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The benefits of inventory management automation in supermarkets through a research study. The study investigates the level of automation, the impact on inventory investment and profits, and the use of various automation tools such as rfid, e-pos, and erp. The document also discusses the importance of inventory management and the objectives of inventory management systems. References are provided for further reading.
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I declare to the best of my knowledge that this is my original work and has not been presented for a degree in any university. No part of this proposal should be reproduced without prior permission of the author and /or University of Nairobi.
Kitheka Samson Samuel
D61/63680/
Signature..................................................... Date: 9TH^ NOVEMBER 2012
This research project has been submitted for examination with my approval as the university supervisor.
Mr. Gerald Ondiek
Department of Management Science
University of Nairobi
Signature............................................ ........ Date: 9TH^ NOVEMBER 2012
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Special acknowledgement goes to my supervisor Mr. Gerald Ondiek whose guidance and positive criticism made the project a success. I also greatly appreciate the guidance and support that was offered by the coordinator school of business, Mr. Alex Jaleha.
I am indebted to the management and employees of all the supermarkets from which data was collected. To all the others not specifically mentioned but who contributed to the writing of this project, thank you very much.
Finally, I thank the Almighty God who made everything a reality during the entire research period.
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In today‟s highly competitive business environment, organizations are striving to achieve effectiveness, cost efficiencies and economies of scale. Most of these organizations hold inventory so as to meet their customers‟ needs. However, managing these inventories in order to achieve their objectives has posed a great challenge to the firms. Many firms have not yet established how much to invest in inventories and the right inventory levels to hold so as satisfy customers. Organizations have therefore turned to using modern technology to overcome such challenges. Specifically, the study sought to address the following two objectives; to establish the extent of inventory management automation and to determine the effect of inventory management automation on the performance of supermarkets in Western Kenya. The study employed a survey design and targeted all the supermarkets in Kisumu, Kakamega and Bungoma. Data was collected from 11 out of the 12 operational supermarkets and a response rate of 90.9% was achieved. Data was gathered using structured questionnaires and analysed using both descriptive and inferential statistics, with the help of Statistical Package for Social Sciences (SPSS). The findings of the study revealed that inventory management automation affected the performance of the supermarkets and that there was a positive linear relationship between inventory management automation and the performance of the supermarkets. The linear regression model used revealed that 56.7% of the supermarkets‟ performance could be explained by inventory management automation (r^2 =0.567). The extent of inventory management was found to be high among the supermarkets, with an overall mean score of 3.94, and the performance was also found to be high with an overall mean score of 4.1both variables being rated on a scale of 1 to 5. The study recommended that supermarkets should automate their inventory management systems so as to improve customer service delivery levels and reduce operational costs. It was also recommended that the supermarkets should decentralize their management structures, encourage specialization of labour and do enough research before investing in any new technology. The study suggested that further research should be conducted on the effect of inventory management automation on inventory investment and profits, effect of automation on demand forecasting accuracy as well as challenges faced by the supermarkets in automating their inventory management systems and how to overcome them.
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BOM : Bill of Materials
EDI : Electronic Data Interchange
E-POS : Electronic Point of Sale
ERP : Enterprise Resource Planning
FFV : Fresh fruits and vegetables
IT: Information technology
MPS : Master Production Schedule
MRP : Materials Requirement Planning
NIMIS: Networked Inventory Management Information Systems
RFID : Radio Frequency Identification
VMI : Vendor Managed Inventory
WIP : Work in Progress
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Inventory is a very critical component in every organization and it requires serious managerial consideration since it ties up a lot of firms‟ capital. However, Inventories are essential for keeping the production continuous whereby moving inventories keep the market going and the distribution system intact. According to David and David (2002), these functions include providing a cushion to prevent against stock- outs and therefore if there is a constant and efficient supply of inventory, it will reduce the chances of uncertainties or lack of stocks and the costs that relate to stock- outs and if this is well achieved, it will enable any firm to attain a competitive advantage over competitors. Donald (2006), points out that there is failure in the firms‟ systems since most of them are not computerised and such firms tend to have huge inventories due to poor planning and also in anticipation that they will beat the competition from the jua kali sector. The failure leads to problems of daily sales accounting since there can be errors in the amounts received in relation to the amounts sold and numerous problems are also encountered in demand forecasting since material managers are not able to predict the exact amount of inventory to maintain so as to meet the customer‟s demand.
