3.1. Theoretical Literature
In extant literature, theories employed in conveying clarity to the inquiry of the role of MM on functional performance exist. These include constraints theory and lean theory to create the imperative concerns vis-a-vis MM influence on firm performance.
3.1.2 Theory of Constraints (TOC)
Conceptualised by Dr. Eliyahu Moshe Goldratt, an Israeli physicist around 1980, the TOC is founded on the application in institutions of experimental science models such as cause-and-effect analysis to social sciences disciplines such as business management. TOC came into lime light when Dr. Eliyahu Goldratt publicized it via his popular 1984 novel, “The Goal” which offered chains of concepts engrossed on elucidating certain principles that oversee production and suggested a method of continuous improvement and decision-making for businesses to achieve their goals (Goldratt and Cox 1984). TOC is a system for detecting the most significant limiting factor (i.e. constraint known as a bottleneck) that impedes the process of achieving an organisational goal and then methodically refining that constraint until it is no longer a limiting factor. TOC states that constraints justify the performance of a system. A very imperative consequence to this is that wasting time optimizing non-limiting factors will not yield important benefits; only improvements to the limiting factors will further the goal. TOC offers a definite approach for detecting and eradicating limiting factors, known as the Five Focusing Steps (FFS). These FFS which are cyclical in nature are 1) Identify the constraints 2) Exploit the constraints 3) Subordinate and synchronize to the constraints 4) Evaluate the performance of the constraints and 5) Repeat the process. Therefore, once a constraint is resolved the next constraint should immediately be addressed.
TOC is criticized for many challenges associated with its implementation. The theory emphasis on sufficiently refining the constraint and the capabilities of these constraints to improve proficiency and this can be achieved by production entities deploying fitting inventory control practices. TOC is a methodology whose suggestion is connected to generation meant to achieve a reduction of the institutional materials.
3.1.3 Lean Theory
The "Lean" term was devised by John Krafcik in 1988 and defined by James Womack and Daniel Jones in 1996. Its production system is founded on efficiency (waste reduction), continuous and incremental improvement, value streams, touch time and standardized products. It is rooted in five principles namely 1) Exactly defining value by specific products, 2) mapping the value stream for each product, 3) creating value flow without interruption, 4) using a pull system, and 5) pursuing perfection (Womack and Jones, 1996). Womack and Jones (1996) describe the system as a production mechanism that induces more production using less manpower, minimal equipment, time, and space, while ensuring that customers are served with their exact product specification. Value-addition activities should only be centered on things customers are ready and willing to pay for and consider all other activities as waste. Firms that implement the lean philosophy, stand the chance of remaining competitive, improve their value delivering capabilities, reduce operational cost, and enhance profitability.
Critics of Lean insinuate that the system is highly unfavorable especially for company employees implementing the Lean system and that the system fails to take into introspection worker protection and welfare. The principle is concomitant with increased worker stress levels, in view of the pursuant for perfection.
Lean also over-emphasis on absolute waste reduction, which is likely to force top management to shut down certain segment of the firm that may not be profitable in the short run but are nevertheless essential to the firm's bequest.
3.2 MM Practices/Techniques
In any establishment, materials for operational activities are kept. When the number of materials in inventory is large and then enormous sums of money is required to generate such materials in inventory, it becomes the concern of the management to have a proper management control over its ordering, procurement, maintenance and consumption. The control can be for order quality and order frequency. It must be noted that, there are several MM practices but for the purposes of this study, the author limited the discussions to the MM practices being implemented by the case study firm.
3.2.1 Economic Order Quantity [EOQ]
The EOQ is a mathematical model for inventory control management developed by F.W. Haris in 1913. This inventory model is concerned with two main decisions: how much to order (purchase or produce) and when to order so as to minimize the total cost. For the foremost decision—there are two basic costs to consider namely, inventory carrying/holding costs and the ordering/acquisition costs. As the quantity ordered is increased, the inventory carrying cost increases while the ordering cost decreases. The ‘order quantity’ means the quantity produced or procured during one production cycle. EOQ is computed by balancing the two costs. EOQ is that size of order which minimizes total costs of carrying/holding and cost of ordering/acquisition. i.e., Minimum Total Cost occurs when Inventory Carrying Cost = Ordering Cost. Holding cost include the cost of financing the inventory along with the cost of physically maintaining the inventory.
