4 5787597727055479190

Dire dawa UNIVERSITY
COLLEGE OF BUSINESS AND ECONOMICS
DEPARTMENT OF LOGISTICS AND SUPPLY CHAIN

MANAGEMENT
LOGISTICS & SUPPLY CHAIN MANAGEMENT PROGRAM
ASSESMENT OF INVENTORY MANAGEMENT SYSTEM (A CASE STUDY OF

DIRE DAWA FOOD COMPLEX SHARE CAMPANY)
A SENIOR ESSAY SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENT

FOR THE DEGREE OF BACHLOR OF ARTS IN LOGISTICS & SUPPLY CHAIN
MANAGEMENT.
BY:- BANTE TILAHUN
ID NO. R/1776/06
ADVISOR:-GEZATE. G
JUNE, 2016
DIRE DAWA, ETHIOPIA

CONTENTS
Title page
Abstract……………………………………………………………………………………I
Acknowledgements …………….………………………………………………………...II
Table of contents …………………………………………………………………………III
CHAPTER-ONE ......................................................................................... 1
1. INTRODUCTION ................................................................................... 1
1.1 Back ground of the study ..................................................................................................... 2
1.2 BACKGROUND OF THE ORGANIZATION .............................................................................. 2
1.2 Statement of the problem ................................................................................................... 2
1.3 Basic Research Questions .................................................................................................... 3
1.4 Objective of the study .......................................................................................................... 3
1.4.1 General objective ............................................................................................................. 3
1.4.2 Specific objective .............................................................................................................. 4
1.5 Significance of the study ...................................................................................................... 4
1.6. Scope of the study .............................................................................................................. 4
1.7 Definition of key terms ........................................................................................................ 4
1.8 Limitation of the study......................................................................................................... 5
1.9 organization of the study………………………………………………………………………………………………..5
CHAPTER-TWO ..........................................................................................
2. LITERATURE REVIEW ........................................................................... 6

2.1 What is inventory?............................................................................................................... 6
2.2 Classification of inventory ................................................................................................... 7
2.3 Inventory management ....................................................................................................... 8
2.3.1 Aggregate inventory management ....................................................................... 9
2.4 Function of inventories ...................................................................................................... 10
2.4.1 Anticipation inventory .................................................................................................... 11
2.4.2 Function inventory (safety stock) ................................................................................... 11
2.4.3 Lot size inventory ........................................................................................................... 11
2.4.4 Transportation inventory ............................................................................................... 12
2.5 Objective of inventory management ................................................................................. 12
2.5.1 Customer service ............................................................................................................ 13
2, 5, 2 Establishing safety stock ............................................................................................... 13
2.5.3 The service level approach ............................................................................................. 14
2.6 Opportunity efficiency ....................................................................................................... 14
2.7 Inventory costs................................................................................................................... 16
2.7.1 Items costs ...................................................................................................................... 16
2.7.2 Carrying costs ................................................................................................................. 17
2.7.3 Ordering costs................................................................................................................. 18
2.7. 4 Stock out costs ............................................................................................................... 18
2.7.5 Capacity related costs..................................................................................................... 19
2.8 Inventory analysis .............................................................................................................. 19
2.8.1 Inventory catalog............................................................................................................ 19
2.8.2 ABC analysis the 80-20 concept...................................................................................... 20
2.8.3ABC classification............................................................................................................. 21
2.9 Types of inventory control systems ................................................................................... 22
2.9.1 A cycle ordering system .................................................................................................. 22
2.9.2 Order point system fixed order quantity system ............................................................ 23
2.9.3 Fixed time period model ................................................................................................. 24
2.9.4 Material requirement planning (MRP) system ............................................................... 25
2.10 The economic order quantity concept ............................................................................. 27
2.10.1 Example of inventory caring cost ................................................................................. 27
2.10.2 Example of inventory acquisition ................................................................................. 28
CHAPTER-THREE ................................................................................... 30
3. Methodology of the study................................................................. 30

3.1 research desion.................................................................................................................. 30
3.2 source of data………………………………………………………………………………………………………………30
3.3 method of data collection……………………………………………………………………………………………30
3.4 sample and sampling technique……………………………………………………………………………………31
3.5 procedure of data collection………………………………………………………………………………………31

3.6 method of data presentation analysis and interpretation…………………………………………… 31
CHAPTER-FOUR........................................................................................................................ 33
5. 0 Data presentation analysis and interpretation ................................................................ 33
CHAPTER FIVE .......................................................................................................................... 44
.5.0 SUMARRY CONCLUSHIN AND RECOMMENDATION ....................................................... 44
5.1 Summary............................................................................................................................ 44
5.2 Conclusion.......................................................................................................................... 45
5.3 Recommendation .............................................................................................................. 44
List of table’s page
Table 4.1 profile of Respondents ……………………………………….33.

Table 4.2 Inventory control system ……………………………………..34
Table 4.3 Inventory control system ………………………………………35
Table 4.4 Inventory control system …………………………………….35.
Table 4.5 bin card Inventory control system …………………………36
Table 4.6 policy and procedures…………………………………………36
Table 4.7 kinds of inventory management……………………………..37
Table 4.8 Inventory management activity………………………………37
Table 4.9. The organization inventory process ………………………..38
Table 4.10 Source of problem inventory management……………….38
Table 4.11 The role of inventory management ……………………….39
Table 4.12 regular purchase……………………………………………….39
Table 4.13 Types of bid………………………………………………………40
Table 4.14 material coding system ………………………………………40
Table 4.15 control of inventory store…………………………………….41
Table 4.16 hold of inventory………………………………………………..41
Table 4.17 Critical supplier…………………………………………………42
ABSTRACT
This research is designed to assess inventory management system in Dire dawa food
complex Share Company. The objective of this study is assessing inventory
management system in Share Company. This Dire Dawa Food complex study takes
30 samples (respondents) from the company employee and used judgmental sampling
technique. In the study both primary and secondary data was used. And also the
researcher used qualitative research design with cross sectional research type. To
analysis the collected data descriptive analyses where used. The study explain
different concept like dimension concepts of inventory, classification of inventory,
fiction of inventory, objectives of inventory management, inventory cost, classification
of inventory.
I
ACKNOWLEDGEMENT
I would like to express my most heart full and deepest gratitude to God
for helping me to go through all the ups and downs of my life.
Next I would like thank my advisor Gezate.g who greatly supported
me until the final stages of this research paper.
I express my special and heart full thanks to mom and my dad, whose
continuous and tireless support to makes this research paper
possible.
Finally thank you employees and managers of dire dawa food complex
share company.
CHAPTER-ONE
1. INTRODUCTION
1.1 Back ground of the study
Inventories are stock of raw materials, work in process and finished good. Those
appear at numerous points throughout a firm’s production and logistic channel
(Doubler 1996). According to ploss land and Weight (1996) inventory is the stock
of any item or resource used in an organization. Whereas Mosich (1988)
Inventory can be defined as the amount of raw materials, finished goods and
work in process to be stocked for the smooth running of a plants operation.
Inventory management system is make possible smooth and efficient operations
of a manufacturing as well as merchandizing company by decupling individual
segment of the total operation. Purchase part of inventory permit activities of
purchasing and supply chain personal permit activities of purchasing and
supply chain personal to be planned and conduct some were independently of
production. (Doubler, Donald 1996)
Holding inventory is often interpreted as carrying an asset, but also means
carrying risk in terms of obsolescence deterioration axed quality faults in
financial terms inventory impacts the balance sheet, cash flow, profit and loss
account. Operationally inventory affects production, efficiency and on time
delivery. (Toney Arnold, 1998) identifies inventory a key component for
measuring business performance in manufacturing environment. Thus good
management of inventory is essential to achieving business objective and
building competitive advantage. Inventory management refers to the events or
activities that affect inventory during the process of transferring in put resources
and material to put goods. Achieving inventory management system is a
precursor to inventory management which is concerned with the means used to
balance inflicting organizational objectives on the overalllevel of stock held to
determine optimum inventory level for each type of stock (chase;1998).
1.2 BACKGROUND OF THE ORGANIZATION
Dire dawa food complex is located in dire dawn town in the eastern part of the country which is
around 515km from Addis Ababa. Dire dawa food complex was established 1995GC and it is one
of the most modern food processing plants in east Africa. The cometof company had played
aleading role in the food processing industry of Ethiopia with respect to introducing new system of
production and packaging as well as it is the pioneer in having international systems certificates.
Dire dawn food complex has much permanent and available number of temporary employees
working in the company. The company has currently 194 permanent employers . 68 contracte and
168 temporary workrs. However the company has been planted on 28,484 square meters land area
and the establishment of the company declared initial capital of 17,173,000 birr. In general the
organization mission of the company is to produce quality flour and flour based products to the
best satisfaction on the customer based on the food safety principles(HACCP,ISO 9001:2OOO)
quality system and (ISO 1400 11:2000) environmental management system requirements.
1.2Statement of the problem

