ICTMBE 2014

3rd International Conference on Technology Management , Business and Entrepreneurship

Mahkota Hotel Melaka Malaysia
23rd – 24th June 2014
2014
ISSBN 978-967-0468-93-8

Inventory Management Practices among Small and Medium-sized

Retails Enterprises

Kamilah Ahmad, Mohamed Ismail Hj Pakir Mohamed, Shafie Mohamed Zabri

Faculty of Technology Management and Business
Universiti Tun Hussein Onn Malaysia
86400 Parit Raja Batu Pahat Johor , Malaysia
kamilah@uthm.edu.my, ismailp@uthm.edu.my, shafie@uthm.edu.my

Abstract

This paper presents the survey’s results on the inventory management practices among retailers in
the SME sector in Malaysia. In particular, the study investigates two main issues first on the forms
and methods used by the relatively small retail enterprises in managing their inventory and second;
factors that have significant associations with the use of systematic inventory management
practices among retailers in the SME sector. The data was collected through a questionnaire survey
among 100 retailers in Batu Pahat, Johor. The findings show that the majority of the respondents
indicate that the use both systematic and non-systematic approach in their inventory management.
The most used inventory management technique is based on rule of thumb, followed by EOQ with
more than one third of the respondents indicated the use of this method. Lastly the finding shows
that cost, perception of owner/manager towards inventory management, and knowledge of
owner/manager are factors that have significant associations with the adoption of the systematic
inventory management approach among small and medium-sized retails enterprises in Malaysia.

Keywords: Inventory management, retail, Malaysia, SMEs

 ICTMBE 2014
3rd International Conference on Technology Management , Business and Entrepreneurship
Mahkota Hotel Melaka Malaysia
23rd – 24th June 2014
2014
ISSBN 978-967-0468-93-8

Introduction

Inventory is among the significant financial assets of retailers. The majority of successful retailers
look at inventory management as a tool to improve customer satisfaction through refined
merchandise assortments and in-stock position (Lee and Kleiner, 2001). The inventory
management is considered as one of the most important management function in the overall
context of materials management systems. By focusing on customer satisfaction will eventually
results in increased revenues, lower inventory levels, greater liquidity, and improved return on
investment. The management of inventories influences a firm’s financial strength and competitive
position because the approach taken to inventory management directly affects working capital,
production and customer service (Rajeev, 2008). Current research has shown that proper inventory
management has a significant role to play in promoting industrial development. However, most
inventory control techniques and concepts in use at present are applied mostly by larger firms.
Therefore, it is prudent to examine the adoption of inventory management practices among SMEs
since this sector contributes significantly to the growth of economy in most countries.

In the context of SMEs in Malaysia and the formal inventory management practices they adopt,
very few studies have been done in this area. Therefore, this paper begins to bridge this gap by
investigating the level of use of inventory management in SMEs in Batu Pahat, Malaysia by
focusing on the small retailers.

Literature review

An inventory management concept is defined as a blueprint of the inventory management system

and includes the physical infrastructure, the planning and control structure, the management
information architecture as well as the organisational embedding of the inventory system. In order
to clearly assess the role and function of the inventory management system of the company,
internal and external objectives need to be linked to questions like: why do inventories exist in the
company; what is the value of inventories; what types of inventories are there in the company
(Vrie, 2007). According to Pirttila and Virolainen (1992) the task of the inventory management
process is to transform broad and general business objectives into operational actions in day-to-
day inventory control. In order to manage inventory successfully, the enterprises should
understand customer needs, vendor partnerships, technology, data integrity, and performance
measurements (Lee and Kleiner, 2001). Meanwhile Manthou (1994) argued that the effective
management on inventories can be divided into three areas; inventory record keeping; inventory
decision making; and MRP system.

Research in inventory management practices can be found in a few studies. For example Rajeev
(2008) revealed that several major problems in the context of inventory management in machine
tool enterprises including the use of rule-of-thumb for inventory management, a low importance
given to forecasting, random ordering of materials, low levels of training and development, and
low computer use as well as a low importance given to purchasing and variable lead-time. The
 ICTMBE 2014
3rd International Conference on Technology Management , Business and Entrepreneurship
Mahkota Hotel Melaka Malaysia
23rd – 24th June 2014
2014
ISSBN 978-967-0468-93-8

study confirmed the need for managers in the machine tool sector to alter drastically their approach
to inventory management.

Chikan and Whybark (1990) conducted a study on the IM practices of SMEs in Finland and Greece
to identify the experiences of managers concerning IM. In Finland, the findings suggest that IM
decisions are made at the operational level with minimal guidance from the top. The lack of
accurate, real-time and suitable aggregate information of material flows and stock levels prevented
the Finnish SMEs from setting precise quantitative goals for IM. Meanwhile financial pressures
forced the enterprises to reduce their inventories, which eventually led to internal as well as
external stockouts. Finally the results suggest that the SMEs were slow to adopt and implement
contemporary IM practices.

