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ADMAS UNIVERSITY

FACULTY OF BUSINESS

DEPARTEMENT OF ACCOUNTING AND FINANCE

INVENTORY MANAGEMENT PRACTIC

IN THE CASE OF ROMEL ELECTRICAL

TRADING

Prepared BY

GENET AREGAWI

HABTEWOLD EDLU

KIBRA KINFE

MAHILET SEFIMICHAEL

RAHEIL HAFTU

Sublimated to Advisor; Mr. Zeray Hagos

2021

ADDIS ABAB

A SENIOR ESSAY SUBMITTED TOTHE

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FACULTY DEPARTMENT OF ACCOUNTING AND

FINANCE

ADMAS UNIVERSITY

INVENTORY MANAGMENT PARCTIC

OF BUSINESS DEPARTEMENT OF ACCOUNTING AND FINANCE

APPROVED BY THE COMMITTIE OF EXAMINERS

Department Head. Signature

________________________ ________________________

Advisor Signature

________________________ ________________________

Internal Examiner Signature

________________________ ________________________

External Examiner Signature

_____________________ ________________________

ACKNOWLEDGEMENTS
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First and most we would like to thanks to almighty god for helping us. For all the things he has
accomplished and his endless support for us we at the beginning of our wisdom do like the thank
without any reservation we would like to expresses Advisor Mr Zeray Hagose .SO we would
like thanks for his constructive comments.

ABSTRACT
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The purpose of this study is to asses practice in the case of Romel Electrical Trading and single
out the core challenges, problems

Inventory management is a challenging problem are in supply chain management .companions

need to have inventories warehouse in order to fulfill customer demand ,meanwhile this
inventories have holding costs and this is frozen fund that can be lost .Therefore , the task of
inventory management is to find the quantity of inventories that will fulfill the demand ,avoiding
overstock .the proposal will present a case study Romel electrical Trading on inventory
management .the relationship between the inventory management and company performance
were determined based on inventory days and return on asset (ROA) .

While performing this research paper both primary and secondary data were used. The
primary data were collected through mixed type (i.e. both close and open ended) questionnaires
and unstructured interviews and the secondary data were collected from other relevant material,
including former research papers done, proclamations, manuals and guidelines, declarations and
policies, books, encyclopedia, and the internet as well.

Table of Contents
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..............................,......................... ...........,......................,.......................,.1.0 BACK GROUND

........................................................................................................................1.1 PROBLEM
STATEMENT .......................................................................................................... 1.2
OBJECTIVES .............................................................................................................................. 1.2.1 Main
objective ....................................................................................................................... 1.2.2 Specific
objectives ................................................................................................................1.3 PURPOSE OF THE
STUDY ....................................................................................................... 1.4 RESEARCH
QUESTIONS .........................................................................................................1.5 SCOPE OF THE
STUDY ............................................................................................................ 1.6 SIGNIFICANCE OF
THE STUDY ............................................................................................2.0 BRIEF
LITERATURE ................................................................................................................2.1 Definition of
inventory ............................................................................................................. 2.3 Motives of holding
inventory ................................................................................................... 2.4 Inventory
costs .........................................................................................................................3.0
METHODOLOGY ......................................................................................................................3.1 Study
area ................................................................................................................................. 3.2 Research design
........................................................................................................................ 3.3 Sampling
procedure .................................................................................................................3.4 Data
sources .............................................................................................................................3.5 Data
analysis ............................................................................................................................3.6 Design methods
........................................................................................................................ 4.0 PROJECT TASK
SCHEDULE ................................................................................................... 5.0 Resource
budget ........................................................................................................................... 6.0 CONCLUSION
AND RECOMENGATIONS ............................................................................ 7.0
References ....................................................................................................................................

