AN EXAMINATION OF INVENTORY MANAGEMENT ON ORGANISATIONAL PROFITABILITY- A CASE STUDY OF NAKUMATT HOLDINGS LIMITED
TABITHA MWELU KIVINDU
1.1 Background of the study
Inventory management is an important part of the working capital management of any organisation. Practical decisions have to be made as to how inventory is going to be managed, which management system should be used, how much inventory should be kept and so on.Inventory which is not in current use is an idle resource, which is costing the organisation money. Therefore, an organisation must have good reason to hold it.
There are many reasons a company will hold inventory but some of the most important are:
1. To meet ongoing demand from the customer
2. To meet an expected rise in demand
3. To ensure production is not stopped
4. To qualify for bulk order discounts/special promotions
5. To meet suppliers requirement for minimum order sizes.
There are, however, costs associated with inventory:
1. Holding costs, e.g the warehousing, cost of insurance etc
2. Ordering costs, e.g delivery costs
3. Shortage costs, e.g the loss of sales revenue, the cost of paying labour even when
there are no raw materials to work with etc
4. The purchase price.
Factors affecting the level of inventory held:
In deciding on a level of inventory to be held, the company has to not only weigh up the costs and benefits outlined above, but also consider the liquidity/profitability trade off. If too little inventory is held, it could affect profitability (for example, sales could be lost) but if too much inventory is held, then cash tied up in this inventory could affect a company’s liquidity....