As the researcher browse the website related to inventory management system,
hold the following facts that necessitate for this study to be conducted which has
a research topic of assessment of inventory management system in
FoodCompany, particularly Dire Dawa Food complex Share Company. In the
first place inventory management system is the process of tracking product
orders keeping adequate amount of products on hand and organizing products
in warehouse and retail location. And also inventory management system is the
active control program which allows the management of sales, purchases and
payments with good inventory management, companies are able to monitor what
shipments they have coming in and going out to customer, allowing them to
keep just enough inventory in stock to meet demand.
Then inventory management system lets companies enjoy many benefits which
include achieving inventory balance, using resource wisely, cutting costs, saving
time and becoming more efficient and planning a head for seasonal changes in
demand.
According to these evidence this study is emphasize on how dire dawa food
complex share company in the industry performs the activity to come up with a
good result along with attaining the main objective of the company.
1.3Basic Research Questions

1. What is the role of inventory management in the organization?
2. What techniques does the company use to manage its inventory?
3. How does the company controlling its inventory
4. What are the main reasons/ rationales for the existence of inventory
management in the company?
1.4Objective of the study

1.4.1 General objective
The overall objective of the study is to examine inventory management system

in case of dire dawa Food compIexShare Company and to suggest useful
recommendation.
1.4.2Specific objective
 To assess the role of inventory management system in the organization.

 To assess the techniques used by the company to manage its inventory.
 To identify the mechanism that the organization use to control inventory.
 To assess the main reason /rational existences of inventory management
in organization.
1.5Significance of the study
Conducting research paper on this topic is vital to give awareness about

inventory management system and techniques for employees of the share
company the paper has also important to increase researchers knowledge and
experience about inventory management. Finally this research paper is used as a
reference for other researchers, who initiated to conduct an in-depth research on
the topic under thestudy.
1.6. Scope of the study

Since the main objective of the study is the assessment of inventory
management system in Dire dawa food complex Share Company, the scope of
the study is delimited to examining inventory management system of dire dawa
food complex share company only.
1.7Definition of key terms

Inventory management: - the maintenance up keep and assurance of adequate
supply of something in order to meet on expected partner of distribution of
demand for a given financial inventory.
o Inventory control: - the technique for ensuring availability of materials

while at the sometime holding in check generally through a system the
tendency to hoard larger amount of stock that is necessary.
o Strategy: - the ideas decisions and actions that enable a firm to succeed.
1.8 Limitation of the study

In conducting this research study there are some limitations that hinder
the researcher to reach on appropriate conclusion, Such as involuntary of
respondents to give necessary correct data especially secondary data. Lack
of experience in conducting research from the side of the researcher is also
one limitations to prove the necessary results at the end.
1.9 Organization of the paper
This paper is composed of five chapters the first chapter deals with the
introduction that include back ground of the study, statement of the problem,
objectives of the study, significance of study and limitations of the study.
The second chapter deals with review related that consist definition and concept
of inventory management. Third chapter deals with methods of data collection
through primary and secondary sources. The fourth chapter deals with data
presentation and data analysis. Finally chapter five suggests conclusions and
important recommendations forwarded.
CHAPTER-TWO
2. LITERATURE REVIEW
2.1 What is inventory?
Inventories are materials that a company carries on hands and usually represent
a sizable portion of the company`s total assets. But few other business topics are
subject to the partisan attitudes that exist concerning inventories. The sales
department frequently sees inventory as an in limited resources and feels that
the production control department has failed if any time is not available when an
order for it is received. The financial people frequently feel that inventories are a
necessary evil. They tie up capital which could be sued better elsewhere (ploss
land and weight: 1996).
Factory people have difficulty of understanding the costs associated with caring
inventories and they frequently look up on the effect of inventory control with
dismay because of the apparent inefficiency forced on the plant by increased set
ups. Form the factors point of view inventories are un limited resource obviously,
because the usually represent in the balance sheet, the usually represent from
20% to 60% of the total asset (Toney Arnold: 1998).
There are three conflicting objective in most businesses. These are customer
service, minimum in inventory investment and efficient plant oration, and that it
is the job of production and inventory control to reconcile these three objectives
in the best interest of the company (ploss land and wight:1967).
Inventories are necessary to give good customer service, town the plant more
efficiently by keeping production at a fairly level rate and turn reasonably sized
manufacturing lots.
They are not a necessary evil but are instead a very useful. Shock significance
inventory investment against other demands for capital, considering the cost
related to both. This balancing requires decision at full in to four major
categories.
1. What balances desired between inventory investment and customer

service? Where effective inventory control exists to execute management
policy. There is a definite relationship between the amount of inventory
carried and the service that results. The lower the inventory the more back
orders and stocks out the higher the inventory the better the service.
2. What balance is desired between inventory investment and cost associated
with changed population levels?
Excess equipment capacity, overtime, idle time hiring, training and laying
off employees and related cost will be higher it production must fluctuate
in response to changing sales rates.
3. What balance is desired between inventory investment and the cost of
placing inventory replenishment order?
Low inventories can be maintained by setting up job frequently placing a
great many purchase orders for small quantities. These results in high set
up cost, purchasing costs, lost quantity discounts and other excessive
operating expense.
4. What balance is desired between inventory investment transportation cost
providing the man power and materials handling equipment so that jobs in
production can be moved hourly?
2.2 Classification of inventory

Although inventories are classified in many ways, the followings classification is
convenient for sue in further discussion of the topic
1. Production inventory: - raw materials, parts and component which enter
the firms product in the production process. These may cosmists of two of
general types.
 Special items manufactured to company specification and
 Standard industrial item purchased “off the shell”
2. MRO inventories: - maintenance, repair and operating supplies which are
consumed in the production process but which do not become parts of the
product (lubricating oil, soap, machine repair parts).
3. In process inventories: - semi finished products found at various stages in
the production operation.
4. Finished goods inventories:-completed product ready for shipment
(Doubler: 1996).
2.3 Inventory management

Inventory management is important for the successful operation of most
businesses and their supply Chains, operations, marketing, and finance have
interests in good inventory management, poor inventory management hampers
operations, diminishes customer satisfaction and increases operating costs.
Some organizations have excellent inventory management and many have
satisfactory inventory management. Too many however, have UN satisfactory
inventory management, which sometimes is a sign that management does not
recognize the importance of inventories. More often than not, though, the
recognition is there. What is lacking is an understanding of what needs to be
done and how to do it (Chease: 1998).
 Ordering and receipt of goods

 Timing the order placement and keeping track of what has been
ordered, how much and form whom
The inventory manger must also follow up to answer question as:
 Has the supplier received the order

 Has it been shipped
 It the data correct
 Is the procedure established for reordering or returning undesirable
merchandise?
2.3.1 Aggregate inventory management

Aggregate inventory management deals with managing inventories according to
their classification (raw material, work-process and finished goods) and the
function they perform rather than at the individual item levels. It is finally
oriented and is concerned with the costs and benefits of carrying the different
classification of inventories. As such aggregate inventory management
involves,(Tony Amold:1998).
 Flow and kind of inventory needed

