CHAPTER ONE

INTRODUCTION

0.1 Introduction

A company's inventory is one of its most valuable assets. In retail, manufacturing, food service
and other inventory-intensive sectors, a company's inputs and finished products are the core of
its business, and a shortage of inventory when and where it's needed can be extremely
detrimental. At the same time, inventory can be thought of as a liability (if not in an accounting
sense). A large inventory carries the risk of spoilage, theft, damage, or shifts in demand.
Inventory must be insured, and if it is not sold in time it may have to be disposed of at clearance
prices – or simply destroyed.

For these reasons, inventory management is important for businesses of any size. Knowing
when to restock certain items, what amounts to purchase or produce, what price to pay – as
well as when to sell and at what price – can easily become complex decisions. Small businesses
will often keep track of stock manually and determine reorder points and quantities using Excel
formulas. Larger businesses will use specialized enterprise resource planning (ERP) software.
The largest corporations use highly customized software as a service (SaaS) application.

Appropriate inventory management strategies vary depending on the industry. An oil depot is
able to store large amounts of inventory for extended periods of time, allowing it to wait for
demand to pick up. While storing oil is expensive and risky – a fire in the UK in 2005 led to
millions of pounds in damage and fines – there is no risk that the inventory will spoil or go out
of style.

For businesses dealing in perishable goods or products for which demand is extremely
timesensitive – 2019 calendars or fast-fashion items, for example – sitting on inventory is not an
option, and misjudging the timing or quantities of orders can be costly. Inventories are essential
for keeping the production wheels moving, keep the market going and the distribution system
intact. They serve as lubrication and spring for the production and distribution systems of 2
organizations. This chapter presents the background of the study, statement of the problem,
purpose of the study, research objectives, research questions and significance of the study.

1.1 Background of the study

According to Chow, Dubelaar& Larson (2000), inventory management is critical to retail financial
performance, since inventory tops the list of valuable physical assets on nearly every merchant's
balance sheet. For many businesses, inventory is the largest asset on the balance sheet at any
given time. Thus, purchasing too many units of a slow-selling item will increase storage costs
and interest costs on the 'short-term borrowings that financed the purchases, which may also
lead to losses if the merchandise cannot be sold at the normal price (Libby et al 2004).

Pharmacist must keep accurate count of their drugs stock inventory. Therefore, it is critical to
know the details of each drug and the stock balance must be immediately updated due to any
approved transaction. (Saxena, 2012). Inventories form a significant portion of the current
assets of manufacturing enterprises (Kruger,2005). Inventory management (IM) is crucial to the
enterprises because mismanagement of this important segment may threaten the enterprise's
existence (Sprague and Wacker, 1996).

The management of inventories has an important bearing on the financial strength and
competitiveness of a manufacturing enterprise due to the reason that it directly affects the
working capital, production and customer services (Vergin, 1998). Many practices are available
for effectively managing.

Management is very critical about any shortage of inventory items required for production. Any
increase in the redundancy of machinery or operations due to shortages of inventory may lead
to production loss and its associated costs. These two aspects call for continuous inventory
control. Inventory control and management not only looks at the physical balance of materials
but also at aspects of minimizing the inventory cost. The classic dilemma in 3 inventory
management is maintained in high service levels to meet the needs of customers while avoiding
high stocks regardless of the type of items or even the department for which such stock is
purchased.

According to Nachtmannet al (2006), of a company's costs can be attributed to the amount it

invests in inventory and associate holding, transportation, and management costs. Effective
management of inventory is thus critical to an SI\IIE's profitability. Therefore, it is important to
investigate the models for effective inventory management in SMEs.

Proper management of inventory plays a big role in enabling other operations such as
production, purchases, sales, marketing and financial management to be carried out smoothly.
Basic challenge however is to determine the inventory level that works most effectively with the
operating system or system existing within the organization.

1.2 Statement of the problem

Inventory management in the pharmaceutical companies involves complex systems that consist
of interrelated and interlocking subsystems. Changes made in one part of the inventory
management system have both anticipated and unanticipated consequences in the other part
of the system. However, some small mistakes in inventory management can quickly lead to
confusion, increased turnaround times, unnecessary expenses or worse, prescription errors that
endanger patient health. often uncertainty that results in a negative impact on the company’s
inventory management system and the lack of qualified individuals to fill the logistics-related
positions in pharmaceutical companies is being recognized in Hargeisa. And it’s a threat that
results in heavy workload and ineffective role performance in the company.

There are some factors that can be face the pharmaceutical company’s inventory such as
warehouse and temperature. Most warehouses do not possess adequate facilities to support
large inventories. A poor organization and not enough designated area for different functions
such as receiving, shipping and storage for both damaged and expired products can cost the
company so 4 much, and Factors such as environmental conditions, particularly temperature
could greatly affect drug potency. Hence, failure to provide the right temperature during storage
and shipment of pharmaceutical products may result in major product wastage.

what inventory controlling techniques is practiced pharmaceutical examining in Hargeisa? Using

the inventory controlling techniques unprofessional way might cause some problems and give
an inaccurate inventory management information. What storage methods is used by the
pharmaceutical firms in Hargeisa? Adopting good storage methods might help the
pharmaceutical companies to determine how much space do they need and at what
temperature are they going to store the drugs. there are chances of gaps in ensuring and
monitoring of temperature level. This makes cold chain difficult to maintain. What kind of
inventory is kept by the pharmaceutical companies in Hargeisa?

