chapter covers the research design, survey population, sampling, sampling methods, sample

size, sampling procedure, sampling design, sources of data, method of data collection, tools of

data collection, data collection procedures, data analysis tools and data presentation.

3.1 Research design

A combination of descriptive, analytical and cross sectional survey design was used and this

helped in collection of enough opinions from the respondents to achieve the objectives of the

study which are: find out the various inventory control techniques in place, inventory control

methods/systems in place, establishing factors that determine the level of profitability at Laborex

(U) Ltd and further establish a relationship between inventory control and the level of profits in

an organization. This helped the researcher in reaching an appropriate conclusion on the

relationship between inventory control as an independent variable and profitability as dependent

variable.

3.2 Sampling population

The study involved 5 respondents from the management level, 15 respondents who were the

principal medical representatives, 20 respondents from the sales department and 10 respondents

26

from the ware house (stores) who were expected to respond on behalf of the firm since the study

was using Laborex (U) Ltd the case study.

3.3 Sampling method

Purposive sampling method was used in such a way that respondents from Laborex were chosen

according to the departments they work with. This was because the method was convenient and

it enabled the researcher to collect the necessary data from the respondents. Convenience

sampling method was also used in order to arrive at respondents who were readily available. This

was in the interest of saving time and labour. Double sampling was also used especially on

respondents who appeared to have a clear insight of the problem and this involved asking

additional questions relating to the research problem. This was intended to add more value to the

findings.

3.4 Sampling size

The sample size was 50 respondents, which was an average of all the respondents used by other

researchers on different and other related topics.

3.5 Sampling procedure

Using purposive sampling method, the researcher selected 50 respondents from Laborex (U) Ltd.

These were selected carefully to reduce on the bias and enabled the generation of the findings.

The respondents were given a questionnaire to attempt a few questions relating to their business.

3.6 Sources of data

The sources of data were categorized into primary and secondary.

3.6.1 Primary source

27

Primary data was collected from respondents through questionnaires and face to face interviews

that helped in collecting data from those who were too busy to tick questionnaires.

28

3.6.2 Secondary source

The secondary data was collected from both internal and external sources; the internal sources

included data collected from the firm whereas the external sources included the internet,

journals, newspapers, magazines and textbooks.

3.7 Data collection procedures

The researcher obtained an introduction letter from the faculty, which she presented to the

concerned authority at Laborex (U) Ltd seeking to be authorized officially to use the firm as a

case study for the study.

The researcher then distributed the structure questionnaires to the respondents seeking for

answers to the questions in the questionnaires and the researcher found the questions easy since

they were open ended.

After obtaining the answers, the researcher used Social Package for Social Sciences (SPSS) to

interpret, analyze and present the findings to the supervisor for review.

3.8 Data collection tools

3.8.1 Questionnaires

The researcher designed structured questionnaires that helped her to gather information from

respondents. The questionnaires were self administered and the respondent was required to give

personal attitudes and information pertaining to the operations. A likert scale was used to

develop a questionnaire, where the respondents views were graded ranging from strongly agree,

agree, disagree and strongly disagree represented on the scale as SA, A, D and SD respectively.

29

3.9 Data analysis and processing

This involved sorting an arranging of the data into respective groups and tables using frequencies

and percentages to enable easy analysis. This also enabled the researcher to analyze responses

from the respondents to be analyzed using statistical package for social science (SPSS) to

establish the relationship between the two variables, and with the help of frequencies,

percentages, tables, graphs and pie charts the researcher was able to reach a conclusion of the

study.

3.10 Problems encountered

i. The researcher faced financial constraints. This was because the researcher was self

funded yet stationary, transportation, typesetting, information required are remarkably

expensive.

ii. The time allocated to the study was not enough to cover all the necessary ends of the

research needed by the researcher and the respondents.

iii. There was a problem of language barrier since some of the respondents were not

comfortable with some languages.

30

CHAPTER FOUR

DISCUSSION AND INTERPRETATION OF FINDINGS

4.1 Introduction

This chapter presents the results of the study according to research objectives. These findings

were obtained from both primary and secondary sources. They were presented and analyzed

using frequency tables and finally a relationship between the variables was established with the

aid of a computer program called Statistical Package for Social Scientists.

4.2 Findings from General Information

For the research to know about the characteristic of the sample that was used during this study,

background information in section one of the questionnaire was sought. The results are presented

below.

