CHAPTER ONE

1. Introduction

In today's vast and complex environment ,organization are starving for effective and efficient
business environment and control system .But because of failure of the organization to keep up
the face organization cannot be able to complete in the global market unless and otherwise they
establish effective inventory management and control system makes the business mission of
being profitable under question .So this study analysis the challenges and prospect of inventory
management system in case of wanji sugar factory which is located in the oromia regional stat
Eastern Shewa zone 110km south east of Addis-Abeba .This study use both primary and
secondary data and try to be confidential and acceptable for the future user of the data by
consistently analysis and interpretations of the finding which are collected in wanji sugar factory
specially in the department of inventory and stock management .And finally ,the outcome of the
study can be presented with it's prospective evidence .From this study specially wonji sugar
factory the stock management bodies can easily identify its strength and weakness on the
existing inventory management and control system by using this study as a benchmark.

1.1. Background and the study

Inventory management involves risk which varies depending open a firms position in the
distribution channel . The typical measure of inventory exposure are time duration depth ,
and width of commitment. For manufacture inventory risk is a long term manufactures
inventory commitment bign with raw materials and component parts purchase include
work imputes and end with finished goods.

Before several years ago, challenges of inventory management were very serious for every
manufactures. The risk associated with handling inventory increase as product move down
the supply chain closer to the customer. Because ,the plantation of having the product in
the work place or for increase and cost have been incurred to distribute the product.
Recently problem of inventory management relatively reduce due to new technological
advancement and incensement of social awareness. However, the problems are not totally
reduced. currently inventory management challenges are also faxing problem for
manufactures affecting operational efficiency , customer satisfaction and revenue. The most
exist problems are, unqualified employees, poor measure of performance unrealistic, business
plan, misplacement of stocks and others. while to days inventory management has more
computational power than every segments and other sophisticated features ( supply chain
logistic management 2010) .

1.2. Back ground of the organization

Wonji shoa sugar factory was established in 1954 by the Duth company HUA in the Wonji
plain that lies at the downstream of the Koka Dam in the Awash River Basin . It is
located in East shoa zone of the oromia region in the central rift valley of Ethiopia 110 Km
south East of Addis Abeba. It lies on altitude between 1510-1560 meter above sea level. the
bimodal of rain fail pattern of the area does not exceed 850 mm per year and average
temperature ranger between 17-30c .

The estate presently has 8000 employees working in three sectors. These are
factory ,agriculture and administrative office most of the factory and administrative
workers live in two factors villages and most of the agricultural workers recide in 14
plantation villages .The community of the estate has depend on well water which has been
known to high fluoride level. It has dual water supply of raw water for washing purpose
and defluoridted water for drinking water was made available for the factory village since
1962 and to all plantation villages since 1976.

1.3. Statement of the study

In today’s competitive economic- climate inventory management practice has become profit
on inhancing tools for the organizations. Before investment system can increase
profitability, poorly conceived system can drain profit and put business at the competitive
advantage . Investment management must take as much interest as very clearly recognized
mission of an organization . The control and maintenance of inventory is the problem
common to all organization in any sector of economy . In case of wonji sugar factory
problems identified were unqualified employees , lack of proper technological instrument ,
poor ware house control, poor measure of performance and others. Currently these problems
are also observe and highly affect the inventory management system of the factory. Considering
these and others the fallowing basic research questions were take out.

1. What are the major problems of inventory management?

2. How the challenges or problems are reduced?
3. What are the contributions of employees to reduce the challenges?
4. What are the causes for the occurrence of the problem or challenge of inventory
management?

1.4 object at the study

This study had two major objectives. These are

1.4.1 General object of the study

The general objective of the study well to assess constraints or challenge of inventory
management and how these problems can solve and reduced in case of Wonji sugar
factory .

1.4.2. Specific objective

 To identify the major challenge of inventory management

 To identify the solutions for challenges of inventory management.
 To evaluate the contribution of employees to solving challenges or problems.
 To examine the cause of the problems in inventory management system.

1.5. Significance of the study

 It helps for the organization to identify the major problems.

 It also important for the community to identify related problems or challenges in
the working area.
 This research also helps other researchers as a source for their finding.

