CHAPTER 1

BACKGROUND OF STUDY
1.1.1 Introduction

Inventory is composed of assets that will be sold in future in the normal course of the
business operations. It is a stock of goods that is maintained to facilitate the continuous
production of goods and services. The term “inventory” refers to the stockpile of the
product a firm is offering for sale and the components that make up the products.
Inventory means “the aggregate of these items of tangible property which are held for
sale in the ordinary course of business, are in process of production for sale, and are to
be currently consumed in the production of goods or services to be available for sale.”
Thus inventory includes the stock of raw materials, goods-in-process, finished goods and
stores and spares. Inventory is often where the biggest costs are hidden in businesses
(Harrington, 1996). In fact, inventory control has been studied for several decades for
cost savings of enterprises. This is the reason why inventory management is the subject
of great importance.
Inventory management is concerned with the determination of the optimal level of
investment for each component of inventory and the inventory as a whole relates to the
efficient use of the components and the operation of an effective control and review
mechanism. The management of inventory requires careful planning so that both the
excess and the scarcity of inventory in relation to the operational requirement of an
undertaking may be avoided. Therefore, it is essential to have a sufficient level of
investment in inventories. The following activities fall within the range of inventory
management: control of lead times, carrying costs of inventory, inventory forecasting,
inventory valuation, inventory visibility, future inventory price forecasting, physical
inventory, available physical space for inventory, quality management, replenishment,
returns and defective goods and demand forecasting. Corresponding Author: - Numaira
Showkat

Inventory management is essential for keeping the production wheels moving, keep the
market going and the distribution system intact. They serve as lubrication and spring for
the production and distribution systems of organizations. Inventory management makes
sure that the operations of manufacturing organizations is smooth and efficient by
decoupling individual segments of the total operation and making it easier for handling
the operations. Purchased parts inventory permits activities of the purchasing and
supply department personnel to be planned, controlled and concluded independently of
shop-product operations. The inventories created using inventory management allows
additional flexibility for suppliers in planning, producing and delivering an order for a
given product. Inventory is essential to organization for production activities,
maintenance of plant and machinery as well as other operational requirements. This
results in better handling of money or capital which the organization can use more
productively. The management of inventory in an organization is a very concerned
attribute when it comes to managing the resources in a proper way. Inventory is part of
the company assets and is always reflected in the company’s balance sheet. Therefore,
this calls for its close scrutiny by management. Management is very critical about any
shortage of inventory items required for production. Any increase in the redundancy of
machinery or operations due to shortages of inventory may lead to production loss and
its associated costs. These two aspects call for continuous inventory control. Inventory
control and management not only looks at the physical balance of materials but also at
aspects of minimizing the inventory cost that reflects upon the total operating cost of
the organization.
The classic dilemma in inventory management is to maintain more number of items and
services so as to meet the needs of customers while avoiding high stocks regardless of
the type of items or even the department for which such stock is purchased, as shown
by the operations of Kampala Siti Industries Limited.
Kampala Siti Industries Limited (KSIL) deals in manufacturing of various hygienic
products such as toilet paper, serviettes and kitchen towels that are used by schools,
restaurants, cleaning companies and also for home usage. This engages the company to
produce quality goods through managing business process in such a way that both the
supplier and the customer are satisfied with quality and consistency of goods or services
being produced.
The organization was very small when they started and had less inventories and hence
less to manage that inventory. In the course of 11 years of their existence in Uganda
they faced enormous amount of challenges for managing the inventory. Looking at the
techniques and the ways that they have overcome these challenges was a very
beneficial success for the organization as well has their suppliers and customers. They
saved time and money and retained their place in the market.
Proper management of inventory plays a big role in enabling other operations such as
production, purchases, sales, marketing and financial management to be carried out
smoothly. Basic challenge however is to determine the inventory level that works most
effectively with the operating system or system existing within the organization.
1.1.2 Historical Background