Table 1: Finding on sex of respondents

Sex Frequency Percent

Male 25 50.0

Female 25 50.0

Total 50 100.0

Source: primary data

31

Results in table 1 show that both genders where represented equally with a (50%). This implies

that Laborex (U) Ltd is gender sensitive through giving equal opportunity to both sexs.

Table 2: Education level

Level Frequency Percent

O’ Level 10 20.0

A’ Level 40 80.0

Total 50 100.0

Source: primary data

Results in table 2 indicate that the 80.0% of the respondents had an A level education while the

rest had O level education (20%), implying that most probably all employees at Laborex (U) Ltd

have gone to school and many reached higher education (A level). Thus able to provide

information that is reliable basing on the study.

Table 3: Response on professional qualification

Frequency Percent

Yes 35 70.0

No 15 30.0

Total 50 100.0

Source: primary data

Findings in table 3 indicate that most (70%) of Laborex (U) Ltd employees have professional

qualification. However, the 30% do not have professional qualification.

32

Table 4: Respondents’ qualifications

Qualification Frequency Percent

CIPS 5 16.7

ACCA 10 33.3

CPA (U) 10 33.3

Other 5 16.7

Total 30 100.0

Source: primary data

Results in table 4 indicate that, 33.3% of the respondents had a CPA(U) and ACCA qualification,

16.7% were qualified in CIPS while others (16.7%) had different qualifications. Majority had

CPA(U) and ACCA qualification, thus had adequate knowledge of the items in the question

concerning each variable under study.

4.3 Findings on objective one: To find out the various inventory control techniques in place

Objective one of this study aimed at finding out the various inventory control techniques in

place. To this effect, respondents were set questions to answer in a self administered

questionnaire and here below are the results.

33

Table 5: Results on just in time technique

N Minimum Maximum Mean Std.

Deviation

Your system is designed to enable JIT

inventory control technique

50 1.00 4.00 3.0000 1.01015

You have a small store since you apply

JIT

50 2.00 4.00 3.0000 .63888

Your suppliers produce and deliver

exactly what you need

50 1.00 3.00 2.1000 .54398

You maintain low inventory levels

because your vendors are reliable

40 2.00 4.00 3.1250 .60712

There is long-term relationship between

your organisation and the JIT vendors

50 1.00 4.00 2.5000 1.03510

Following the likert scale ranging from strongly agree to strongly disagree, the analysis in tbale 5

above revealed that respondents agreed that they maintain low inventory levels because their

vendors are reliable with a mean value of (3.1250). It was further found out that respondents

were not sure that their system is designed to enable JIT inventory control technique with a mean

value of (3.0000) and also having a small store since they apply JIT with mean of (3.0000).

However, respondents disagreed that there is long-term relationship between their organisation

and the JIT vendors with a mean (2.5000) and also suppliers produce and deliver exactly what

they need with a mean of (2.1000).

34

Table 6: Results on Economic Order Quantity

N Minimum Maximum Mean Std.

Deviation

You maintain low inventory levels

because your vendors are reliable

40 2.00 4.00 3.1250 .60712

You procure large amounts of items in

your inventory is certain and

continuous

50 1.00 2.00 1.6000 .49487

The demand for some items in your

inventory is certain and continuous

50 1.00 3.00 2.2000 .75593

The ordering and carrying costs are

known and fixed

45 1.00 4.00 2.7778 1.24113

The lead time is certain and you exactly

order the same quantity at every

purchase

50 2.00 4.00 3.0000 .90351

The analysis in table 6 revealed that respondents agreed that they maintain low inventory levels

because their vendors are reliable with a mean value of (3.1250). It was further found out that

respondents were not sure that the lead time is certain and they exactly order the same quantity at

every purchase with a mean value of (3.0000). However, respondents disagreed that the ordering

and carrying costs are known and fixed with a mean (2.7778) and also they procure large

amounts of items in their inventory is certain and continuous with a mean of (1.6000).

35

Table 7: Results on ABC Analysis

N Minimum Maximum Mean Std.

Deviation

You maintain different classes of items

in your inventory

50 1.00 3.00 1.2000 .60609

Fast moving items have larger stock

levels in your store

50 1.00 2.00 1.4000 .49487

You closely monitor items that are

critical to the operation and functioning

of the organization

50 1.00 3.00 1.7000 .64681

Purchase decisions depend on the

materiality and value of inventory items

45 1.00 2.00 1.4444 .50252

The ABC analysis is the most effective

inventory control technique any

company should adopt

50 1.00 4.00 2.9000 1.14731

In table 7 above, the analysis revealed that all respondents disagreed that they maintain different

classes of items in their inventory with a mean value of (2.9000), they closely monitor items that

are critical to the operation and functioning of the organization with a mean value of (1.7000)

and also they maintain different classes of items in their inventory with a mean value of (1.2000).