1.6. The scope of the study

The scope of the study well limit to identifying the major challenge of inventory
management in Wonji sugar factory . The study well focus primary on the challenge and
prospect of inventory management .

1.8. Organization of the study

This research contains five chapters. The first chapter deals with the background of the
study and the organization , statement of the problem , objective and scope of the study .
The second Chapter deals with literature review. And the third chapter deals research
methodology and design. The fourth chapter deals with data analysis and interpretation. Finally
it deals with conclusion and recommendation.
CHPTER TWO

2. Review Literature

2.1. Definition inventory

Inventories are material and supplies that a business or institution carries either fo sale or
to provide inputs or supplies to the production process. Inventories are very important to
manufacturing companies that is on the balance sheet they usually represent from 20 % to
60% of the total assets . Inventories are used their value is converted into cash which
improve cash flow and return on investment ( Arn old , champman & clive , introduction
to material management ( 2008).Inventory is a current asset that should provide return on
the capital invested . The return an inventory investment is the marginal profit on sales
that should not occur without inventory. The four functions , geographical specialization
decoupling, balancing supply and demand and buffering uncertainty require inventory
investment to achieve operating objective . The minimum level inventory invested to
achieve geographical specialization and decoupling can be modified only by changes in
network facility location and apparitional process of the enterprise . The minimum level
of inventory required to balance supply and demand depends on ability to estimate
reasonable requirements( J Bow essox, J. cluss m. cooper, supply chain logistic management
(2010).

2.2. Classification of inventory

There are many ways to classify inventory. One and often used classification is related to the
flow of materials in to through and out at manufacturing organization , these are:

2.2.1. Raw materials

These are purchase items received that have not entered the production process. They
include purchased materials, component parts and subassemblies.

2.2.2 Work in process

Row material that have entered to manufacturing process and are being worked on or
waiting to be worked on.

2.2.3. Finished goods

The finished product of the production process that are ready to be sold as completed
items . They may be hold at factory or central ware house or at various point in the
distribution system.

2.2.4. Distribution inventories

These are finished goods located in the distribution system.

2.2.5. Maintenance, Repair and operational supplies (MRO)

Items used in production that do not become part at the product. These include hand tools, spare
parts, lubricants and cleaning supplies( Arnald , et, al , Introduction to material management

(2008).

2.3. Common Inventory Management Problems

A successful business relies on many factors, one of which is a reliable inventory management
system. Inventory management consists of everything from accurate record-keeping to shipping
and receiving of products. Inventory management that is properly maintained can keep a
company’s supply chain running smoothly and efficiently. However, there are many common
inventory management problems that can occur. Inventory management problems can interfere
with a company’s profits and customer service. They can cost a business more money and can
lead to an excess of inventory overstock that is difficult to move. Most of these problems are
usually due to poor inventory processes and out-of-date systems. There are a number of
problems that can cause havoc with inventory management. Some happen more frequently than
others. Here are some of the more common problems with inventory systems.

.Unqualified employees in charge of inventory. Too many companies put people in charge
of their inventory distribution who either don’t have enough experience, are neglectful in
their job, or don’t have adequate training. No matter what kind of system is used, companies
need to pay closer attention in overseeing their inventory management and making sure
employees receive proper training.

.Using a measure of performance for their business that is too narrow. All too often
companies will evaluate how well their business is doing. The processes they use are not
wide enough and do not encompass all the aspects and factors in the company. Many
areas get overlooked and can lead to either inventory shortages or inventory stockpiling.

.A flawed or unrealistic business plan for a business for the future. To predict how
well a company may do in the future, you have to collect enough data and accurately
analyze it. The downfall of many companies starting out is that they give an unrealistic
assessment of a company’s growth. This affects inventory management because if a
company predicts more growth than they actually experience, it can lead to an overstock
of inventory. The opposite is true if forecasters do not predict enough growth and are left
with not enough inventory.

.Not identifying shortages ahead of time. It happens all the time. A business needs a
number of products or materials but discover that they do not have enough in stock and
must re-order. Waiting for the shipment to come in can slow down the supply chain
process. Not having enough product in stock to meet customer demand can lead to bad
customer relations. A supervisor in charge of inventory management should look over
their inventory on a regular basis to make sure enough product is in stock.