The first signs of inventory management go way back in history. When you look
achievements of ancient architecture and read about great battles of past, you need to
ask yourself how did they manage it, how did they manage logistics of such monstrous
projects?
Supplies, tools, manpower
We think of first inventory management systems as primitive and ineffective, but the
latest archeological and science breakthroughs give us a totally new insight in old
inventory times
Dr. Gunter Dreyer of the German Institute of Archaeology is perhaps the most
prominent of a number of archeologists who believe that writing actually developed out
of early marks that were used to tally the kinds and amounts of goods in stock at
ancient warehouses.
Dr. Dreyer recently discovered numerous inscribed bone labels attached to bags of oil
and linen in the tomb of King Scorpion I at Abydos, Egypt. The labels date back 5300
years, are the world’s earliest known writing, and describe inventory owners, amounts,
and suppliers.
One could even conclude that Inventory control goes back further than writing. Even
before systems of representing specific sounds by specific pictures arose – the systems
that let you look at a letter “s” and associate it with the hissing sound one makes by
pressing the tongue lightly behind the upper teeth and squeezing air out of the lungs,
for example – there were simpler inscriptions in Egyptian and Babylonian warehouses
and granaries, with pictures that represented the inventory owner and numbers
representing amounts in stock and taxes due.

Middle Ages
Merchants couldn’t really account for stolen goods unless they did time-consuming
physical counts on a regular basis. They also had trouble making sure they got the right
number of products when orders came in because of sparse record keeping.
Great battles in the past with more than 100 000 knight included-needed to be
prepared. There was an inventory system that enabled armies to be equipped and
prepared in time. With the invention of accounting and new world explorations,
inventory management climb its leaders. There are tons of documents regarding
inventory preparations and counting. But still, inventory counting was done manually
and it was a much tedious process.

Industrial revolution: 
Industrial Revolution Era Tracking
The Industrial Revolution completely transformed production processes by increasing
efficiency and therefore lowering the cost per item. Lower item costs paired with a
 higher standard of living led to a boom in the consumer good industry. Inventory is
driven by demand and now that more people had disposable income, these was an
increase in demand for goods. Mass production and an improved customer
experience at the point of sale became the focus of businesses.
1880s – Enter the Machine Readable Punch Card
In 1889, Herman Hollerith invented the first punch card that was readable by machines.
It allowed people to record data for a variety of purposes, from census taking to work
timesheets, by putting tiny holes in sheets of paper. Harvard University was inspired by
Hollerith’s idea in the 1930s and created the first modern check-out system. It used a
punch card that corresponded with catalog items and was used to generate billing as
well as manage inventory. Customers would fill out the punch cards and a computer
would read them, sending the information to the storeroom, which would then bring
the item to the customer. A version of this system is still used today for expensive and
controlled items such as medication, however, it did not become too popular because of
its high costs and slow lead time.

1940s – The Barcode is Born!

The precursor to the modern barcode was created in the late 1940s and early 1950s. It was
composed of ultraviolet light-sensitive ink and reader. Unfortunately, technology had not
yet caught up to their idea, making the system too bulky and lacked the computing power
needed to be successful. In the 1960s, a group of retailers came together and came up with
the modern barcode to track inventory. Lasers allowed for cheaper and faster scanners. The
first barcode was born and widely accepted in the late 1960s, the Universal Product Code
(UPC). A 10-pack of Juicy Fruit gum was the first item to have its barcode scanned was on
June 26, 1974 at a Marsh supermarket in Troy, Ohio.

1980s – Software Improves Tracking

Technological advancements in the 1980s and 1990s made inventory tracking even more
efficient with the implantation of more advanced computers and software. These systems
worked in a cycle, from purchasing to tracking and monitoring inventory, then back again.
The price of barcodes and readers dramatically decreased because personal computers
were becoming more commonplace. One of the reasons why barcode inventory
management was slow to grow, especially with small and medium sized businesses was
because businesses had nowhere to store the information they collected. By now inventory
tracking by hand was replaced by scanning products and inputting information into
computers by hand. In the early 2000s, inventory management software developed even
further so businesses no longer needed to input data by hand and barcode readers could
instantly update their databases.