1.2.1 Importance of the research

Inventory Control is important for pharmaceutical companies since inventory is a major

investment made towards the success of the firm; hence adequate management is essential in
assuring security of the firm’s single largest asset. It is important as it improves workflow and
enhances customer satisfaction which is ultimately the breaking point of the business. Essential
Inventory Management (EIM) is vital for the profitability of the Pharmacy, ‘EIM results in better
cash flow, good customer service, good relationship with suppliers, goods return on investment
and accurate prediction of future needs of inventory.

There has been a question for management about the efficiency of inventory management
procedures in place resulting from inconsistencies of inventory levels leading to various
weakness like losses that come as a result of over, under-stocking, expiry inventory, failure to
meet targets and low morale of the company members. As a result of the company’s stores are
over crowd and making the work of a store-keeper difficult, late issue of materials to the
department and these in turn result into poor inventory service delivery.

1.2.2 Problem Gap

The research is an attempt to identify the gap between inventory management theory and
practice based on the pharmaceutical companies in Hargeisa. It also attempts to provide
suggestions to potentially bridge this gap. And

1.3 Objectives of the research

The main objective of the study is to investigate the standard inventory theories and models
used to help management in pharmaceutical firms in keeping costs down while still meeting
customer service requirements. Therefore, Considering the strategic importance of inventory to
effective operations of an industrial enterprise and in view of the problems highlighted above,
this study was to examine the different inventory management practices in the Pharmacies
firms and assess their impact on the inventory decisions on the organizations.

The objectives of this study are to:

1) To examine the different kinds of inventory kept by pharmaceutical firms in

Hargeisa
2) To examine the different inventory control technique are currently practiced by
the pharmaceutical firms in Hargeisa
3) To study the storage methods that’s adopted by the pharmaceutical firms in
Hargeisa

1.4 Research questions

1) What kind of inventory is kept by the pharmaceutical firms in Hargeisa?

2) What inventory controlling techniques is practiced by the pharmaceutical firms in Hargeisa?

3) What storage methods are adopted by the pharmaceutical firms contribute to the control of
stock?

1.5 Significance of the Study

The findings of the study will provide well–researched information, which can be useful to
researchers for academic purposes in the area of inventory management. To the stores and
Procurement department staff, the study hopes to provide them with useful information like the
recommended techniques of inventory control so as to meet their customer’s and organization’s
needs.

To the firm’s management, the recommendations of the study may enable them to design
inventory management policies to improve the smooth running of the firm, thereby satisfying
customers and generally minimizing costs. There aren’t much studies that conducted on the
inventory management practices adopted by the pharmaceutical firms in Hargeisa and their
correlation to assess the profitability of the firms.
Inventory management happens to be a vital important area that decides the fate of small and
large firms. the study is to investigate the standard inventory theories and models used to help
management in medium to small-sized enterprises in Somaliland to keep their costs down while
still meeting customer service requirements. Inventory management entails more than simply
the forecasting and replenishment of inventory; it also demands the management of inventory
to optimize services and profit. A large number of inventory theories offer optimal order
quantities, safety inventory levels and inventory control procedures, as well as given
assumptions about demand, lead-time and cost structures.

1.4 Scope of the Study

The scope of the study will be limited to assess the impact of inventory management on the
pharmacy firms. The study will be carried out at Hargeysa’s the Pharmaceutical firms and
involved the staff of the firm’s stores, procurement Unit, support departments and
management.

1.5 Definitions of key words

1.7.1 Inventory

Inventory is the array of finished goods or goods used in production held by a company.
Inventory is classified as a current asset on a company's balance sheet, and it serves as a 7
buffer between manufacturing and order fulfillment. When an inventory item is sold, its
carrying cost transfers to the cost of goods sold (COGS)category on the income statement.

1.7.2 inventory management

Inventory management refers to the process of ordering, storing, and using a company's
inventory. These include the management of raw materials, components, and finished products
as well as warehousing and processing such items.

1.7.3 Pharmaceutical companies

Pharmacy is the science and technique of preparing, dispensing, and reviewing drugs and
providing additional clinical services. It’s a health profession that links health sciences with
pharmaceutical sciences and aims to ensure the safe, effective, and affordable use of drug. The
professional practice is becoming more clinically oriented as most of the drugs are now
manufactured by pharmaceutical industries. Based on the setting, the pharmacy is classified ads
a community or institutional pharmacy. Pharmaceutical is one of the most sensitive and major
industry that deals with human and animal life. Purity is highly deserved in this industry and
there is no option of second chance. Quality, security, identities are the most important to
maintain. So inventory management of the industry is a difficult job. A pharmaceutical company
handled 500-600 types of products that includes huge amount of raw materials movement,
packaging and secondary packaging of the finished products. Planning and scheduling in the
pharmaceutical companies is a critical activity. Demand management under constraints of
lifelimited inventory buffers and non-discrete nature of products is challenging.
Conceptual framework figure

Inventory management Pharmaceutical Firms

Independent variables dependent variables