CHAPTER ONE
INTRODUCTION
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Table of Contents
CHAPTER ONE....................................................................................................................................6

INTRODUCTION.................................................................................................................................6

1.0 BACK GROUND......................................................................................................................6

1.1 PROBLEM STATEMENT........................................................................................................6

1.2 OBJECTIVES............................................................................................................................6

1.2 General objective.......................................................................................................................7

1.2.2 Specific objectives..................................................................................................................7

1.3. PURPOSE OF THE STUDY....................................................................................................7

1.4 RESEARCH QUESTIONS.......................................................................................................7

1.5 SCOPE OF THE STUDY..........................................................................................................7

1.6 SIGNIFICANCE OF THE STUDY..........................................................................................8

1.0 BACK GROUND

The project will be carried out of Romel Electrical Trading which is located at Addis Ababa
around urael inferont of s.t urael church. Romel Electrical Trading is mattress foaming company
having many competitors in the same industry like Royal Electrical Trading, Dama Trading,
Electric world etc. The foaming industry in Ethiopia is composed of customers and companies
that are price sensitive were a slight increase in price can result into a big negative effect on sales
obtained, there for, Romel Electrical Trading competes with others using a cost effective
strategy. Romel Electrical Trading uses series of inventories including; raw materials (copper),
polyethylene material, in processed materials like (copper ), as mattress covers, finished
mattress ready for dispatch, MRO inventory etc. At Romel Electrical Trading,
materials/inventory forms the biggest and most significant asset to the company, meaning that a
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lot of capital is tied there. However, from the analysis of the Romel audited books of accounts
for the business years2018, 2019 and 2020, it was realized that the company is operating under
highly increasing direct production inventory cost, on average 74.5% of the total production cost
and that a lot of money value was/is lost inform of capital tied in inventory. This has resulted
into a drastic decrease in the profit margin by 10%.
Drastic increase in the production cost was due to rapid increase in the direct inventory cost, it
has greatly become a concern, and it has caused questions like why, what and how the problem
be solved so as to increase the profits of company with decrease in the direct production material
cost.

The prevailing situation has brought a need for the design of an effective inventory management
system which can plan and control the direct production material/inventory.

1.1 PROBLEM STATEMENT

Internal control over inventory is essential to all organizations engaged in import,store.,order to
achieve their intended objective and to ensure the .In order to ensure such objective,an
organization should have good inventory controlling system,written
policies,rules,regulation,procedures,and principles that help the organization easily manage the
inventory and protect it from inventory control problems such as overstocking,expiring,loss,theft,
& fraud which will lead to bankruptcy.Generaly inefficient use of internal control over inventory
adversely affect the efficiency & effectiveness of activities for the organization.such kinds of
problems results in making the company compltely lost its assets & become out of the market &
stopped its function.The purpose of this study is to assesses the internal controlling system over
inventory in the case of Romel Electrical Trading Private Limited Company.
Romel Electrical Trading is operating under rapidly increasing direct production inventory cost
of 74.5%(average for the business year 2018, 2019 and 2020) of the total production cost, the
company is hit by rising inventory holding costs, spoilage, direct storage costs, obsolescence,
pilferage and cost of losing the use of funds tied up in inventory. This is greatly affecting the
profits attained by the company.

1.2 OBJECTIVES
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1.2 General objective

To asses an inventory management system for Romel Electrical Trading.

1.2.2 Specific objectives

 To determine the economic order quantity, safety stock and reorder levels for each
function group?
 To evaluate the inventory and stock control handing tools of the company.
 To examine the contributions of inventory management practices of the company.
 To assess inventory controlling practices of the company.
 To evaluate the existing warehouse policy and procedure that guides

1.3. PURPOSE OF THE STUDY

To update an effective inventory management system for Rommel Electrical Trading which will
reduce the inventory cost to the optimum level

1.4 RESEARCH QUESTIONS

What are different production inventories used at Rommel Electrical Trading and their functional
group?

What is the economic order quantity, safety stock and reorder levels for each inventory
functional group?
How best can the store layout and codification system be made?

1.5 SCOPE OF THE STUDY

Content scope

The study will be based on the inventories used in the production of mattresses at Romel
Electrical Trading, the researchers will limit themself only on the direct production input
materials/ inventory to the production of mattress.