2000s – The Introduction of RFID in Barcode Technology

RFID (Radio-frequency identification) technology was first patented in 1970s and has
become a staple in warehouses, factories, and retail stores in the 2000s. It uses a microchip
to transmit product information, such as serial number, type of product, or manufacturer,
to a scanner. Think of it as a more advanced barcode. Scanners are able to read the RFID tag
without being in direct sight, which makes it ideal for reaching high shelves in warehouses.
It also is able to store more information that the basic barcode. Reference ERPAG Inc.

1.1.3 Conceptual Background

Objectives of Inventory Management:

There are two main objectives (with dependent and independent variable) of inventory

management:

1. Making Adequate Availability of Inventories (Dependent):

The main objective of inventory management is to ensure the availability of inventories as

per requirements all the times. This is because both shortage and surplus of inventories

prove costly to the organization. In case of shortage of availability in inventories, the

manufacturing wheel comes to a grinding halt as a result it affects the production unit. The

consequence is either less production or no production. The inventory has to be managed in

order to avoid bottleneck and to avoid discontinuation in production. Excess stock is also

improper management of inventory where the excess order can increase the inventory for

no reason and cost us in long term.

The either case results in less sale to less revenue to less profit or more loss. On the other

hand, surplus in inventories means lying inventories idle for some time implying cash

blocked in inventories. Speaking alternatively, this also means that had the organization

invested money blocked in inventories invested elsewhere in the business, it would have

earned a certain return to the organization. Not only that, it would have also reduced the

carrying cost of inventories and, in turn, increased profits to that extent. With these

reasoning we can say that it is a dependent variable in my key concept. This is because the
knowledge of the availability of the inventory items will lead to proper management which

in turn will reflect the other operations and overall management to perform in harmony.

2. Minimizing Costs and Investments in Inventories (Independent):

Organizations are now monitoring their inventory more significantly in order to make sure

that the extra cost which they can exempt from the operational cost can be managed in

other important processes. Closely related to the above dependent variable of the topic the

agenda for each organization should be to minimize both costs as well as volume of

investment in inventories in the organization and have a proper fund system for managing

the inventory by making sure that planning and forecasting is applied in Inventory

management. This is achieved mainly by ensuring required volume of inventories in the

organization all the times. This also makes it easy for the operations to avoid bottleneck and

has a smooth way of managing and forecasting the costing of the inventory which the

organization will require in the latter months or years of operation.

This benefits organization mainly in two ways. One, cash is not blocked in idle inventories

which can be invested elsewhere to earn some return. This also helps the organization in

putting the value for money first as the value for money currently is less than that of the

future so proper management can allow to save money and to use that money maybe in

ordering raw materials or any maintenance issue. Second, it will reduce the carrying costs

which, in turn, will increase profits. Inventory management, if done properly, can bring

down costs and increase the revenue of a firm. It can also give better understanding for the

accountants to plan and forecast the payments and allows them to have a clear vision or

the expected money they will require to order or to acquire to maintain the inventory.
This is an independent variable because due to this the cost is minimized by doing so the

finance is controlled in a better way. Reference: DK Sinha.

1.1.4 Theoretical background

Inventory refers to those goods which are held for eventual sale by the business
enterprise. In other words, inventories are stocks of the product a firm is manufacturing
for sale and components that make up the product. Thus, inventories form a link
between the production and sale of the product.

The forms of inventories existing in a manufacturing enterprise can be classified into

three categories:
(i) Raw Materials:

These are those goods which have been purchased and stored for future productions.

These are the goods which have not yet been committed to production at all.

(ii) Work-in-Progress:

These are the goods which have been committed to production but the finished goods

have not yet been produced. In other words, work-in-progress inventories refer to

‘semi-manufactured products.’

(iii) Finished Goods:

These are the goods after production process is complete. Say, these are final products

of the production process ready for sale. In case of a wholesaler or retailer, inventories

are generally referred to as ‘merchandise inventory’.

Some firms also maintain a fourth kind of inventory, namely, supplies. Examples of

supplies are office and plant cleaning materials, oil, fuel, light bulbs and the like. These

items are necessary for production process. In practice, these supplies form a small part
of total inventory involving small investment. Therefore, a highly sophisticated

technique of inventory management is not needed for these.