Automated inventory systems usage has had little application and this has resulted in problems that come as a result of stock shortages and it is for this reason that various researches have been carried out pertaining to Inventory Management Control Systems. Godwin (2003) researched on the impact of telecommunication in inventory management and established that telecommunication and inventory control systems are directly related. For instance, Just-in Time System helps in improving the lead-time since orders are made on time and there is just-in-time delivery and therefore this helps in improving the production scheduling and planning of most companies. Every organization holds something in stock; organizations such as manufacturers, healthcare institutions and other service providers place stock in a subsidiary position rather than a central position. Inventory is still an important element in operational effectiveness and often appears in the balance sheets as the
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forces for automated inventory management are increasing customer requirements, the need for networked organizations and the opportunity of networked inventory management. In networked firms where the inventory managers have to deal with several other organizations as far as stock management is concerned, the Networked Inventory Management Information Systems (NIMIS) come in handy (Martin et. al. 1996).
Inventory is a very expensive asset that can be replaced with information which is a less expensive asset but to do this, the information has to be accurate, timely, reliable and consistent. When this happens, you carry fewer inventories, reduce cost and get products to customers faster (David, 1996). This therefore implies that inventory management is very important if a company wants to achieve a balance between efficiency and responsiveness.
David, (1996) explains the following objectives of inventory management: maximizing customer service, maximizing the efficiency of purchasing and production, maximizing inventory investment and maximizing profit. It is worth noting that meeting these objectives requires balancing short-term as well as long- term objectives. Whether used to provide customer service or to achieve efficiencies, the need to carry inventories conflicts with the management‟s desire to minimize inventory investments. For instance, long production runs tend to create inventories; marketing people want stocks of a larger variety of products and options to serve a broad customer demand. High levels of inventory also take up space in factories and distribution centres, thus incurring additional costs of storage, insurance, and so on. Reconciling these conflicting objectives is a primary goal of inventory management. Inventory Management systems and inventory control processes provide information to efficiently manage the flow of materials, effectively utilize people and equipment, coordinate internal activities and communicate with customers (Wolcott, 2000).
Vijay (2004) defines automation as a technology dealing with the application of mechatronics and computers for the production of goods and services. Automation is
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broadly classified into manufacturing and service automation. The main reasons why many firms automate is to curb the problems of shortage of labour, high cost of labour, need to increase productivity and to reduce the manufacturing lead-times. All this put together, it implies that automation leads to lower operational costs and improved customer service. Inventory can appear in many places in the supply chain, and in several forms such as raw materials inventory, work- in-process (WIP) or finished goods inventory. The major challenge faced by many supply chain managers is establishing an efficient and effective inventory management system for their organizations (Brason et al, 2005).
In order to effectively automate inventory management, several systems have been developed so as to ensure that firms, supermarkets included, hold the right quantities of stock so as to strike a balance between the costs involved and customer satisfaction. Such systems include Materials Requirement Planning (MRP), Vendor Managed Inventory (VMI), Radio Frequency Identification (RFID), Enterprise Resource Planning (ERP), Electronic Point of Sale (E-POS), and E- Procurement (Ken et al. 2010; Simchi-Levi et al. 2009 and Sople, 2010).