Ordering cost include the cost associated with actually placing the order. These include a labor cost as well as a material and overhead cost. Organisation can therefore rely on the EOQ principles deploying the when to order (re-order level/point) and how much to order (EOQ) in an attempt to enhance their MM practices to reduce total inventory cost.
3.2.2 ABC Analysis [ABC]
ABC materials analysis is a method used to classify a business’s materials into three categories – A, B and C, based on their value to the business. A items are the most important in terms of the value they bring a company, B items are more important than C items but less important than A items whilst C items are the least valuable. The objective of ABC inventory analysis is to help managers focus their time on their most valuable materials and adapt their MM policies accordingly. As there are many ways to define ‘value’, this classification can be based on many criteria, including annual sales revenue, average profit margin, annual sales volume or annual consumption value. ABC analysis is an important technique that follows the Pareto Principle with respect to a firm’s MM. A- items represent 70–80% of the businesses annual consumption estimate and just 10–20% of total material items. B items represent 15–25% of annual consumption estimate and 30% of aggregate materials and C items characterize 5% of the annual application of estimate and half of total materials.
3.2.3 Materials Requirement Planning and Control [MRPC]
MRPC is a scientific technique of ascertaining in advance the requirements of raw materials, ancillary parts and components, spares etc. as directed by the production programme. It is a subsystem in the overall planning activity. The MRPC is performed based on the sales forecast and production plans.
This involves estimating the individual requirements of parts, preparing materials budget, forecasting the levels of inventories, scheduling the orders and monitoring the performance in relation to production and sales. The factors, which influence material planning are classified as macro (price trends, business cycles, government import policy etc.) and micro (plant capacity utilization, rejection rates, lead times, inventory levels, working capital, delegation of powers and communication) systems.
3.2.4 Strategic Supplier Partnership [SSP]
SSP plays an important role in optimizing the costs and improving the quality of materials being provided to the firm. Partnering with suppliers to develop deep, mutually rewarding relationships over the long-term is often cited as a means by which to lessen that risk and develop true supply chain excellence. The Institute for Supply Management (ISM) defines supplier partnership as a commitment over an extended time to work together to the mutual benefit of both parties, sharing relevant information and the risks and rewards of the relationship. These relationships require a clear understanding of expectations, open communication and information exchange, mutual trust and a common direction for the future. It is highly imperative for the manufacturer to involve the supplier at the initial stages of the product design process so as to reduce the probability of defect and the risk of obsolescence (Lwiki et al., 2013).
3.2.5 Just-in-Time [JIT]
The just-in-time (JIT) MM system is a Japanese philosophy that aligns materials orders from suppliers directly to the producers as and when needed. JIT provides an efficient production in an organization and delivery of only the necessary materials in the right quantity, at the right time and place while using the minimum facilities.
Businesses deploy this method to enhance efficiency and reduce waste by procuring goods only as they need them for the manufacturing activity, which decreases inventory costs. According to Harrison and Hoek, (2011), JIT is viewed as a “Production methodology which aims to improve overall productivity through elimination of waste and which leads to improved quality”. Manufactures therefore need to predict demand accurately. For the JIT system to be successful, it is highly dependent on steady production, high-quality workmanship, glitch-free plant machinery, and dependable suppliers. JIT production method reduces materials costs in view of the fact that producers need not incur storage costs. Producers need not worry about unwanted materials whenever orders are cancelled. The central motive of JIT is to have at the right time, the appropriate quantity of materials, open to satisfy either the firm’s production needs or the end user requirements. The less an organisation incur on materials acquisition, storage and final delivery to the firm’s customers, the limited obsolete quality it has to markdown. Lastly, this all climaxes into saving and substantial sums of money fot the organisation.
3.2.6 Stores Management [SM]
Store is an essential element of MM since it is a place that keeps the materials in a manner by which they are well accounted for, are preserved safe, and are accessible at the times of need. Storage is an important part of the economic cycle and store management is an expert operation, which can contribute substantially to the overall efficiency and effectiveness of the materials function. The most vital purpose served by the stores is to offer incessant service to the manufacturing sections. Characteristically a store has a few processes and a space for storage. The main processes of store are (i) to receive the incoming materials (receiving), (ii) to keep the materials as long as they are required for use (keeping in custody), and (iii) to move them out of store for use (issuing). The ancillary process of store is the inventory control.