The size of above mentioned by DK Sinha are three types of inventories to be

maintained will vary from one business firm to another depending upon the varying

nature of their businesses. For example, while a manufacturing firm will have all three

types of inventories, a retailer or a wholesaler business, due to its distinct nature of

business, will have only finished goods as its inventories. In case of them, there will be,

therefore, no inventories of raw materials as well as work-in- progress.

Functions of Inventory

It is an established opinion that all the three components of inventory work as blood

vessels in the operational functioning of an organization. The more efficiently the

inventories are held, the more flexible the organizational run is ensured. The main

functions of inventories are:

Maintain a Rate of Flow through a Process: Every inventory type works as a link among

the operational processes. It narrows the gap between long awaiting customers and

manufacturer; between manufacturer and supplier; and more importantly, between the

machine in one section and the one in another section. The efficient management of

finished goods relieves the customer from unnecessary waiting; the properly handled

raw material inventory reduced the gestation period of manufacturing of a product, and

similarly the maintained in-process inventory renders the machines to operate

simultaneously.

Covering gaps in a discontinuous Process: The major function of inventory is to cover

the gaps in any discontinuous process. Time lag between supply of raw material and the

receipt of the same, gestation period between the processing of the materials and
finished products; and in time interaction between the product and the customer. An

efficient inventory management system minimizes such complicacies with ease.

Providing Multiple Sources of Supply: the vital function of an efficient inventory system

is to provide various sources of supply both of raw materials to the manufacturer and

goods to the customer. Allowing Purchases in more economic lots The more commonly

studied inventory decisions are those which involve production or procurement of

material in lots and those which allow the firm to respond to most fluctuations in

supply, process, or demand. Thus the function of inventory management should be to

procure raw materials in most economical ways.

Allowing Temporary variations in operating Rates: The operating patterns of

companies differ from each other by more than one dimension. Some companies resort

to three shifts operating, while as some operate on one shift rate. And within a

company, there are urges of independence between supplier and user. Even though

assembly might be a continuous process, it might prove more economical, at times, to

operate on partly manufacturing by making larger, more infrequent lots.

Meeting Fluctuations in Supply or Demand or Storing Perishables: Many companies

operate in environments with major seasonal fluctuations. They do not necessarily

operate at a rate which fluctuates immediately with the demand or supply levels. Their

supplies such as labor or raw material may be available only at a different rate. An

inventory system is used to balance the two rates. An efficient inventory system is such

which controls properly over the storing of perishables.

Inventories as Motivators: The presence of inventory has a motivational effect on the

people around it. It is common belief that large piles of goods displayed in a super

market will lead the customer to buy more. In contrast, too much piled up in everyone’s
way leaves a negative impression on buyer and employee alike. It is understood that

workers should be able to see the work ahead of them in an appropriate amount. If

there is not enough work in sight, they may slow down to protect themselves short

hours or layoffs.

Motives for Holding Inventories:

A simple but meaningful question arises:

Why do firms hold inventories while it is expensive to hold inventories? The reply to this

question is the motives behind holding inventories in an enterprise.

There are three major motives behind holding inventories in an enterprise:

1. Transaction Motive:

According to this motive, an enterprise maintains inventories to avoid bottlenecks in its

production and sales. By maintaining inventories; the business ensures that production

is not interrupted for want of raw material, on the one hand, and sales also are not

affected on account of non-availability of finished goods, on the other.

2. Precautionary Motive:

Inventories are also held with a motive to have a cushion against unpredicted business.

There may be a sudden and unexpected spurt in demand for finished goods at times.

Similarly, there may be unforeseen slump in the supply of raw materials at some time.

In both the cases, a prudent business would surely like to have some cushion to guard

against the risk of such unpredictable changes.

3. Speculative Motive:

An enterprise may also hold inventories to take the advantages of price fluctuations.

Suppose, if the prices of raw materials are to increase rather steeply, the enterprise

would like to hold more inventories than required at lower prices.

Benefits and Costs of Holding Inventories:

Holding inventories bears certain advantages for the enterprise.