The performance of an organization is evaluated by how it reduces cost or increases value. Firms‟ performance monitoring is important; in many industries, the supply chain represents roughly 75 percent of the operating budget expense (Palevich, 1999). Three common measures of performance are used when evaluating performance: efficiency, responsiveness and effectiveness (Chase et al., 2001). Efficiency implies minimization of total system wide costs from transportation and distribution to inventories of raw materials, work in process and finished goods. To be efficient, firms should utilize strategies aimed at creating highest cost efficiency and for such efficiencies to be achieved, non-value adding activities should be eliminated, economies of scale pursued and optimization techniques deployed so as to get the best utilization capacity. To be responsive means ensuring that customers‟ needs/demands are attended to at the right time without delays. In order to achieve responsiveness, the firms should be flexible to the changing and diverse needs of the customers and also build to order and mass customization processes as a means to
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changes within the consumer market and the retailers therefore have an opportunity to present products to their customers in an informative way. The rise of supermarkets in developing countries has received considerable attention in the development economics literature over the past few years (Reardon et al., 2003). That literature shows that: supermarkets are spreading quickly in urban areas and that supermarket chains are modernizing their product procurement systems, differentiating them from those used by traditional retailers and wholesalers. In Kenya for example, Neven and Reardon (2004) showed that supermarkets are growing at an annual rate of eighteen percent (18%) and have a twenty percent (20%) share of the urban food market overally. Supermarket chains in Kenya have recently began to modernize their procurement systems by centralizing their procurement over the country into distribution centres (away wholesalers dedicated to sourcing from farmers as well as the wholesale markets.
The advent of supermarkets in the rural communities has opened up unprecedented opportunities for a considerable number of (mostly large) farmers, albeit generating negative impact on small producers unable to meet the stringent requirements of supermarket chains and other modern food supply channels. Inevitably, the food security of this latter group is impaired. It is therefore imperative that development policies and national as well as international assistance programmes take this factor into account and include actions that will enable this disadvantaged group to benefit from the new opportunities opening up in the food trading system. Most studies conducted with regard to supermarkets in Kenya have focused on fresh fruits and vegetables (FFV) (Reardon et al. 2003).
Over the last 5 years, Western Kenya has experienced an immense growth in the number of supermarkets. Economic growth within the area has greatly contributed to this growth and this is probably due to the establishment of several universities and constituent colleges in Kisumu, Bungoma and Kakamega towns. In the three towns mentioned, there are twelve (12) supermarkets, most of them with more than one branch, most probably with an objective of reaching out more customers in the region. Many other shopping malls are still under construction and have already been earmarked by other big supermarket chains and this greatly implies that the future of the retail industry in the area is a bright one.
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Inventory management entails all the unified management of those internal activities associated with the acquisition, storage, issue, use and internal distribution of inventory used in the production and provision of services. It is the activity of determining the rate, quantities and the procedures of materials to be stocked in an organization and regulation of receipts and issues of those stocks (Sople, 2010). Many firms have had a persistent problem in establishing the right inventory levels and they have thus turned to computerizing their systems so as to achieve a balance between responsiveness and efficiency.
Leading supermarkets in Kenya have moved towards the use of more centralized procurement systems for FFV. More recently, however, Kenyan supermarkets are focusing on offering a one stop shopping service by providing everything that a customer wants, all under one roof and it is quite difficult to achieve this using manual inventory management systems (Neven and Reardon, 2004). However, the use of automated inventory management systems has had little application in most organizations. This has resulted in problems that come as a result of stock-outs and stoppage in inventory flow. This in turn leads to dead inventory and the firms end up incurring huge losses in terms of opportunity costs associated with holding inventory (Wolcott, 2000).
Allan and Remko (2002) researched on how to establish inventory levels of gifts and decorative accessories in beauty shops and established that companies that make good use of Electronic Data Interchange (EDI) are far much better equipped to succeed than those which rely on outdated methods of inventory control. The research however fails to explain how using such a powerful system would assist the firms increase their profits, improve their service delivery levels and reduce the total operation costs for the firms. Godwin (2003) also did a research on the performance driven in production planning and inventory control to process choice, and established that inventory tracking system might constitute a wasteful use of financial resources. But for the other firms operating in industries, it can result in effective inventory management. It has been established that there are many benefits that accrue from efficient utilization of computerised inventory control systems, the