As it is previously mentioned, the aim of this research is to make the assessment on inventory
related p r o bl e m s. So, the scope of this research stud y were delimited to the
assessment of inventory management and stock control practices, that is inventory
management is a systematic approach to plan, acquire, store, move and control materials
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in such a way so as to maintain an event flow of operation, at the same time avoiding excessive
investment in inventories in order to optimize all company resources and provide services
consistent with company policy. Inventor y is the operating item and it has a relation with all
parts of the organization. In this case, b y making the initial and destination point on the
inventory or warehouse section, this research was o n l y confined to Finance,
Administration, Logistic and Purchasing, Operation department, and store user of the
company

Geographic Scope

There are 4 B r a n c h R o m e l E l e c t r i c a l T r a d i n g i n A d d i s A b a b a
R e g i o n s . Due to time and resource limitation, the study was delimited to the 4 Addis
Ababa Regions located in the city of Addis; namely Urael branch,Atlas Branch,Megenagna
Branch and Piyassa Branch .As the mainstream of Romel Warehouse, it was included for the
study. Furthermore Romel Warehouse is a centralized store and gives a nation wise service, so
there are varieties of electrical materials including lighting fixtures and as a result a huge
amount of materials flow in the store.

1.6 SIGNIFICANCE OF THE STUDY

The inventory management system will provide an intelligent planning and control over direct
production inventory. This will have the following significance?

It will control the levels of stock and the investment in direct production materials, this will
reduce the company¡¯s money/capital invested and tied in inventory, thus giving high

Options and opportunities for the company to utilize the capital in other profit making
businesses?
It will also reduce the loss and cost incurred by the company inform of obsolescent materials
(chemicals)?
The project will reduce the storage cost?
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The project will also help the researchers to complete his program since the project is one of the
requirements for the partial fulfillment for the degree in bachelor of Accounting and Finance
management.

CHAPTER TWO

2.0 BRIEF LITERATURE

2.1 Definition of inventory
Pandey (2006) defines the term inventory as products a company manufacture for sale and
components that make up finished product that are kept in stock. According to Render (2005)
and star, inventory is any resourced used to satisfy a current or future need.

2.2 Types of inventory

Inventory differs according to organization, but they generally categorized according to the
following;
1. Raw material inventory: materials waiting for dis parchment to the production system for
conversion into finished products.
2. in process inventory: this is work in process e.g. partially produced/worked on product
awaiting for further processing to completion.
3. Finished product inventory: this is finished products awaiting for dis parchment to the final
consumers.
4. MRO (Maintenance, Repo) useful in the maintenance, repair and operations of systems e.g.
spare parts,

Continuous Receive System /Fixed Quantity System

Perpetual System: a record is kept of each transaction & the stock balance is
compare to the order point. The order quantity is fixed; the time between orders
will vary depending on the random nature & demand.
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Two Bin System: The inventory is physically separated in to the order point
quantity (a special container or designated by a line on the storage bin or drum
and the remaining units. The latter all consumed first and an order is placed on
their conspire.

Periodic Review System

This involves determining the amount of an item in stock at a specified fixed time
interval and placing an order for a quantity that, when added to the quantity on
hand will equal to predetermined maximum law. The time period between rows of
the quantity on hand is fixed. The maximum inventory level is the sum of the
anticipated demand during lead time, the anticipated demand during the
replenishment period (review period) and the safety stock.

Elements of Inventory Management

Various elements of an inventory control model are discussed by Saxena,

(2004). According to him inventory management control systems have different
elements. Among these, the following are considered as basic elements:

Minimum Level: This is the level below which the inventory level is not
allowed to fall. In case, for any reason, the stock goes below the minimum level,
the matter is reported immediately and action is taken to ensure that the material
is received at the earliest with extra effort. In fact, reaching minimum level is an
indication of the danger of a likely stock- out situation. It is essential to keep an
eye on all the items, which have reached the necessary for these items.

Maximum Level: This is a control point to avoid any extra stock. Attempt is
made to avoid excessive purchasing that may result in crossing the maximum
level, and to ensure that the money is not blocked unnecessarily. Crossing of
maximum level reflects inadequate inventory control and should not be allowed
without proper analysis of overall benefits. Failure to control the maximum level
may result in non-moving or slow-moving items and obsolescence. Inventory
turnover would be adversely affected if maximum level is not controlled.
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Safety Stock: This is a level, decided by keeping in view the degree of safety
planned against being out of stock. A very high degree of safety would need a
high level of inventory; where as a low degree of safety would require low
inventory stock. If the risk of

being out-of stock is acceptable, there is no need of having safety stock. As the extent of

Safety planned increases; a higher level of inventory is to be maintained. For a

high level of safety a very large quantity is to be stocked, which is into desirable.
According to the desired safety level, the inventory level, which is termed as
'Safety Stock' can be decided. Normally most organizations maintain safety stock
equal to the minimum stock level.