.Bottlenecks and weak points can interfere with on-time product delivery. This
means that if too many orders come in for outgoing shipments and do not get handled in
an efficient manner, they can build up, or ‘bottleneck’. This slows down deliveries. The
same is true for any weak points in an inventory management system. Weak points slow
down the system and can stop it altogether.

.Falling victim to the “bullwhip effect”. This is an over-reaction by a company to

changes in the market. As the demand of a market changes, a company may panic and
order an overstock of inventory, thinking the new market conditions will move the
inventory. Instead, the market stabilizes and the business is now left with a surplus of
products that just sit in the warehouse, taking up space and not making money.

.Too much distressed stock in inventory. Distressed stock is products or materials in

inventory that has or will soon pass the point where it can be sold at the normal price
before it expires. This happens all the time in grocery stores. As a particular food product
nears its expiration date, the business will discount the item in order to move it quickly
before it expires.

.Excessive inventory in stock and unable to move it quickly enough. This is probably
the most common problem for most businesses. Cash-flow comes from moving
 inventory. If a company buys an amount of product for their inventory and they do not
move it, the company ends up losing money.

.Computer assessment of inventory items for sale is inaccurate. Nothing is more

frustrating than going to a business that says it has a product but it turns out that they do
not. The quantities are off and the actual items are not available. Too many people
assume that the computer records are infallible. But the records have to be entered by a
person and if the person responsible does not keep accurate records, it can turn into a real
headache. Inaccurate inventory records can easily result in loss of money and strained
customer service.

.Computer inventory systems are too complicated. There are many inventory software
programs available for business use. The problem is that many of these programs are not
user-friendly. Computer software developers do not take into account that most of the
people who will actually be using these systems are not tech savvy. A company does not
always have the time and money to invest in training of personnel to use software
effectively.

.Items in-stock get misplaced. Even if the computer accurately shows the item as in
stock, it may have been misplaced somewhere at the warehouse, or in the wrong location
within a store. This can lead to a decrease in profits due to lost sales and higher inventory
costs because the item must be re-ordered. Plus, the company must spend the time for
employees to track down the misplaced item.

.Not keeping up with the rising price of raw materials. This falls more into the
accounting end of inventory management. By not keeping current with the rising price of
raw materials, a company will lose profits because they are not adjusting the price of their
finished products. Finished items in inventory must be relative to the cost of raw goods.(
http://www.askdeb.com/inventory-management/common-inventory-management-
problems/)

2.4. Function of Inventories

In both Manufacturing the basic purpose of inventory is to decuple supply and demand .
Inventories serve as buffer between supply and demand,and customer demand and finished
goods ,finished goods and component availability , requirement for an operation and suppliers
of materials . based an this inventory can be classified according to function they
perform.these are:
2.4.1. Anticipation Inventory
These are built up on anticipation of future demand. For example they are created ahead of peak
sealing season, promotion program, Vacation shutdown, or possibility the threat of strick. They
are built up to help level production and to reduce the cost at thanking production rates.
2.4.2. Function Inventory (safety stack)
This is helped to caver random un predictable function in supply and demand or load time
. If demand or load time is greater than forecast, stock out will occur. Safety stock is carried
to protect against this possibility .Its purpose is to prevent distributions in manufacturing or
deliverer to customer safety stock is also called buffer stock or reserve stack
2.4.3. lot- size Inventory
Items purchase or manufacture in quantity greater than needed immediate create lot size
inventory . This is to take advantage of quantity discounts to reduce shipping clerical and
setup costs and incase where it is impossible to make items the same rate that they will
be used or sold. lot size inventory is sometimes called “cycle stock”. It is partisan of
inventory that depletes gradually as customers order came in and is replenished cyclically
when supplies order are received.

2.4.4. Transportation Inventory

Exist because of the items needed to move goods from one location to an other such as
from plant to distribution center or customer. They are sometimes called “pipeline or
movement” inventory. The average amount of inventory transit is:

I= tA

365

Where I: is the average annual inventory in trasit

 T: is transit time in a day and

A: is annual demand

The any way to reduce inventory in transit and its cost is to reduce the transit time.