 Supply and demand patterns
 Functions that inventories perform
 Objective of inventory management
 Cost associated with inventories
2.3.2 Inventory and the flow of materials

There are many ways to classify inventories one often used classification is
related to the flow of materials in to through and out of a manufacturing
organization.
2.3.3 Supply and demand patterns

If supply met to demand exactly, there would be little need for inventory. Good
could be made at the same rate as demand and no inventory would build up for
this situation to exist, demand must be predictable, stable and relatively consent
over a long time period.
If this is so manufacturing can produce goods on a line flow basis, mattering

production to demand, using this system, raw material feet to production as
required, work flow from one work station to another is balanced so little work in
process inventory is required, and goods are delivered so the customer at the
rate the customer need them. Because the Varity of products they can make is
so limited, demand has to be large enough to justify economically setting up the
system (Tony: Arnold: 1998)
Demand for most product is neither sufficient nor constant enough to warrens
setting up line flow system, and there products are usually mode on lots or
batches. Work stations are organized function, for example all machine tools. In
one area, all welding in another and assembly in another work moves in lots
form one workstation to another as required by the routing. By the nature of
systems inventory will raw materials, work in process and finished goods. (Tony
Arnold: 1998).
2.3.4 Dependent and in dependent demand

To do the well, an inventory controller (managers) needs one additional bit of
information about each of times in inventory- is the demand (usage) for the item
“dependant” or independent”.
An item is said to exhibit dependents demand characteristics when its use is

directly dependant on the scheduled production of a larger component or
apparent product, of which the item is a part. Hence in a plant producing
automobile engines the demand for engine bloc casing is a dependent demand;
once the production schedule for a group of engines is established. The
controller knows with certainty one block will enquired for each engine
conversely the demand for cutting oil used by the machines on the line cannot
be calculated from the production schedule. Thus, cutting oil is said to have an
independent demand (Doublers, 1996).
2.4 Function of inventories

Inventories thus required both substantial cost and investment commitments. It
is understandable, then shy some business men view inventories and their fail
analysis of total situation. Before one looks unfavorably up on the size and cost
inventory be must also assess carefully the benefits afforded his company by the
existence of the inventory (Gloss land and Wight: 1967)
Inventory of parts components produce “in house” decouple the many individual
machine and production process form various subassembly and assembly.
Activity, this enables monuments to plan production runs in individual
production areas in a manner which utilities man power and equipment
considerably more efficiently than if all were tied directly to the final assembly
line. Also finished goals inventories program the function of decoupling the total
production process form distribution demands. Allowing on a broader scale the
development of similar efficiencies of production. The result produced by this
inventory should be good services to the customers on stock items, and lower
purchasing costs. Thus, well planned and effectively controlled inventories can
contribute substantial to the firm profit and it decouples supply and demand,
inventory serves as a buffer between.
 Supply and demand

 Customer demand and finished goods
 Finished goods and component availability
 Requirements for an operation and the output from the preceding
operation.
 Parts and materials to begin production and the supplier of materials.
Based on this, inventories can be classified according to the function they

perform.(Toney Arnold: 1998)
2.4.1 Anticipation inventory

These inventories are built up in anticipation of future demand, for example they
are created a head of peak selling season: a promotion program. Vacation shut
down, or possibly the threat of a strike. They are built up to help level
production and to reduce the costs of changing production rates.
2.4.2 Functioninventory (safety stock)

Inventory is held to cover random UN predictable functions in supply and
demand or lead time. If demand or lead time is greater than force case. A stock
nut will occur. Safety stock is carried to protect against this possibility. Its
purpose is to prevent disruptions in manufacturing or deliveries to customers.
Safety stock is also called buffer stock or reserve stock.
2.4.3 Lot size inventory

Items purchased or manufactured in quantities greater than needed immediately
create lot size inventories. This is to take advantage of quantity discounts, to
reduce shipping. Clericaland set up costs, and in case where it is impossible to
make or purchase item at the same rate they will be sued or sold lot size
inventory is sometimes called cycle stock called cycle stock.
It is the portion of inventory that depletes gradually as customers orders come in

and is replenished cyclically when supplier`s orders are received.
2.4.4 Transportation inventory

This inventory exists because of the time needed to make goods from one
location to another such as from a plant to distribution center or a customer.
They are sometimes called pipe line or movement inventories. Transportation
inventory does not depend up on the shipment size but on the transit time and
the annual demand. The only way to reduce the inventory in transit, and its cost
is to reduce the transit time.
Some product such as minerals and commodities for example, grains or animal
products are trade on a worldwide market the price for these products fluctuates
according to world and demand. If buyers expect price to rise. They can
purchase hedge inventory when price are low.
2.4.5 Maintenance, repair and operating supplies (MRO)

MROs are item used to support general operations and maintenance but which does
not become directly part of a product. They include maintenance, supplies, spare
parts, and consumables such as cleaning compounds, lubricants, pencils, and
erasers.
2.5 Objective of inventory management

A firm using to maximize profit will have at least the following objective
- Maximize customer service
- Low cost plant operation
- Minimum inventory investment
2.5.1 Customer service

In broad terms, customer service is the ability of a company to satisfy the needs
of customer. In inventory management the team is used to describe the
availability of items when needed and is a measure of inventory management
effectiveness. The customer can be a purchaser. A distributer another plant in
the organization or the work station where the next operation is to performed,
(Tony Arnold. 1998).
There are many different ways to measure customer service. Each with its
strength and weakness, but there is no one best measurement. Some
measurement some measure are percentage of order shipped on schedule.
Percentage of line item shipped on schedule and order days out of stock.
Inventories had to maximize customer service by protecting against uncertainty.

If we could forecast exactly that customer wants and when, we could to meet
demand with no uncertainty. However, demand and the lead time to get an item
are often uncertain, possibly resulting in stock nuts and customer
dissatisfaction.
For these reasons, it may be necessary to carry extra inventory to protect against
uncertainty. This inventory is called safety stock, (Tony Arnold: 1998).
2,5, 2 Establishing safety stock

In the majority of case, though, demand is not constant but varies from day to
day. Safety stock must therefore be maintained to provide some level of
protection against stock must therefore be maintained to provide some level of
protection against stock out. Safety stock out be defined as the amount of
inventory carried in addition to the expected demand. In a normal distribution,
this would be the mean. If our average monthly demand is 100 units and we
expect next month to be the same if we carry 120 units, then we have 20 units of
safety stock, (Chase:1998).
The general literature on the subject of safety stocks contains two appropriates
rating to the demand for the inventory that is to be protected. First is the
probability that demand will exceed some specified amount for example an
objective may be something like “set the sates stock level so that there will only
be 5 percent chance that demand will exceed 300 units”(Richard B. chase.1998).
The second approaches deals with the expected number of units that will be out
of stock. For example an objective might be to set the inventory level so that we
can meet 95% of the order for the unit (or be out of stocks percent of the time). A
gain the first approach deals with the probability of exceeding a value and the
second approach concerned the how many units were short, (Chase: 1998).
2.5.3 The service level approach

Using an analysis we will convey the short comings in using the probability
approach to determine safety stock.
Service level refers to the number of unit of demanded that can be supplied form
stock currently on hand. For example if annual demand for an item is 1000
units, a 95 percent service level mean that 950 can by supplied immediately
frosted and 50 units are short. (These concepts assume that orders are small
and randomly distributed. This model would not happy, for example, where the
entire annual demand might to sold to just a few customers since we need
enough data point to approximate normal distribution. (Chase: 1998).
2.6 Opportunity efficiency

Inventories help make a manufacturing operation more productivity in four
ways.
1. Inventories allow operations with different rates of production to operate

separately and more economically. If two or more operations in a sequence
have different rates of output and are to be operated efficiently, inventories
must build up between them. (Tony Arnold 1998).
2. Production planning for seasonal products in which demand is non
uniform throughout the year and the level of production which anticipate
inventory for sale in the peak periods. This will result the following.
 Lower over time cost
 Lower hiring and firing costs
 Lower training cost
 Lower subcontracting costs
 Lower capacity required
By leveling production manufacturing can continually produce an amount equal

to the average demand. The advantage of this strategy is that cost of changing
production levels are avoid (Tony Arnold: 1998).
3. Inventories allow manufacturing to runs. Which results in the following?

