Inventory Management Practices and Operational Performance of Small and Medium Enterprises in Kenya: a Study of Pharmaceutical Manufacturers in Nairobi, Kenya

Abstract

A number of factors including internationalization, artificial intelligence, diminishing resources, decreasing markets, increased substitutes, ever advancing technology and increased consumer awareness are dictating today’s business environment. An environment that is highly organized but no longer humble and characterized with high levels of volatility. This outlook has made it difficult for many firms to create sustainable competitive advantage, as market customer loyalty and market share keep shifting from point to point. In the pharmaceutical sector, manufacturers are equally facing the same challenges as costs of production/manufacturing and regulations top the chart. Specifically, cost which is controllable factor poses great influence on performance and ultimately on the final net profit. Operations that include ordering, shipment and storage of raw material and component products represents an average of 70% of the total operational costs. The mismanagement of these particular sections guarantees complete failure of the entire firm if preventive and corrective measures are not put in place. Among the highly recommended measures we have use of technology, practices, management derivatives and motivation injection. The management of cost is normally based on inventory control and specifically through the use of practices. Practices that include economic order quantity, just-in-time, ABC analysis, vendor management inventory and material requirement planning. When these practices are optimally involved, operational performance is expected to expand. This research project sought to establish if the use of the practices by SMEs results to enhanced operational performance. The objective of the study was therefore to establish the relationship between inventory management practices and operational performance of small and medium scale pharmaceutical manufacturers in Nairobi. The study used resource-based view and transaction cost theory to provide understanding on the variables. Using descriptive research design, a census study was carried out on 16 SMEs in the pharmaceutical manufacturing sector. Two study questionnaires were distributed to each company using drop and pick criterion. Out of the 32 distributed questionnaires, 23 were returned, depicting a response rate of 71.8% (sufficient). Descriptive statistics indicated that all the five practices were variably used. ABC analysis, JIT, VMI, EOQ and MRP were found to have 69.57%, 65.22%, 56.52%, 52.71% and 34.78% recognition amount respondents. With an average 3.408 out of 5, EOQ, VMI, JIT, ABC and MRP had an extent application mean of 4.04, 3.5, 3.4, 3.3 and 2.8 respectively, indicating that EOQ was widely spread compared to MRP which scored least. From the correlation, a relationship R-value 0.558 with a coefficient of determination were obtained showing a positive relationship. The regression analysis equally indicates that a unit increase in the practices reflects into a positively increment of the operational performance indicators. Therefore, it is the study’s conclusion that inventory management practices highly and positively influence SMEs operational performance.