Example problems

Delivery of goods from supplies is in transit for ten days . It the annual demand is 5200 units,
what is the average annual inventory in transit?

Answer: I= 10*5200 = 142.5 units

365

2.4.5. Hedge inventory

Same product such as minerals and commodities for example grains or animal products are
traded on worldwide market. The price fore these product fluctuate according to world
supply and demand . If buyer expect to rise they can purchase hedge inventory when price
are low . Heading is complex and beyond the scope of this text (Long, international logistic
(2003).

2.5. Objective of inventory management

A firm wishing to maximize partite will have the following objectives.

2.5.1. Customer service

In broad terms, customer service is the ability of company to satisfy the need of customer. In
inventory management the term is used to describe the availability of items when needed
and is measure of inventory management effectiveness. The customer can be or the work
station where the next operation is to be performed.

2.6. Factor in inventory decision

 The nature at situation determines the appropriated an inventory management system.
Although, it is not possible to examine all combinations of factors each of which can
define unique situations and set of consideration.It is possible to describe those that are
must important in selecting an inventory management system and why they are important .
These factories are important. These factors are:

2.6.1. Demand pattern

The nature of the demand pattern has an effect greater than any other possible factory an
the appropriateness of when to order decision rules and thus on the design of inventory
management system . The relationship of demand pattern to the quantity on hand ( in stock) is
the key factor in classifying demand patterns. A pattern that results relatively gradual and
steady decrease in inventory is representative of independent demand on the other hand. A
pattern that causes about and dramatic in stock is representative of dependant demand.

2.6.2. Source common supplier or production process

Inventory also can be grouped on the base of the supplier the process and the department
through which the item are processed. Items produce in the same department or on similar
group of machines also should be grouped for analyzing the relationship of aggregate
order quantity capacity revilement to capacity availability and possibility of common setups.

2.6.3. Customer Requirement

When group of items has been ordered or usually is ordered by a single customer. The
production or purchase of these items may be grouped to enable current delivery, unless the
purchase order specify different delivery det for different items .This situation may exist
when all the items are recurred in assembly produced by the customer (W.fogarty,
R.Haffmann, and W,stonebreaker operational management (1989).

2.7. Principle of inventory management

Inventory management in enterprise should be on the inventory policy. Instead at just reacting
to change in a demand or supply. This policy can be both at the tactical level and strategies
level. It provide the criteria to decide such a questions as where to place inventory when
to replenish stock, and how match to allocate to sub units.

Capacity constraints are important planning consideration This refer to such things as the
ever house space , the ability of information system to keep up with inventory change
and soon.

The inventory policy need to consider for example what is the maximum amount of
inventory that cloud be held if needed.

2.8. Inventory Management systems

Many different inventory management systems can be used when the orders form customers
are fairly large we will examine here four of the major types of systems . Which use
combination of safety levels, recorder points to manage the inventory.

2.8.1 Reorder point /EOQ system

The reorder point /EOQ system (also called order point order quantity system). Will be
examined in same detail since many of the element of this system also apply to an other
three to be considered here also apply to another three to be considered here. This system
uses three elements.

 Safety level of stock computed using the prevailing disused equation.

Safety stock= k*a
Here: K= factor determined by management policy.
A= standard deviation of demand.
Average demand during the lead time computing using: Average demand during load
time= D*l
D = average daily demand
L= lead time.
which added to the safety stock yields the recorded point or ROP
ROP= (K*a) + (D*L)
 Or more simply and directly
ROP= safety stack + average demand duting ting lead time
 Economic order quantity or EOQ , computing using

EOQ=
√ 2 ab
I
Where; = EOQ = economic order quantity
A= annual used item
B= Administrative cost per order

I= inventory carrying cost per item per year,

as appetence of the unit price.

Inventory is drawn dawn until the ROP is reached , at which time an EOQ is ordered from
the source of supply. The average demand during leads time provides butter stock to be
used until the replenishment order is filled depending on the rapidity of use, this ,may or
may not prevent drawing on the safety stock and thus may not always prevent stoke out .

This method require constant monitoring of the inventory to detect properly when the ROP is
being approach. Unfortunately, this system is not well adopted to the organizations caring
inventory that contain a large number of different items. Companies gradating highly
diverse multiple lines would probably be better advised to use same sort of materials
requirements planning coupled with just in time ( or kanban) method of control.