Beheshti (2010) demonstrates the usefulness of a decision support model in analyzing and
developing a cooperative environment among supply chain members in order to reduce the cost of
inventory as well as the cost of goods sold. The effects of utilizing such tools as just-in-time and
electronic business systems are explained in their study.

Manthou (1994) conducted a study on the use of computer information systems in inventory
management in small to medium and large companies of Northern Greece. The research found that
the use of computers at the operational level was satisfactory, the use of integrated information
systems is non-existent in small to medium firms, and limited in a number of large companies.
Also, there was no exploitation of the available decision support models in an integrated system.

The literature discussed above suggests that inventory management is a system that needs to be
given a particular attention among all organisations including SMEs. However research in this area
focusing on SMEs is still lacking especially among Malaysian SMEs. Therefore this research is
built to fill in the research gap and to contribute additional information to the body of knowledge
in the inventory management field. The research questions developed for this study are as follows:

i. What is the level of use of inventory management practices among business retailers in the
SMEs sector?
ii. What factors that have significant associations with the proper inventory management among
business retailers in the SMEs sector?

Research methodology

This section discusses the methods that applied to carry out this study which includes the type of
data collection and data analysis. In order to answer the research questions developed in this study,
the quantitative study is chosen by utilizing questionnaire survey to collect the data. The
respondents are among managers or owners of SMEs in retailing industry located in Batu Pahat,
Johor. Batu Pahat is one of the industrial area in Malaysia where the SMEs have been operating.
 ICTMBE 2014
3rd International Conference on Technology Management , Business and Entrepreneurship
Mahkota Hotel Melaka Malaysia
23rd – 24th June 2014
2014
ISSBN 978-967-0468-93-8

Using 100 samples of the responding enterprises the data are analyzed using the descriptive and
correlation analyses in order to answer two research questions respectively.

Results and discussions

This section discusses the results of the data collected from 100 retailers in the SMEs sector. The
section begins with a discussion on profile of the firms followed by bivariate analysis on the factors
that have significant relationship with the level of inventory management practices.

Profile of the responding firms

Table 1: Profile of the responding firms

No. of employees Frequency (%)

0–5 78.0
6 – 20 6.0
21 – 50 11.0
51 – 150 3.0
More than 150 employees 2.0
Total 100.0

Years in business
Less than 5 years 58.0
5 to 10 years 18.0
10 – 15 years 10.0
More than 15 years 14.0

Inventory management approach

Unsystematic 17.0
Mix of systematic and unsystematic 49.0
Systematic approach using certain inventory 34.0
management system
Total 100.0

Techniques used in inventory management

Economic Order Quantity (EOQ) 26.0
Vendor Managed Inventory 4.0
Bar Code Tagging 6.0
Own experience/ Rule of Thumb 63.0
100.0

Table 1 shows the profile of respondents in term of number of employees, years in business,
inventory management approach and the techniques adopted. The results indicate that most
 ICTMBE 2014
3rd International Conference on Technology Management , Business and Entrepreneurship
Mahkota Hotel Melaka Malaysia
23rd – 24th June 2014
2014
ISSBN 978-967-0468-93-8

retailers are from micro sized enterprise which is 78 percent of total respondents. This is followed
by small-sized enterprise which is around 17 per cent and medium category around 5 per cent.
This suggests that retailing industry are largely comprised by the micro-sized enterprises. This
might due to certain factors such as low capital, easy to operate and low use of technology.

Meanwhile the majority of the enterprises are still new in the business where more than 50 per
cent of the respondents indicate they have been operating not more than five years. This is followed
by 5 to 10 years which is just under 20 per cent. Lastly about a quarter of the total respondents
have been operating for more than 10 years. This group indicates stability in the business and
might adopt certain inventory management system.

Next almost half of the total respondents indicated their inventory is managed in both systematic
and unsystematic way. Just more than a third of the respondents manage their inventory in a proper
and systematic way using certain management system. The results suggest that overall the retailers
in the SMEs sector do adopt inventory management practices in certain way.

Data in Table 1 also indicate ‘own experience or rule of thumb’ appear to be the most used
techniques in managing the inventory among the respondents where more than 60 percent
respondents indicate the use of this approach. This is followed by EOQ where more than a quarter
of the total respondents adopted this technique. Meanwhile vendor managed inventory and bar
code tagging are used only by the minority of the respondents. The results suggest that majority of
the respondents use their own experience to manage the inventory in their business. This might
due to their relatively small size and other factors that contribute to this situation. The next section
discusses the potential factors that might have significant relationship with the level of inventory
management practices.

The relationship between the selected factors and the use of inventory management practices.

There are many factors that might affect the level of use of inventory management practices among
retailers in the SMEs sector. For the purpose of this study three factors have been identified which
is cost, owner/manager’s knowledge and owner/manager’s perception. The data are measured
using the 5-Likert scale where 1 indicate ‘very low’ and 5 ‘very high’. This study utilizes a
correlation analysis using a Spearman’s rho in order to find a relationship between the three factors
and the level of adoption of inventory management practices.