The important advantages but not confined to the following only are as follows:

1. Avoiding Losses of Sales:

By holding inventories, a firm can avoid sales losses on account of non-supply of goods

at times demanded by its customers.

2. Reducing Ordering Costs:

Ordering costs, i.e., the costs associated with individual orders such as typing,

approving, mailing, etc. can be reduced, to a great extent, if the firm places large orders

rather than several small orders.

3. Achieving Efficient Production Run:

Holding sufficient inventories also ensures efficient production run. In other words,

supply of sufficient inventories protects against shortage of raw materials that may at

times interrupt production operation.

Costs of Holding Inventories:

However, holding inventories is not an unmixed blessing. In other words, it is not that

everything is good with holding inventories. It is said that every noble acquisition is
 attended with risks; he who fears to encounter the one must not expect to obtain the

other. This is true of inventories also. There are certain costs also associated with

holding inventories. Hence, it is necessary for a firm to take these costs into

consideration while planning for inventories.

These are broadly classified into three categories:

1. Material Costs:

These include costs which are associated with placing of orders to purchase raw

materials and components. Clerical and administrative salaries, rent for the space

occupied, postage, telegrams, bills, stationery, etc. are the examples of ordering costs.

The more the orders, the more will be the ordering costs and vice versa.

2. Carrying Costs:

These include costs involved in holding or carrying inventories like insurance charges for

covering risks, rent for the floor space occupied, wages to laborers, wastages,

obsolescence or deterioration, thefts, pilferages, etc. These also include opportunity

costs. This means had the money blocked in inventories been invested elsewhere in the

business, it would have earned a certain return. Hence, the loss of such return may be

considered as an ‘opportunity cost’.

1.1.5 Contextual background

Kampala Siti Industries Limited is a manufacturing company and solution providers in

the Hygiene sector established in 2009. The company has two division of production,
comprising of the Tissue Paper division and the Thermal Paper Converting Division.

Product Range
We’re presently manufacturing around 45 products. Our wide range of high quality
Tissues are in the categories of Toilet Rolls, Paper Napkins, Facial Tissues, Kitchen
Towels, Medical Towels, Multipurpose, Paper towels, Thermal Paper Rolls, ATM
Rolls and complete solutions for hygiene.
 Quality Control
We follow key parameters to test our range of products for Quality Assurance. Quality,
being the top priority of our organization, is worked upon with great consideration by
the team of quality controllers. Our raw materials are from the most reputed market
vendors globally. To ensure high quality standards in our end-products, we test the
procured range on several quality parameters such as Softness, Quality, Eco friendliness,
Hygiene, Skin friendliness, Absorbency, Regular Laboratory Tests.

Inventory Management
Our inventory comprises of the raw materials required to make the products as well the
packing materials which comes under work in progress and finally the finished goods.
Which are then supplied to the customers. Inventory management is done on a daily
basis to maintain exact amount of stock and to determine various facts about the
production facility such as average usage of specific material, forecasting of the usage
and daily consumption of materials. Reference: www.ksil.co.ug

1.2 Statement of the problem

This research is done in order to get to know about the various methods that are available

theoretically in the books and how to apply them to solve the modern issues of inventory

management. Currently the whole world is facing significant hikes of the prizes of the

commodities as well as the low availability of many raw materials. The unpredictability

of the situation is rising day by day and to manage the inventories on a daily basis is

becoming very tedious. Each and every company now is facing the absorption because of

the price hike and in turn the customers are facing the problems in getting the services

and goods.

The research is conducted in an FMCG sector namely Kampala Siti Industries Limited

where the researcher himself is an employee and can go into depths of the problem and

get the proper insights and try to find a solution of the same. FMCG will allow the

researcher to understand the demand and supply of the goods better and with the

company chosen it will be easy for the further operations and will help the researcher in

finding ways to accomplish the long term goals for the company and for the sake of

acquiring knowledge to handle such repercussions in the near future.

1.3 Research objectives
1.3.1 General Objective

It is crucial for an organization today to understand its inventory to achieve both

efficient and fast operations, that too, at an affordable cost.