2.8.2. Reorder point /maximum level system

The reorder point /maximum/ level system also often called “ order point/ order up to
maximum system use three somewhat different elements. These are:

 Maximum level inventory to be maintained as prescribed by management.

 Reorder point ( ROP) computed as above by adding the safety stack and the
average demand during the lead time.
 Reorder amount.
 This system also require close monitoring of inventory to detect when the ROP is
being approached. When the ROP is reached , an amount is ordered from the supplier to
bring the total level of stock up to prescribed maximum. This method requires some
skill at forecasting since the demand during the load time may not be known with
certainty. The logistic manager will have to estimate how mach should be ordered to
caver the lead time demand to bring the inventory up to desired maximum level. Since
the forecast often quarry, the maximum level could be either exceed or failed a bit short
depend on the extent of the forecast error.
2.8.3. Scheduled Review/Maximum level system
The scheduled review/ Maximum level system also called the “periodic review order up to
Maximum system” use only two elements.
 Maximum level inventory to be maintained as prescribed by management, Reorder
amount.
This system schedules a review at prescribed internal of time. At scheduled review time, no
matter what the level of inventory happens to be, reorder is placed to bring the stock up
to the prescribed maximum level as depicted. some command sense should be used here.
Demand also heavy , if unanticipated that the safety level is poached should announce an
emergency situation even between the review periods. The availability in the size of the
replenishment orders will also cause some problems. Adjusting the size of the reorder to reach
the precise maximum prescribed level will not be possible with any degree of frequency.
2.8.4. Scheduled review EOQ system
The scheduled review /EOQ system often called the “periodic review” or order quantity
system is perhaps the least satisfactory of the three methods discussed here. Any a single
element is used in this system the economic order quantity. The inventory is checked at
regularly scheduled intervals and an EOQ is submitted when the stock is found to be
below either the recorded point or safety stock. This method tends to result in either serious
over under ordering.
2.9. Visual method inventory control
Two visual method of determining when to reorder stock are rather easy to use, provided
the ware house personnel can be relied on to give warning when they stock are to low. The
two bin method divides the inventory for each item between two bins or containers. When
stock- picker empty one bin and start on the second, the former is notified and reordered is
placed. The red- line method require painting highly visible red line around the inside of
the bin just far enough from the bottom to provide safety stock .
When the stock pickers empty out the bin to the red line reorder is placed . A variation at these
visual method is to package the reserve or safety stock and place the container at the
bottom of the bin when the stock pickers either reach the package or are forced to fill
order is placed corollary to the problem of managing inventory is the task of just keeping
track of what is actually on hand ( car M. Gue, Introduction to logistic management (1989).

CHAPTER THREE

3.1. Research Design

To identify and obtain information on the characteristics of particular problem the research well
use descriptive method of research. It well use to describe the state of nature or affair as it
exist at a present.

3.2. Sources of Data

In order to get adequate and relevant data and information the researcher well use primary
and secondary source of data. The primary well close end questionnaires to the target
population. The secondary data well collect from internet, organizational broacher, magazine,
new paper of the employer and the other.

3.3. Data collection tools

The study well collect data by preparing questionnaires for the target population and
covenant sampling method well use because of suitable to the study in that respondents
can be cease at random rather they can be access only when they come to the
organization.

3.4. Sample size and techniques

Wonji showa sugar factory is agro industry estate of 5000 hectors in central Ethiopia
located in the Rift valley. The estate presently has about 8000 employees working three
sectors. The target population the research were face on employees, exporters and
managers. As it is impossible and take many time and cost to collect data from the whole
population the research well use 60 of the total population. The representative sampling
well select from the target population by using simple random sampling techniques .
Because simple random sampling provide adequate data for analyzing the contribution and
association problems.

1.8.5. Methods of data Analysis

Methods of data analysis well use both qualitative and quantitative methods. The researcher
used qualitative method to find out how people feel or what they think about the
problem of investor management in Wonji sugar factory. Whereas the researcher well use
quantitative methods to get clear information based on quantitative method than qualitative
to be the research more objective in nature.