o Lower setup costs per item: - to cost to make a lot or batch depends
up on the set up costs and the run costs. This serve are fixed, but
the run cost vary with the number produced. If the larger lots are
run, the set up cost are absorbed over a large number and the
average (unit) cost is lower (Tony Arnold: 1998).
o An increase in production capacity due to production resource being
used a greater portion of there for processing as opposed to set up.
Time on a work center us taken up by set up and by run time.
Output occurs only when an item is being worked on and not when
set up is takes place. It large quantities are produced at one time.
These are fewer set ups required to producing goods. This is most
important with bottlenecks resource. Time lost on set up on these
resources is lost through put (total production) and lost capacity
(Tony Arnold: 1998).
Inventories allow manufacturing to purchase in large quantities which results in
lower ordering cost per unit and quantity discounts.
But all of this is at a price. The problem is to balance inventors’ investment with
the following (Tony Arnold: 19998).
I. Customer service: - the lower the inventory, the higher the likelihood of
a stock out and the lower the level of customer service. The higher
inventory level, the higher customer service will be.
II. Cost associated with changing production levels:- excess equipment
capacity, overtime hiring, training, and lay off lost will all be higher it
production fluctuate with demand.
III. Cost of placing order: - lower inventories can be achieved by ordering
smaller quantities more often, but this practice results in higher annual
ordering costs.
IV. Transportation costs: - goods moved in small quantities cost more to
make per unit than those marked in larger quantity. However, moving
larger lots implies higher inventory. It inventory is carried, there has to
be a benefit that excesses the cost of coming the inventory.
2.7 Inventory costs

The following costs are used for inventory management decisions.
 Items costs
 Caring costs
 Ordering costs
 Stock out costs
 Capacity related costs
2.7.1 Items costs

The price a paid for a purchased item consists of the cost of the item and any
other direct cost associated in getting the item in to plant. These could include
success things at transportation, custom duties, and insurance.
The inclusive cost is often called the landed price. For an item manufactured in
house, the cost includes direct materials, direct labor, and factor overhead.
These costs can usually be obtained from either purchasing or accounting (Tony
Arnold: 1998).
2.7.2 Carrying costs

These costs include all expenses incurred by the firm because of the volume of
inventory carried. As inventory increase, so do these costs. They can be broken
down in to three categories (Tony Arnold: 1998).
1. Capitola costs:- money invested in inventory is not available for other sues
and as such represents a lost opportunity cost. The minimum costs would
be the interest lost by not investing the money at the prevailing interest
rate and if may be much higher depending on investment opportunities for
the firm.
2. Storage costs: - storing inventory requires space, workers and equipment.
As inventory increase, so do these costs.
3. Risk cost:- the risks in caring inventory are
a) Obsolescence: - loss of product value is resulting from a model or style
change or technological development.
b) Damage:- inventory damage while being held or moved
c) Pilferage:- good lost, storage, or stolen
d) Deterioration”- inventory at rest or dissipates in storage or whose shelf
life is) imites.
What does it cost to carry inventory? Actual figure vary from industry to industry
and company to company. Capital costs may vary depending up on interest
rates. The credit renting of thefirm and the opportunities the firm may have for
investment. Storages costs vary which location and type of storage needed. Risk
costs can be very low or can be close to 100% of the value of the item for
perishable goods (Tony Arnold: 1998). The carrying cost is usually defined as a
percentage of the dollar`s value of inventory per unit of time (Usually one year).
2.7.3 Ordering costs
Order costs are those associated with placing an order either with factory or
supplies. The cost of placing an order does not depend up on the quantity
ordered. Weather 10 + of 100 to 100 is ordered the costs associated with placing
order are essentially the same. However, than now cost of ordering dependent up
on the number of orders placed in a year. Ordering costs in a factory include the
following (Tony Arnold: 1998).
1. Production controls: - the annual cost and effort expanded in production

control depend on the number of order placed not on the quantity ordered.
The fewer orders per year, the less the cost the lost incurred are those
issuing and losing orders scheduling, loading displacing, and expending.
2. Set up and dear down costs: - every time ordered is issued, work centers
have to set up to turn the order and tear down the setup the end of the
turn. These costs do not depend up on the quantity ordered to the number
of order placed. It is particularly important and costly with bottleneck
work centers.
3. Our chase order costs: - every time purchase order is placed; costs are
incurred to place the order. These costs include order preparation follow
up, expedite, receiving, authority payment and the accounting costs of
reactivity and paying the invoice. The annual cost of ordering depends up
the number of orders placed. This can we reduced by ordering more at one
time, resulting in the placing of fewer orders. However, this drives up the
inventory levels and the annual cost of carrying inventory.
2.7. 4 Stock out costs

If demand during the lead time exceeds forecast we can expect a stock out. a
stock can potentially be expensive because of back order costs, last sales and
possibly lost customers, stock out can be reduced by caring extra inventory to
protect against those items when the demand during read time is greater than
for costs, (Tony Arnold:1998).
2.7.5 Capacity related costs
When output levels must be changed, there may be costs for over time. Hiring
training extra shifts and layouts. These costs can be avoided by leveling
production that is by producing items in slack periods for sale in peak periods.
However, this builds inventory in the slack periods.
2.8 Inventory analysis

The inventory typical industrial firm includes as many as 10,000 to 50,000
different items. Initial planning and sub sequent control of such an inventory is
a accomplished on the basis of knowledge about each of the individual items and
the finished product of which each it part. Consequently, the starting point for
sound inventory management is the development of complete inventory catalog
followed by a through ABC analysis (Dobler: 1996).
2.8.1 Inventory catalog

1. As a medium of communication: - it enables personal located in many
different departments to perform their job more effectively. For example, a
design engineer may have a choice between using either of two stranded
parts is carried inventory and may be available immediately for use in the
experimental work.
2. It accurse to the inventory control operation itself: - this benefit takes the
form of more complete and correct record a through the reduction of
duplicator record for identical parts. A purchasing department often buys
the same part from several different suppliers, under various
manufacturing part numbers, unless control requirement dictate
otherwise, identical part from all supplies should be consolidate on one
inventory record.
Such everyday occurrences obviously results a higher inventories and reduce

operating flexibility. Similar situation sometimes occur even when the part is
purchased form onlyone supplies. Changes in commercial nomenclature
billing particles or in office personnel frequently result I supplier documents
which appear to describe two different items when in fact they cover the same
part. Use of an inventory catalog does not eliminate the possibility un
detected duplicate record, but it carefully developed and maintained,
significantly reduces such as possibly reduces such possibility(Dobler: 1996)
2.8.2 ABC analysis the 80-20 concept