36

4.3 Findings on objective two: To establish factors that determines the level of profitability

at Laborex.

Objective two of this study aimed at establishing factors that determines the level of profitability

at Laborex. To this effect respondents were set questions to answer in a self administered

questions and here below results.

Table 8: Results on factors that determine profitability

N Minimum Maximum Mean Std.

Deviation

The company has been making profits

on a progressive level

50 1.00 4.00 2.3000 .78895

Costs have a big impact on the

company's balance sheet

50 1.00 3.00 2.0000 .63888

The company is able to meet its

expenses and liabilities

50 1.00 3.00 1.8000 .60609

The company is grossly affected by the

unstable foreign currency since it relies

heavily on imported products

40 1.00 3.00 1.6250 .70484

Political atmosphere has an effect on

business of the company

45 1.00 2.00 1.5556 .50252

37

Stiff competition has been a threat to

the company's sales revenue

45 1.00 3.00 2.1111 .57296

Following the likert scale ranging from strongly agree to strongly disagree, the analysis in table 8

revealed that respondents disagreed that the company has been making profits on a progressive

level with a mean value of (2.3000), costs have a big impact on the company's balance sheet with

a mean value of (2.0000), the company is able to meet its expenses and liabilities with a mean

value of (1.8000) and also political atmosphere having an effect on business of the company with

a mean value of (1.5556).

4.4 Findings on objective three: To establish a relationship between inventory control and

the level of profits in an organization.

For the researcher to establish the relationship above, Pearson correlation was used and findings

are presented in the table below.

Table 9: Correlation

Correlations

Inventory Control Techniques Profitability

Inventory Control Techniques Pearson Correlation 1 .553**

Sig. (2-tailed) .000

N 50 50

Profitability Pearson Correlation .553** 1

Sig. (2-tailed) .000

38

N 50 50

**. Correlation is significant at the 0.01 level (2-tailed).

There is a strong positive correlation between inventory control and the level of profits in an

organization (r = 0.553** P < 0.01). This implies that 55.3% is the contribution of inventory

control towards the level of profits in Laborex (U) Ltd. Other factors not considered in this study

contribute 44.7% to the level of profits. These findings are in line with studies by Lyson (2000)

who observed that because of the variation in lead time and the daily demand for inventory,

inventories are a cushion to prevent stock out and the resulting loss of sales. As already noted

above, stock out costs, include the extra costs of processing back orders and opportunity cost of

lost sales. While the opportunity of sales lost is frequently specified as the selling price less the

invoice price opportunity, costs are considered greater if dissatisfied customers subsequently

patronize other firms. In this case, the profitability of an organization remains fragile if no proper

control measures are considered.

39

CHAPTER FIVE

DISCUSSION, CONCLUSION AND RECOMMENDATION

5.1 Introduction

This chapter presents discussion, conclusion and recommendations according to research

objectives in chapter one and these included; to find out the various inventory control techniques

in place, to establish factors that determines the level of profitability at Laborex and to establish

a relationship between inventory control and the level of profits in an organization.

5.2 Discussion of research findings

5.2.1 To find out the various inventory control techniques in place

Results revealed that respondents were in disagreement that the control techniques in place were

adequate. These findings are accredited to the methods employed by the firm to establish,

maintain and control the levels of inventory techniques, that is, Two bin inventory system, ABC

Analysis/classification, Materials requirement planning (MRP), Economic Order Quantity

(EOQ) or Re-order quantity, Re-order level, Just in time (JIT) Techniques, Order cycling system

and Inventory turnover ratio. Findings are also commensurate with works of Pandey (2004) who

says the total cost of inventory is incentive to moderate changes in order and it may be

appropriate to say that there is an economic order range. If total costs do not change, then the

firm can change Economic Order Quantity within the same range without suffering significant

losses.

40

5.2.2 To establish factors that determines the level of profitability at Laborex

Results revealed that majority of the respondents were in disagreement that the level of

profitability at Laborex (U) Ltd was satisfactory. Findings concur with studies by Wood and

Sangster (2002) who observed that the cost of production and volume of sales are the

interdependent determinants of profit. The analysis of cost behavior in relation to the changing

volume of sales and its impact on profit is very important to determine the break even level of a

firm. The level at which total revenue equals total costs, is said to be the break even level of a

firm. The level at which total revue equals total costs, is said to be the break even level where

there is no-profit or no-loss. Sales beyond break-even volume bring in profits. Generally

production is preceded by the process of demand forecasting, to decide on the volume of

production, the produce of which will be absorbed by the market. Pricing and promotions come

at a later stage. Costing is done to predict the costs of production and resultant profit at various

levels of activity.