Study to make sure that effective management of inventory is practiced in reducing

costs which further keeps accounts and finances in check. Learn how to manage the
resources as well as the demands and expectations of the customer with better services
such as fast delivery, low shipping charges and quality product.

1.3.2 Specific Objectives

1. Managing inventory: To study about managing the accessibility of the materials

required for production and also ensuring that the production is not stopped or
slowed down due to lack of resources.
2. Ensure better service: For better service we should make sure that we have
enough materials to complete the order. Also with the available resources we
also should have time constraints to complete the order.
3. Minimize wastage: Proper inventory management can drain loses by minimizing
the wastage of the resources. So avoiding the goods to be squandered or
misplaced. Furthermore, how to keep inventory safe from all kinds of natural
hazards and from getting robbed is also a matter of concern. So a proper practice
should be given to store the goods in warehouse and go downs in any
production plant.
4. Cost effective storage: To study about the various techniques of storing and
labelling materials in order to manage a big amount of materials and to identify
them in proper manner. Also to make the storage cost effective by examining
which product is fast moving and which is not.
5. Optimizing the trend: Trend of production and sales can be optimized by getting
to know the demand of the specific product and then plan or forecast the
production to supply the appropriate quantity in order to avoid miscalculations
by making excess stock.

1.4 Research Questions

1. How to forecast the inventory for the warehouse and optimize the warehouse layout in
order to store the materials efficiently?
 2. How to track an inventory which has many items and how to track the inventory which
are present in multiple locations?
3. What are the factors which can determine that a company will require an inventory
management system for its operations and how can we get the best value for money by
using it?
4. What is the best way of managing the inventory so that all its purpose is fulfilled and
the value of inventories are understood with budgeting and a possible way of satisfying
the customers needs?
5. Which type of Inventory policy should be used depending upon the factors that
determine the best possible way of storing and maintaining it?
6. What are the benefits of using the inventory management system and how it can
empower the work force by minimizing costs and increasing response time?

1.5 Conceptual Framework

Inventory management comprises of various practices which can be conceptualized into

the diagram given below.

Firstly, the management handles the cost barriers and the negotiation part where
procurement of the inventory is performed. Then comes the recording part and storing
part in which all the items are classified and numbered so that each product has a specific
ID or tag for differentiation. Material analysis and storage practices are done in the
warehouse.

Now comes the part where all the materials are traceable and used according to their tag
numbers in the production unit. The materials are well classified with the knowledge that
which are fast moving and which items are slow moving, in accordance to that the
materials are reordered and hence the management of inventory is done systematically.
1.6 Significance of the Study

The findings of the study will provide well–researched information, which can be useful to
researchers for academic purposes in the area of inventory management. To the stores
and Procurement department staff, the study hopes to provide them with useful
information like the recommended techniques of inventory control so as to meet their
customer’s and organization’s needs. To the firm’s management, the recommendations of
the study may enable them to design inventory management policies to improve the
smooth running of the firm, thereby satisfying customers and generally minimizing costs.

The case study will also allow the researcher to practice his work more efficiently and be
ready for any unavoidable circumstances for the near future in managing the inventory. It
will also help Kampala Siti Industries Limited (KSIL) to use various techniques and
theoretical knowledge into practice for an overall impact due to better management in
inventory.

1.7 Scope of the Study

The scope of the study will be to gather all the previous knowledge and the techniques of
Inventory management in order to understand and apply that knowledge in Kampala Siti
Industries Limited (KSIL) and to acquire in depth knowledge about handling the types of
inventories.

1.7.1 Content Scope

The content of the study will be taken from the various articles, news websites and
the readings will be taken from the company itself to provide precise information on
the project. The dependent variables in the project will be the articles and readings
of various sites and the independent variable will be the readings and facts about
the company from its existing employee.

1.7.2 Geographical Scope

The study will be done in Kampala Siti Industries Limited (KSIL). Departments such as
finance, sales and production of the company will be involved in giving out the real
time observations and insights of their knowledge on the case study.

1.7.3 Time Scope

The case study will be prepared with all the articles and data and will sum up in a
months’ time with all the alterations.