As soon as an inventory is identified and described, the manager must determine
the importance and the dollar value of each individual inventory items. This calls
for a study of each in terms of its price, usage and lead time, as well as specific
procurement or technical problems. Without the data provided by such study.
Inventory manager normally does not have enough information to determine the
best allocation of department effort and expenses to the tasks of controlling
thousands of inventory items. (Doblers: 1996)
ABC analysis can be made on the basic of either the average inventory
investment in each items or the annual dollar usage of each item. The analysis is
easy to conduct one inventory has been properly identified and using records
have been maintained for a complete operating cycle. All items are simply ranked
in order to their (average inventory investment or annual sage) for all inventory
items is their computed.
The value of each individual item is next expressed as a percentage of the total
by going down the list and successfully computed individual percentage for each
items. In can determine which times make up the first 75 percent of inventory
investment, the first 90 percent and so on (Dobler: 1996).
Management can use the information generated from such a study institutively
or formally. Some managers informally concentrate department effort on the
some of the B items. Other develops formal policies and procedure for handling
A, B and C items.
2.8.3ABC classification
If the annual usage of item inventory is listed according to dollar volume and the
large number of items account for a small dollar volume. The ABC approach
divide this list in to three groupings by value:- a item constitute roughing the top
15 percent of the items, B items the next 35 percent and item the last 50
percent, segmentation may not always accurse so neatly. The objective, through
is total to separate the important from the unimportant. Where the lines actually
bread depends on the particular inventory under question and on how much
personnel time is available. (With more time a firm could define larger A or B
categories (Chase: 1998). The purpose of classifying items in to group is to
establish the approached degree of control over each item on a periodic basic for
example, class items an item may be more clearly controlled with weekly order if
items may be ordered weekly and item, may be ordered monthly or bimonthly.
Note that the unit cost item is not related to their classification.
Sometimes an item may be critical to a system if this absence creates a sizable

losses in this case regardless of the item`s classification. Sufficiently large stock
should be kept on hand to prevent rain out. One way to ensure closer control is
to designable this item and A or B forcing it in to the category even if its dollar
volume does not warrant such inclusion (Chase: 19998).
Using ABC classification there are two general rules
q1. Have plenty of low: - value item c item represent about 50 percent of the
item but account for only about 50 percent of the total inventory value.
Caring extra stock of C items adds little to the total value of the inventory C
item are really only important if there is a shortage of one of them. When they
become extremely important. So supply should always be on hand (Chase:
1998).
Use of money and control effort saved to reduce the inventory of high value
item.
A item represent about 15% of the items and account for about 85% of the role
they are extremely important and deserve the lightest test control and the most
frequent review (Chase:1998).
2.9 Types of inventory control systems
Generally speaking, three basic systems can be employed in controlling
inventories.
 The cycle ordering system

 The order point or fixed order quality system
 Material requirements planning system (MRP)
2.9.1 A cycle ordering system

The first is a time: - based system which involves schedule periodic reviews of
the stock level of all inventory items. When the stock level of a given item is not
sufficient to sustain the production operation unit the next scheduled review an
order is placed to replenish the supply firm. The frequencies vary from firm to
firm. If also varies among material on the some firm (Doubler: 1996).
Stock level can be monitored by physical inspection, by a visual review of

perpetual inventory cards, or by automatic computer surveillance. In operation
where a small number of materials are involved. The simplest and most accurate
method is a period physical count of the stock. It this procedure is closely
controlled, the inventory record for each material should at all-time be in
reasonably close agreement with the actual stock balance human error
inevitably creeps in to such a procedure. However, necessitating a physicals
stock count at least once or twice a year (Doubler: 1996).
The cyclical ordering system is well suited for materials whose purchase must be
planned moms in advance because of established and infrequent production
schedule maintained by the suppliers. It also works well for materials which an
irregular or seasonal usage and whose purchase must be planned in advance on
the basis of sales estimate (Doubler: 1996.
Cyclical order inventory control system is used for all materials in an inventory
in the above manner, however it possessor three distinct disadvantages:-
1. It compels a periodic review of all items this in itself makes the system
somewhat in effect. Because of difference in usage rates many items may
not have to be ordered until the succeeding review. Conversely, the usage
sometime during the period may have increased to the point where they
should have been order before the current review data.
2. Equally important the system demands the establishment of renter
inflexible order quantities in the interest of administrative efficiency.
Theoretically, there exists an optimum economic order quantity for each
time depending up on its price structure. It rate of usage and attendant
internal costs.
3. The cyclical ordering system tends to peak the purchasing work load
around the review dates. This advantage can be avoided to some extent by
regulating the frequency reviews.
2.9.2 Order point system fixed order quantity system

The second basic type of inventory control system the order point system is
based on the order point and order quantity factors, renter than on the time
factors. The design of this system recognizes that each item possesses its own
unique optimum order quantity and it permits more effective utilization of these
facts.
1. The predetermination of an order point so that when stock level on hand

drops to the order point, the item is automatically “flagged” from recorded
purpose.
2. The predetermination of flex quantity to be ordered each time the supply of
the item is replenished.
This determination typically is based on a consideration of price of usage and

other pertinent production and administrative factors.
2.9.3 Fixed time period model
In a fixed time period system inventory is counted only at a particular time such
as every week or every month. Counting inventory and placing orders on a
periodic basis is desirable in situation such as when vendors make routine visits
to customer and take order for their complete line of products, or when buyers
want to combine orders to save transportation costs. Other firms operate in a
fixed time period to facilitate planning their inventory count. For example x calls
every two weeks and employers know that all distributor axes’ product must be
counted (Chase: 1998).
Thus it is possible to be out of stock throughout the entire reviewperiod. T. and

order time L safety stock. Therefore, must protect us against stock outs during
the review period itself as well as during the lead time form order placement to
order receipt.
1. Two –bin system: - a variation of the basic order point system is round in
the simple two bin system. The distinguishing using feature of this system
is the absence of perpetual inventory record. The stock is physically
separated in to two the bins or contains. The lower bin contains of a
quantity of stock equal to the order point. The upper bin contains a
quantity of stock equal to the difference between the maximum and the
order point (Doubler: 1996) this method demonstrates vary simply the
fundamental concept which underlies the basic order point system. These
two bin method is widely used in handling low value hardware and
supplies whose usages not recorded on a perpetual record. The major
advantage of these works is reduction of clerical work.
2. Optional replenishment system:- an optional replenishment system forces
reviewing inventory level of a fixed frequency (such as weekly) and ordering
or replacements supply if the level at a fixed frequency 9 such as weekly)
and ordering a replacement supply if the level has dropped bellow some
amount (Chase:1998).
3. One bin system: - a one bin inventory system involves periodic
replenishment no matter how few are needed. at fixed periods (Such as
weekly) the inventory is brought up to its predetermined maximum level.
The one bin is always replenished, and it their fore differs from the
optional replenishment system, which only records when the inventory
used, is greater than some minimum amount (Chase: 1998).
Feature Fixed order quantity Fixed time
period model
Order quantity Q- constant (the same Variable[varies
amount order each time) such time order
is placed]
When place order Re-when inventory position Taken the
drops to the recorders excel review period
arrives.
Record keeping Each time a with drawler Counted only
additional is made at review period
Size of inventory Less than fixed time period Larger than
model fixed order
quantity model.
Time to maintain Higher due to perpetual
record keeping
Time formation Higher priced, critical or
important items.
2.9.4 Material requirement planning (MRP) system

The material requirement planning concept provides a very basic and different
way of looking at the management of production inventories. Fundamentally in
its purest sense, MRP challenges the traditional.
Concept that May significant level of production inventory need be carried prior
to the time materials is actually required by the production operation, (Doubler:
1996)
The MRP approach typically calculates production material requirement 5

weekly (based on production schedules that are update weekly) several operating
periods in advance of the actual need and then generates requisitions for each
material to be delivered in the required quantity and with specified number of
days prior to the start of the manufacturing operation.
The major element in the MRP concept has evolved from experience with the
cyclical ordering of system. And more resigned sue of the computer has
produced accurate timely data that permit MRP to minimize the need for stats
stock inventory. A cardinal difference between the two systems however is the
driving forces which accurate the material acquisition cycle. In the case of the
cyclical ordering system. It is inventory control system itself that is designed to
imitate the request of material. It is the fundamental difference which sets the
MRP system a part for all other inventory system (Doubler: 1996).
A technique of an MRP system is designed for use in certain specialized

operating situations. The system can be sued most advantageously under the
following condition.
1. When usage (demand) of the material is discontinuous or highly unstable

during a firm normal operating system. This situation typified by an
intermittent manufacturing or job shop operation, as opposed to a
continuous processing or mass production operation.
2. When demand for material is directly dependent on theproduction of other
specific inventory items or finished product. MRP can be through of as
primarily a component fabrication planning system. In which the demand
for all parts (materials) is dependent on the demand (production
schedules) for the parent production. Hence most production inventory
items meet this “dependant demand” requirement: MRP inventory items do
not because their demand is derived independently and cannot be a)
calculated from the master production schedule (Doubler: 1996).
3. When the purchasing department and this suppliers as well as the firm’s
own manufacturing units, posses the flexibility to handle order placement
rod every release son weekly basis.
2.10 The economic order quantity concept