5.2.3 To establish a relationship between inventory control and the level of profits in an

organization

There was a strong positive correlation between inventory control and the level of profits in an

organization (r = 0.553** P < 0.01). This implies that 55.3% is the contribution of inventory

control towards the level of profits in Laborex (U) Ltd. Other factors not considered in this study

contribute 44.7% to the level of profits. These findings are in line with studies by Lyson (2000)

who observed that because of the variation in lead time and the daily demand for inventory,

inventories are a cushion to prevent stock out and the resulting loss of sales. As already noted

above, stock out costs, include the extra costs of processing back orders and opportunity cost of

41

lost sales. While the opportunity of sales lost is frequently specified as the selling price less the

invoice price opportunity, costs are considered greater if dissatisfied customers subsequently

patronize other firms. In this case, the profitability of an organization remains fragile if no proper

control measures are considered.

5.3 Conclusions

It was concluded that respondents were in disagreement that the control techniques in place were

adequate.

It was concluded that majority of the respondents were in disagreement that the level of

profitability at Laborex (U) Ltd was satisfactory.

It was concluded that there was a strong positive correlation between inventory control and the

level of profits in an organization (r = 0.553** P < 0.01). This implies that 55.3% is the

contribution of inventory control towards the level of profits in Laborex (U) Ltd.

5.4 Recommendations

It was recommended that management should adopt practical and adequate inventory control

techniques to establish, maintain and control the levels of inventory techniques.

It was recommended that management should ensure that it earn a return on investment in the

company through positive gains from an investment or business operation after subtracting for

all expenses.

42

It was recommended that management at Laborex (U) Ltd should adopt adequate inventory

control techniques so as to enhance the level of profits.

5.5 Areas for further research

The study did not exhaust all the dependent variables that influence profits thus the need for

other researchers to conduct an exhaustive study on variables here below:

5.5.1 Product quality and level of profits

5.5.2 Organizational learning and level of profits

5.5.3 Management style and level of profits

43

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Horngren (2000) Inventory Management Techniques

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46

APPENDIX 1

QUESTIONNAIRE

I am a student of Makerere University undertaking a Bachelor of Commerce degree. Currently I

am carrying out a research study on inventory control and profitability, a case study of Laborex

Uganda. Please spare me a few minutes to help me answer this questionnaire.

SECTION A: Demographic characteristics

1. Gender: Male Female

2. Level of Education: Primary O’ Level A’ level

University degree Other……………………..

3. Do you have any professional qualification?

Yes No

4. If yes which of the following qualifications do you have?

CIPS

ACCA

CPA (U)

Other (please specify)

In the following sections, SA- Strongly agree, A-Agree, D-Disagree and SD-Strongly disagree

47

SECTION B: Inventory control techniques

SA A D SD

1) The company employs the following techniques of inventory control

a) Just in time

i) Your system is designed to enable JIT inventory control

technique

ii) You have a small store since you apply JIT

iii) Your suppliers produce and deliver exactly what you need

iv) You maintain low inventory levels because your vendors are

reliable

v) There is a long-term relationship between your organization and

the JIT vendors

b) Economic Order Quantity

i) You maintain an established and known minimum order quantity

ii) You procure large amounts of items to reduce orders you make

per year

iii) The demand for some items in your inventory is certain and

continuous

iv) The ordering and carrying costs are known and fixed

v) The lead time is certain and you exactly order the same quantity

at every purchase

c) ABC Analysis

48

i) You maintain different classes of items in your inventory

ii) Fast moving items have larger stock levels in our store

iii) You closely monitor items that are critical to the operation and

functioning of the organization

iv) Purchase decisions depend on the materiality and value of

inventory items

v) The ABC analysis is the most effective inventory control

technique any company should adopt

SECTION C: Factors that determine profitability

SA A D SD

i) The company has been making profits on a progressive level

ii) Costs have a big impact on the company’s balance sheet

iii) The company is able to meet its expenses and liabilities

iv) The company is grossly affected by the unstable foreign since it

relies heavily on imported products

v) Political atmosphere has an effect on business of the company

vi) Stiff competition has been a threat to the company’s sales

revenue

49