CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF STUDY
Companies face a dilemma in today’s competitive marketplace, where on one hand, customer demand customized products and services and require that their orders are filled quickly, but on the other hand they do not want to pay a premium for this customization and availability (Vohra 2008). Therefore, organizations are exploring ways towards postponement strategy in response to constantly changing demands. Vohra 2008 argued that today, the cost of holding, extensive product proliferation and the risk of obsolescence, especially in rapidly changing markets, make the expense of holding large inventories of finished goods excessive and that high demand items naturally have safety stock assigned to them, but in many organization there are so many very-low-demand items that keeping any stock of these items is unreasonably expensive, so they argue that companies must now provide good services while maintaining minimal inventories. Therefore, inventory management approaches are essential aspects of any organization. In traditional settings, inventories of raw materials, work-in-progress components and finished goods were kept as a buffer against the possibility of running out of needed items.
However, large buffer inventories consume valuable resources and generate hidden costs. Consequently, many companies have changed their approach to production and inventory management. Since at least the early 1980s, inventory management leading to inventory reduction has become the primary target, as is often the case in just-in-time(jit) systems, where raw materials and parts are purchased or produced just in time to be used at each stage of the production process. This approach to inventory management brings considerable cost savings from reduced inventory levels. As a result, inventories have been decreasing in many firms (Sawaya Jr.and Grauquw,2006),although evidence of improved firm organizational productivity is mixed(Tement et al(2010). The role inventory management is to ensure faster inventory turnover. It increases inventory turnover by ten(10) and reduce costs by 10% to 40%. The so called inventory turnover is not yet right to sell product on the shelves based on the principle of fifo cycle (Kenneth lyson sans Moore et al,2003). Inventory is classified basing on the business undertaking from organization to organization. Common criteria used and are nature of inventory for example manufacturing, sale or retail, purpose for which inventory is being held in stock or function and the related usage in the supply chain. Typical classifications are raw materials (items in unprocessed state awaiting conversion e.g. timber, steel and coffee seeds), components and sub-assembles. These are for incorporation into the end product e.g. side mirrors,glasses for car assembling company and monitor or keyboards for a computer assembling company), consumable ( all supplies in an undertaking which are classified as indirect and which do not form part of saleable product.(divided into production, maintenance, office and welfare). Proper classification of inventory and its control improve the financial position of a business (David Jessop and Johnson,2008).
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