In a production setting, this process of receiving, keeping in custody, and issuing forms a cyclic process which runs on a continuous basis.
3.2.7 Computerized Materials Management [CMM]
A CMM system is the integration of sub-functions involved in the management of materials into a single interconnected system. It is software installed on the computer systems that aids a firm to track the material levels by executing the automatic counting of materials, recording withdrawals and revising the materials balance. It is very difficult for any firm to maintain a large stock of materials, and therefore, many businesses have adopted the JIT system in terms of minimum and maximum limit for the materials. There is an inbuilt system for placing orders in computer systems that automatically generates a payment order to the supplier when the minimum level of the material stock or the reorder point is reached. The benefits of a CMM system can be derived, when the business integrates its materials control system with the other systems such as accounting and sales that aids in better control of material levels. Thus, a CMM system has made a life of both the producer and the retailer easy, who can manage their materials electronically without wasting much time on the manual tracking system. Also, all the documents, such as purchase order, Invoice, account statement gets automatically generated with a use of computerized inventory control system. But however, over reliance on the technology may be problematic in the situations of power outbreak and lost internet connectivity, as it may bring a system to a halt.
3.2.8 Ergonomics/Human Engineering [E]
Ergonomics or human engineering is a comparatively new branch of science which evolved around 1949 but depend on inquiries carried out in several other older, traditional scientific fields, such as engineering, physiology and psychology.
ILO defines human engineering as, ‘The application of human biological sciences along with engineering sciences to achieve optimum mutual adjustment of men and his work, the benefits being measured in terms of human efficiency and well-being.’ Human engineering is concerned with man-machine system. Thus another definition which highlights the man-machine system is: ‘The design of human tasks, man-machine system, and effective accomplishment of the job, including displays for presenting information to human sensors, controls for human operations and complex man-machine systems.’ Human engineering focuses on human beings and their interaction with materials, equipment facilities and environments used in the work.
3.3. Empirical Literature
In extant literature, several studies have been conducted on the nexuses between MM practices and performance. Khan (2020) evaluated the mediating aspects of business strategies in affecting the aspects of inventory capability and firm performance of the Bangladeshi readymade garment industry using a survey of 385 senior managers. The study results revealed that business strategies mediate the consequence of inventory materials capability and performance of the firm. Shin, Ennis, and Spurlin (2015) assessed the relationship between firm performance and inventory management using data from the US manufacturing industry and the findings indicated that a lower ratio of inventory to sales generated a higher profit. Koumanakos (2008) also examined the impact of MM on performance within the manufacturing sub-sectors of food, textile, and chemicals from the period 2000 - 2002 in Greece utilizing traditional inventory measurement criterion such as inventory level, lead time and demand and found out that firms that maintained high inventory levels generated lower rate of return.
Atnafu & Balda (2018) examined the impact of inventory management practices on firms’ competitiveness and organizational performance of micro and small enterprises operating in the manufacturing sub-sector in Ethiopia and found that higher levels of inventory management practice can lead to an enhanced competitive advantage and improved performance. Also, competitive advantage can have a direct, positive impact on performance. A study conducted by Lwiki et al. in 2013 on the impact of inventory management practices on financial performance of sugar manufacturing firms in Kenya from 2002 – 2007 revealed a direct relationship between inventory management and performance. In another Kenyan study, Nyabwanga and Ojera (2012) explored the nexus between inventory management practices and business performance of small scale enterprises (SSEs) in Kisii Municipality in Kenya. The study finding showed a positive and significant relationship between effective inventory management practices and performance. The study further, indicated that inventory budgeting had the largest effect on performance, followed by shelf-space management, Inventory level management had the least effect on performance. Empirical evidences in Ghana also follow similar trend just like their African counterparts. Kasim, Zubieru and Antwi (2015) analysed the inventory management practices of 300 small and medium enterprises (SMEs) in the northern region of Ghana and also observed a positive and significant correlation between inventory management practices and SMEs performance. Similar to this results, Prempeh (2016) also found a positive and significant correlation between efficient inventory management practices and profitability of four listed manufacturing firms in Ghana.