Table 2: Average score mean for item cost, knowledge and owner/manager’s perception.

Factor Average score mean Level

Cost 3.52 High
Knowledge 2.48 Moderate
Owner/manager’s 3.22 Moderate
perception
 ICTMBE 2014
3rd International Conference on Technology Management , Business and Entrepreneurship
Mahkota Hotel Melaka Malaysia
23rd – 24th June 2014
2014
ISSBN 978-967-0468-93-8

Table 2 indicates that most respondents indicate that a cost for adopting inventory management
practices is high. Meanwhile the owner/manager’s perception towards the implementation of
inventory management practices is only moderate. Similarly the level of knowledge of
owner/managers on the use of inventory management practices is at moderate level.

Table 3: Results of Spearman’s rho for the relationship between cost, knowledge,
owner/manager’s perception and the inventory management practices.

Factor N Correlation Significance

coefficient level
Cost 100 -0.237* 0.18
Knowledge on inventory 100 0.361** 0.000
management
Owner/manager’s perception 100 0.419** 0.000
Correlation is significant at the 0.05 level (2-tailed).*
Correlation is significant at the 0.01 level (2-tailed).**

Table 3 shows that all three factors (cost, knowledge of owner/manager on inventory management
and owner/manager’s perception towards inventory management) have significant association
with the adoption of systematic approach of inventory management practices. A cost factor appears
to have a negative and significant relationship with the inventory management practise which
indicates that the higher the cost the lower the use of more systematic approach of inventory
management practices. Therefore this indicates that SMEs in retailing business are significantly
concern on the cost of adopting a proper inventory management in their operations.
Due to their relatively small sized cost play a major role for the adoption of a more
sophisticated approach in managing the inventory among SMEs in Malaysia. In addition both
knowledge and attitude or perceptions of small retailers contribute to the positive relationship with
the level of use of systematic approach of inventory management among SMEs.

Conclusion

This research reports descriptive results obtained from 100 useable responses to a questionnaire
sent to a sample of 100 Malaysian SMEs in the retailing sector enquiring as to level of their use of
systematic inventory management and factors that affect their use. Across the sample, majority of
the SMEs in this sector have adopted both unsystematic and systematic inventory management
approach in their business. Only a third of the respondents utilize a proper and systematic way in
managing their inventory. The results suggest that there is a room for the SMEs to improve their
performance and operate competitively in the market by focusing on their inventory management.
The unsystematic approach of inventory management might costs the SMEs in many ways such
as unable to attract or retain the existing customers or for not having proper information of their
inventory details which is crucial for evaluating their financial health. For business in the retailing
 ICTMBE 2014
3rd International Conference on Technology Management , Business and Entrepreneurship
Mahkota Hotel Melaka Malaysia
23rd – 24th June 2014
2014
ISSBN 978-967-0468-93-8

industry inventory is the major asset that might be given a serious attention by the owners. Lastly
SMEs in this sector perceived cost factor as the main hurdle for implementing a systematic
approach of inventory management apart of their knowledge and attitude towards this issue.

This research has increased knowledge of inventory management in a SMEs context. This study
can be also a starting point for further investigations and analysis of inventory management among
SMEs particularly in Malaysia. In conclusion, the work presents new explanations of the inventory
management in SMEs and therefore contributes additional information to the policy makers and
to the body of knowledge.
 ICTMBE 2014
3rd International Conference on Technology Management , Business and Entrepreneurship
Mahkota Hotel Melaka Malaysia
23rd – 24th June 2014
2014
ISSBN 978-967-0468-93-8

References

Rajeev, N. (2008),"Inventory management in small and medium enterprises: A study of machine

tool enterprises in Bangalore", Management Research News, Vol. 31, No: 9 pp. 659 – 669

Chikan, A. and Whybark, C.D (1990), ‘‘Cross-national comparison of production and inventory
management practices’’, Engineering Costs and Production Economics, Vol. 19, pp. 149-56.

Mantho, V. (1994), ‘‘Concepts and applications of inventory management in Northern Greece’’,

International Journal of Production Economics, Vol. 35, pp. 149-52.

Pirttila, T. and Virolainen, V. (1992), ‘‘An overview of the state and problems of inventory
management in Finland’’, International Journal of Production Economics, Vol. 26, pp. 217-20.

Lee, H. and Kleiner B. H., (2001),"Inventory management in the women's retail clothing industry",
Management Research News, Vol. 24, No: 3 pp. 40 – 44

Hooshang M. Beheshti, (2010),"A decision support system for improving performance of

inventory management in a supply chain network", International Journal of Productivity and
Performance Management, Vol. 59, No: 5 pp. 452 - 467

Kamilah Ahmad, Mohamed Ismail Hj Pakir Mohamed, Shafie Mohamed Zabri, ©2014. The authors grant a non-
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 ICTMBE 2014
3rd International Conference on Technology Management , Business and Entrepreneurship
Mahkota Hotel Melaka Malaysia
23rd – 24th June 2014
2014
ISSBN 978-967-0468-93-8