One guideline for determining the most advantageous order quantity can
come an analysis of all incremental cost associated with roe quantity cost are
grouped in two group(categories(Doubler:1996).
- Inventory carrying cost

- Inventory acquisition cost
2.10.1 Example of inventory caring cost

 Opportunity costs of inventory funds; - when a firm purchase in balky for
production material and keeps it in inventory. It simply has this much less
cash to spend for other purposes.
 Insurance costs: most firms insures their assets against possible loss from
fire and other forms of damage an extra amount of money which is paid for
this is insurance premium.
 Property taxes: as with insurance, property taxes are lived on the assessed
value firms’ assets.
 Storage cost: - the warehouse in which a firm stores its inventory is
depreciated ascertains number of dollar per year over the length of this
late.
 Obsolescence and deterioration: - in most operations, a certain percentage
of inventory items spoils is damaged, splintered, or eventually becomes
obsolete. With new product being produced at an increasing rate
probability of obsolescence is increased accordingly. Consequently the
larger inventory the greater is the absolute loss forms this source.
Generally, spearing this grows of calling cost rises and rally nearly proportionally
with the rise and filly inventory levels. Furthermore, the inventory level is
directly related to the quantity in which material ordered. The larger the order
quantity the higher is the average inventory levels during the period by the
order. The factors all contribute to the cost of generating and processing an
order and this related place work.
2.10.2 Example of inventory acquisition

1. A certain portion of wage and operating expenses of such department as
purchasing production control, receiving inspection, stores, and account
payable.
2. The cost of suppliers such as purchasing, production control, receiving
and accounting and stationary and so forth.
3. The cost of service such as telephone, telegraph and postages expended in
procuring materials.
For this situation to exist, demand must be predictable, stable and relatively
consent over a long time period.
If this is so manufacturing can produce goods on a line flow bias, maturating

production to demand, using this system, raw material feet to production or
required, work flow form one work station to another is balanced so little work in
process inventory is required, and goods are delivered to the customer at the rate
the customer need them. Because the Varity of products they can make is so
limited, demand has to be large enough to justify economically setting up the
system (Tony: Arnold: 1998).
Demand for most products is neither sufficient nor constant enough to warrens
setting up line- flow system and their products are usually mode on lots or
batches. Work stations are organized function, for example, all machine tools. In
one area, all welding in another and assembly in another work moves in lots
form one workstation to another as required by the routing. By the nature of
systems inventory will raw materials, work- in process and finished goods (Tony
Arnold: 1998).
CHAPTER-THREE
3. Methodology of the study

3.1. Research type
The Research type used under the study is a cross sectional approach. A cross
sectional study is a research method that is often called snaps shot. A purpose
to its name across section of population is sampled. And its involve the data
collected at defined time, they takes place different group at one particular time
and careful examination of phenomenon.
The study also uses descriptive type of research to conduct the study.
Descriptive research helps to identify and obtain information on the
characteristics of certain particular qualities and detailed describing a
phenomenon they exit. Therefore, the study would use such type of research
detailing to obtain reliable data on inventory management system in dire dawa
Food Complex Share Company.
3.2.Source of data
To conduct this research paper the researcher uses both primary as well as
secondary data.
3.3. Method of data collection
The study employed both questionnaires and interview data collection

instruments. The nature of the questionnaires is a self-administered
structured questionnaire. The questionnaire consists of closed ended items.
The questionnaire data were collected from inventory department; quality
department and purchasing department employees who considered in the
sample.
The interview instruments were administered from the inventory department

manager and sectional unit team leaders. The interview instrument is designed
as structured personal interview
3.4. Sample and sampling techniques
To collect the relevant data the study employ the judgmental sampling a
nonprobabilistic sampling techniques. The rationale to use this sampling
technique is difficult to include every individual because of their professional
area, cost, time, and constraint.
Dire dawa Food Complex Share Company currently have 430 employees. Out of
the total employees 250 are male and 180 are females. Out of target employees
for these target employees 24 male and 6 females, at this time the study would
draw the sample 30 employees who work on inventory department, quality
department, and purchasing department taken as sample of the study. The
reason that the researcher selectsthese departments is because they are closely
relatdataed with the study area that the researcher conducts research paper.
3.5 Procedure of data collection

To carry out the study of the researcher follow the following procedures
 Select of respondent
 Formulation of questionnaire and interview
 Distribution questionnaire and interview
 Collection of the respondents
 Processing of data
 Data analysis
 Conclusion and recommendation
3.6 Method of data presentation analysis and interpretation
Once the relevant Data is gathered through questionnaire and interview, the
data has to be presented and analyzed in to a meaningful ways. The data are
presented using a tabular data presentation technique. And data are analyzed
using simple descriptive statistics techniques such as frequency and percentage.
After appropriate presentation and analysis data is undertaken, interpretation
and discussion will proceed. The interpretation will be expressed by using
quantitative and qualitative ways
CHAPTER-FOUR
4. Data presentation analysis and interpretation

The data is obtained from respondents through questionnaire prepared by the
researcher and distributed to employees and managers ofdire dawa Food
complex share company.
The researcher have analyzed the collected data in well-organized format by

giving clear expression for each feed backs cross checking ideals of respondents
to be the right information to find accurate value the data is collected from both
employees and manager.
Table 4.1 profile of Respondents
No Item Alternative Response

Frequency Percentage
1 Sex Male 24 80
Female 6 20
Total 30 100
2 Age 18-30 8 27
31-40 16 53
41 and above 6 20
Total 30 100
3 Education back Below 12 8 27
ground Certificate 10 33
Diploma 4 13
Degree and above 8 27
Total 30 100
4 Work experience < 5 years 18 60
6-10 years 5 17
11-15 years 4 13
>16 years 3 10
Total 30 100
Source: own questionnaire June, 2016
From the above table 4.1 number 1 show that 24(80%) out of respondents is
males and the remaining 6(20%) out of respondents are female. This implies that
the number of female participation the organization is less than that of the
number male participation. From this the majority respondents are male. For the
second question table 4.1 number 2 most of the respondents is 16(53%) out of
respondents is 31-40 and 8(27%) out of respondent are between 18-30. The
remain 6(20%) out of the respondent is 41 and above. Therefore, the researcher
can conclude that majority of the respondent are young since they are less
between 31-40 age group.
For the third question table 4.1 number 3 show that 27% of respondent are
below 12(complete) and 33% of the respondents are certificate and 13% of the
respondents are diploma and the remaining 27% of the respondents re Degree
and above. This shows the majority of the respondents are involved around
certificate.
Table 4.2 Inventory control system
No Question Option Response

1 What type of Periodic 7 56.7
inventory Perpetual 8 26.7
management system Just in time 15 16.7
does your Total 30 100
organization use is ?
From the above table 4.2, indicates that 56.7% of respondents responded
periodic inventory system and on the hand 26.7% as perpetual and also 16.7%
of their respondent said there is just in time. Form this we can conclude that
organization uses perpetual inventory managementsystem.

Frequency percentage
2 Does your company`s Yes 30 100
inventory control
No 0 0
system is assigned by
Total 30 100
a computerized?
From the above table 4.3 indicate 100% respondents responded that the
organization inventory control system is assigned by computerized system. The
researcher concludes that all the company inventory control system is assigned
by a computerized.

3 What mechanism do Material received 23 76.7
you use when the note
inventory is in out Material return
form the store? note
Material transfer 7 23.3
note
Total 30 100
According to respondents from the above table indicates that 76.7% said that
material received note. And also 23.3% of their respondents said there is
material transfer note. This implies that the majority of the respondent use
material received note mechanism when the inventory out from store.
Table 4.5 bin card Inventory control system

4 Does the organization Yes 30 100
use bin card system
No 0 0
in control of
Total 30 100
inventory?
From the above show that 100% of respondents responded that the organization
used bin card system. This concluded that bin card inventory control system is
used in the company.
Table 4.6 policy and procedures

5 Is the inventory management Yes 27 90
process performed in No 3 10
accordance with the
Total 30 100
organization policies and
rules?
From the above table 90% of respondents said that the organization proper
inventory management process performance in accordance with the organization
policies and rule. And also 10% of the respondent said there is no. this is
generalized that the management process performed based on the organization
policies and rules.
Table 4.7 kinds of inventory management

6 What kind of All item are at 20 66.7
inventory the center
management does All item are at 10 33.3
the company choose? the distinct area
of the store
Total 30 100
+Source: own questionnaire June, 2016
From the above table 4.7 show 66.7% of the respondents are replied kind of
inventory management that the company chooser is all terms are at the center.
And they remain 33.3% of the respondents are replied all items are at the
distinct area of the sore. This implies that the organization choose the kind of
inventory management is all items are at the center.
Table 4.8 Inventory management activity

7 Does the organization Yes 20 66.7
implement effective
No 10 33.3
inventory
Total 30 100
management activity?
As the above table shows 66.7% of the respondents are replied yes the
organization implement effective inventory management activity and the
remaining 33.3% of the respondents are replied that the organizationdoesn’t
implement effective inventory management activity. This implies inventory
management activity is implemented effectively in the organization.
Table 4.9. The organization inventory process

8 Does your Yes 10 33.3
organization
No 20 66.7
inventory process
Total 30 100
have shortage of
supporting material?
The above table shoes 10(33.3%) of the respondents are replied yet the company
inventory process have shortage of supporting material, and the remaining
20(66.7%) of the respondents are replied no the company inventory process have
shortage of supporting material. This implies that there is a shortage of
supporting materials in inventory process of the organization.
Table 4.10 Source of problem inventory management

9 Which are Policy procedure and principle 15 50
source of of the organization
problem Lack of skill and man power 6 20
inventory Budget constraint 9 30
management? Total 30 100
From the above table most of the respondents which are 50% out of the
respondents are replied the polices, procedure and principle of the organization
is source of problem in inventory management. The other 20% of the
respondents replied that lack of skill and man power is sources of problem in
inventory management the remaining 30% of the respondents are respond
budget constraint is a source of problem in inventory management. This implies
that the most source of problem in inventory management in the organization is
policies, procedures, and principle of the organization.
Table 4.11 The role of inventory management

10 Do you think Yes 30 100
inventory
No 0 0
management play a
Total 30 100
role in your
organization?
As show in the above table 4.1 the entire respondents replied that inventory
management plays a role in the organization. This implies that inventory
management has a great role in the organization.
Table 4.12 regular purchase

11 How often do you Every month 4 13.3
make regular
Every month 8 26.7
purchase??
Every 6 month 18 60
Total 30 100
From the above table 4.12 shows 13.3% the respondents are respond the
company makes regular purchase in every month, 26.7% of the respondents
replied the company makes regular purchase in every month, and the remaining
60% of the respondents respond that; the organization makes regular purchase
every 6th month. This implies that the company makes regular purchase every
6th month.
Table 4.13 Types of bid

12 Which methods does Restricted 10 33.3
the company follow to tender
purchase raw Open tender 20 66.7
materials? Total 30 100
As shown the above table 4.13 show most of the respondent which is 20(66.7%)
out of the respondents are replied the company follow open tender to purchase
raw materials. And they remain to (33.3%) of the respondents are respond the
company follows restricted tender to purchase raw materials. This implies the
method the company follows to purchase raw material is open tender.
Table 4.14 material coding system

13 Does your Yes 26 86.7
organization use
No 4 13.3
material coding
Total 30 100
system?
From the above table 4.14 show most of the respondent which is 86.7% out of
the respondents replied that thecompany uses material coding system, and the
remaining13.3% out of the respondents replied that the company doesn’t use
material coding system. This implies that company uses material coding system.
Table 4.15 control of inventory store

15 How do you Through recalculation of 17 57
control recorded amount with actual
inventory in balance on hand
store in your Through control of each 13 43
company? receipt insurance
Other
Total 30 100
From the above table 17(57%) of the respondent are replied the way of control
inventory in the store, through recalculation of recorded amount with actual
balance on hand but the other respondent that is 13(43%) says that inventory is
controlled in store through control of each receipt and insurance. This mean that
the company inventory control way in the store is through recalculation or
recorded amount with actual balance on hand as the majority response.
Table 4.16 hold of inventory

16 Does your company Yes 23 77
hold inventory?
No 7 23
Total 30 100
As the above table shows 77% of the respondents replied yes the company hold
inventory in the company, and the remaining 23% of the respondents are replied
that the or company doesn’t hold inventory.This implies that the company holds
inventory.
Table 4.17 Critical supplier

17 What are the criteria Quality 18 60
to select supplier in
Low price 3 20
your organization?
Quantity 4 13
All 5 17
Total 30 100
From the above table 4.17 show that 60% of respondents are have critical to
select supplier is quality, 20% of the respondents repliedhave low price is criteria
to select of supplier, 13% of the respondents replied that quantity is the criteria
to select supplier, and the remaining 17% of the respondents replied that
quality, low price, and quantity are the basic criteria’s to select suppliers. Form
the above table the researcher concludes that quality isthe basic criteria to select
supplier for the company.
Interview Analysis
The data collected through interview is primarily developed to the managers of

DIRE DAWA FOOD COMPLEX SHARE COMPANY and the data that is relevant to this
research is gathered verbally through face to face interview.
q1. What types of inventory control system does our company use?
According to the manager of dire dawa Food ComplexShare Company, The

Company follows both periodic and perpetual inventory system. Under periodic
inventory control system quantity of inventory is determined at the end of each
month solely through physical count.
The perpetual method controls the inventory continuality to provide information

on current level inventory each time. Form this the researcher understand that
the company use periodic as well as perpetual inventory control system used to
order items (periodic) and provide information (perpetual).
q2. Which methods of valuation of inventory do you use in your company?
According to response of the manager,dire dawa FoodComplex Share Company

uses FIFO (first in first out) method for most of its inventories. FIFO method is
earliest purchased or produced (work in process and finished goods) are first to
be sold or used for production purpose. This company uses FIFO because first
produced inventories like pasta and macaroni should be sold first unless they
become obsolete.
q3. Is underinvestment on inventories are good or bad for your company?
According to manager under investment on inventory is bad on the company.

Because the company faces in adequate new materials and working process
inventors will result infrequent production (production interruption) and finished
goods inventories are not sufficient to the demand of customers regularly and
they may shift to the competitors.
CHAPTER FIVE
5. SUMARRY CONCLUSHIN AND RECOMMENDATION
5.1 Summary
This section presents the summary of the major finding identified this study.
Therefore the following at the major finding of the study.
 Almost over all the respondents 80% male

 Most of the respondents which are 53% are in age category between 31-40
years old.
 The majority of the respondents which is share 33% holds certificate.
 The majority of the organization has less than five years (60%) work
experience.
 Most of the respondents which share around 56.7 say that the
organization highest periodic inventory control system.
 The majority of the respondents about 100% says the inventor control
system in assigned by computerize the camper.
 78.9% majority of the respondent use material received note mechanism
when the inventory out from store the company.
 Almost of the respondents which are 100%are bin card inventory control
system is used in the company.
 Most of the respondents which are 90% say yes that management process
performed based on the organization policies and rules.
 Most of the respondents which share around 66.7% servant the company
all item are at the center.
 66.7% of the respondent says yes inventory management is implementing
effectively in the company.
 66.7% of the respondents are inventories process have not shortage of
supporting material.
 Most of the respondents which are 50% policy procedure and principle of
the organization source of problem in inventory management.
 The entire respondents agree that inventory management have a great role
in the company.
 60% of the respondents replied that the company makes regular purchase
every 6 month
 Most of the respondent which are 66.7% are open tender for the company
follow to purchase raw material
 86.7% majority of the respondent say that yes the company uses material
coding system.
 Most of the respondents which are 53.3% are symbolic material condign
system the organization.
 Most of the respondent which are 57% of through recalculation of record
amount with actual balance on hand inventory store in the company.
 The majority the organization have 77% hold inventory in the company.
 60% the majority of the respondent use quality as the criteria to select
suppler in the organization.
5.2 Conclusion
This study has been made to the assessment of inventory management system
in dire dawa Food ComplexShare Company. The purposeof this study has been
to describe the activities as well as the procedures followed by the inventory
department relationship that exists among the department and with other
department and source of possible recommendations that could be useful in the
effectives undertaking of inventory management activities.
 Majority of the organization employees are male

 Most of the employees organization are young
 From the finding most of the organization employees hold certificate
 Most number of the respondents in the organization have work
experience less than five year
 The organization use periodic inventory control system
 The company assign inventory control system by using
computerized system
 Dire dawa Food Complex company use material received note when
inventories goes out of the store
 The organization use bin card system for inventory management
system
 The organization inventory management system perform based on
the company policy and rule
 The company provide all items at the center
 The organization implement inventory management system
effectively
 Polices procedures and principles of the organization are the major
source of problem in inventory management
 Inventory management system have a great role in the organization
 Purchasing is performed regularly every six month
 The organization open tender for purchasing of material
 Dire dawa food complex company use material coding system
 The organization know its inventories by recalculation amount with
hand
 The company hold inventories
 Quality is the major criteria to select suppliers
5.3 Recommendation
After all the above observation the following could be provided as
recommendations for an effective inventory management to be implemented in
dire dawa Food ComplexShare Company.
 The company should implements a computerized data base system for
facilitating is inventory control and order processing took. This well case
the customers from suffering extremely delay
 A clearly established inventory management department should be in
corporate in the organizational structure of the company.
 The objective of this department should be selecting all the necessary
equipment’s which are an appropriate for minimizing losses that may arise
for breaker, spoilage and theft.
 Inventory control system of the company is an essential part of the
physical distribution system composition of inventory. The area should be
titled with qualified employees. Top management of the company should
assign qualified people for the system needs skill full people especially in
inventory management.
 The company needs to have material disposal policy (by mean of by
product) for items that are spoiled, scraped or finished their storage life
before they are sued. This activity may be useful for coaching revenue and
also reduce storage cost.
 In order to overcome the problem of lack of essential input in stock or the
company should mount the records of inputs and supplies manual which
contain the information of possible materials and their substitutes,
reliable forces of inventory and their substitutes.
 Clearly defined purchasing polices should be developed for both suppliers
and purchasing units I line with corporate goals.
BIBLIOGRAPHY
1. Doubler, Donald W, and Burst David N, (1996) purchasing and

supply managements 6thend; McGraw-Hill Inc.
2. Mosich A.N (1988), Intermediate Accounting.6th ed. United states of

America.
3. J.H. wasting and others. (1985). Purchasing management; 2nd ED:
John Wiliry and sons Inc.
4. N.K Nair. (1998). Purchasing and materials management.2nd
edition: Vikas publishing house.
5. William J. Sternsons 1998, operation management, 6th edition.
6. Richard B. Chase, production and operations management, 7th
edition 1998.
7. JOSEPH G. MONK’s operation management 5th edition 1987.
8. J.R. Tony Arnold, introduction to materials management, 8th
edition 1998.
Appendix 1
DIRE DAWA UNIVERSITY
COLLEGE OF BUSINESS AND ECONOMICS
DEPARTMENT OF LOGISTICS AND SUPPLY CHAIN

MANAGEMENT
Dear respondents:-
This questionnaire is designed to collect the data towards the assessment of

strategy significance of inventory management in dire dawa Food ComplexShare
Company. Therefore you are kindly requested to give you attention to each
question.
Instruction: - put tick” mark in the box given against the statement and
writing the necessary information on the given space provided.
- Do not write your name and address

- You can tick more than one box
Thanks you very much for your cooperation in Advance!
Part one
Personal information
1. Sex: male female

2. Age : 18-30 31-40 41 and above
3. Education back ground: below 12 certificate diploma
degree and above
4. Work experience < 5 years 6-10 years 11-15 years
>16 years
Part two
Basic quaternaries
1. What type of inventory management system does your organization?
Periodic perpetual just in time
2. Does your company inventory control system in it by a computer?
Yes No
3. What mechanism do you use when the inventory out from the store?
Material received note material transfer note
Material return note
4. Does the organization use bin card system in control of inventory?
Yes No
5.Is the inventory management process performed in accordance with the

organization policies and rules? Yes No
6. What kind of inventory management does the company choose?
All items at the distinct area of the store

All items are at the center
7. Does the organization implement effective inventory management activity? Yes

No
8 Does your organization inventory process have shortage of supporting

material? Yes No
9 Which are sources of problem in inventory management?
Policy procedure and principle of the organization

Lack of skill man power budget constraint
10 Do you think inventory management play in a role in your organization?
Yes No
11 How often do you make regular purchase?
Yes No
12 Which methods does the company follow to purchase raw materials?
Restricted tender open tender
13 Does your organization use material coding system?
Yes NO
14. If your answer is yes for question number 13 what material coding system
the factors use?
Alphabetic numeric symbolic
15. How do you control inventory in the store in your company? Through
recalculation of the recorded amount with actual balance on handThrough
control of each receipt and issuance
Others
16.Does the company hold inventories?

Yes No
17.What are the critical to select supplier in your organization?
Quality quantity Low price all
APPENDIX 2
Interview question
The data collected through interview primary developed to the managers of
dire dawa Food ComplexShare Company. The interviewee (manager) gave
the need information verbally through face to face.
1. What types of inventory control system does your company use
2. Which method of evaluation of inventory do you use in your company?
3. Is under investment on inventories are good or bad for your company?

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Dire dawa UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF LOGISTICS AND SUPPLY CHAIN

LOGISTICS & SUPPLY CHAIN MANAGEMENT PROGRAM

ASSESMENT OF INVENTORY MANAGEMENT SYSTEM (A CASE STUDY OF

A SENIOR ESSAY SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENT

BY:- BANTE TILAHUN

DIRE DAWA, ETHIOPIA

2. LITERATURE REVIEW ........................................................................... 6

3. Methodology of the study................................................................. 30

3.3 method of data collection……………………………………………………………………………………………30

3.4 sample and sampling technique……………………………………………………………………………………31

3.5 procedure of data collection………………………………………………………………………………………31

Table 4.1 profile of Respondents ……………………………………….33.

1.2Statement of the problem

1.3Basic Research Questions

1.4Objective of the study

The overall objective of the study is to examine inventory management system

 To assess the role of inventory management system in the organization.

Conducting research paper on this topic is vital to give awareness about

1.6. Scope of the study

1.7Definition of key terms

o Inventory control: - the technique for ensuring availability of materials

1.8 Limitation of the study

1. What balances desired between inventory investment and customer

2.2 Classification of inventory

2.3 Inventory management

 Ordering and receipt of goods

The inventory manger must also follow up to answer question as:

 Has the supplier received the order

2.3.1 Aggregate inventory management

 Flow and kind of inventory needed

2.3.2 Inventory and the flow of materials

2.3.3 Supply and demand patterns

If this is so manufacturing can produce goods on a line flow basis, mattering

2.3.4 Dependent and in dependent demand

An item is said to exhibit dependents demand characteristics when its use is

2.4 Function of inventories

 Supply and demand

Based on this, inventories can be classified according to the function they

2.4.1 Anticipation inventory

2.4.2 Functioninventory (safety stock)

2.4.3 Lot size inventory

It is the portion of inventory that depletes gradually as customers orders come in

2.4.4 Transportation inventory

2.4.5 Maintenance, repair and operating supplies (MRO)

2.5 Objective of inventory management

2.5.1 Customer service

Inventories had to maximize customer service by protecting against uncertainty.

2,5, 2 Establishing safety stock

2.5.3 The service level approach

2.6 Opportunity efficiency

1. Inventories allow operations with different rates of production to operate

By leveling production manufacturing can continually produce an amount equal

3. Inventories allow manufacturing to runs. Which results in the following?

2.7 Inventory costs

2.7.1 Items costs