Lead Time: The time from the point a requisition for material is raised by the
user or the inventory control section has raised a purchase requisition after
review of stock level and a future requirement, to the point when material is
received, inspected, and is ready for use is known as the lead time.

Re-order Point Level: This is the level of inventory that triggers a purchase
order. Usually the reorder point is equal to the amount would be used ruing the
lead time period.

Material Requirement Planning (MRP): In order to avoid the conflicting

objectives of Inventory management, which is concerned in minimizing inventory
costs while providing adequate dependent demand inventory, inventory manager
must balance the costs of having dependent demand inventory with the cost of
doing without this type of inventory. MRP is a computer based management
information system, which is used for determine the quantity and timing for the
acquisition of dependent demand items needed to satisfy master schedule
requirements.

Economic Order Quantity (EOQ): If one has to make decisions about managing
an inventory, it is useful to understand the behavior of the inventor-related cost
factors just discussed. These factors often help a manger determine which items
should or should not be carried in inventory, what inventory levels should be
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carried for specific item, what order quantities are appropriate for given items.
Among the factors that often enter this decision process is a concept known as
EOQ the notion of an economic order quantity. As its name suggests, this concept
holds that the appropriate quantity to order may be the one that tends to
minimize all the costs associated with the order-carrying costs, acquisition costs,
and the cost of the material itself.

2.3 Motives of holding inventory

Organizations hold inventory for several motives. These include?
Transaction motive; to achieve continuous profit making since it emphasizes the need to hold the
inventory to facilitate smooth production and sales?
Precautionary motive, which necessitates holding of the inventory to guard against the risk of
unpredictable changes in demand and supply forces and other factors (Render and Star, 2005)?
Speculative motive, keeping inventory with the fear of increase in price if price inflation is being
experienced by your supplier and in the entire market.
2.4 Inventory costs
Ordering costs
These are the entire cost of acquiring materials/ raw materials. They include cost in cured in the
following activities: Requisition, purchasing ordering, transporting, receiving, inspecting and
sorting. Ordering cost increase in proportion to the number of orders, thus the more frequently
inventory is acquired, the higher the company¡¯s ordering costs. On the other hand, if the firm
maintains large inventory levels, there will be four orders placed and ordering cost will be
relatively small. Thus ordering cost decreases with increasing size of inventory (Pandey,
2006)Carrying cost Costs incurred for maintaining a given level of inventory are called carrying
costs. They include storage, insurance, taxes, and alteration and also license.
The storage costs comprise of cost of storage space (warehousing costs), stores handling and
clerical and staff service cost incurred in the recording and providing special facilities such as
fencing, line tracks etc. carrying costs vary with inventory size.
This behave is contrary to that of ordering costs which declines with increase in inventory size
(paddy, 2006)
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Stock out cost

These include loss of future sales because customer go elsewhere, lost contribution through a lost
sale, cost of production stoppages and extra cost associated with urgent small quantity
replenishment order (Lucey, 2002)

CHAPTER THREE

3.0 METHODOLOGY
The methodology high light the methods that will be used when carrying the project, it will show
the study area, research design, sampling procedures, data sources, collection methods and
analysis methods. It will further show inventory control models, methods, replenishment
methods and store management system that will be used.

3.1 Study area

The project will be carried out at Romel Electrical Trading; it’s mainly centered on designing an
inventory management system for direct production inventory/ materials for the company.

3.2 Research design

The research
This research was Explanatory type.the project will involve collection of data and information
to facilitate the design, this will be done through direct visual observation (where phenomenon
will be observed from factory), face to face interview and desk research. Obtained data will be
analyzed.

3.3 Sampling procedure

Using convenient (professional mix) and purposive sampling.
The target population of the study which directly related to the issues
Only employees from the production, procurement, finance, sales and marketing will be
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contacted, and only two resourceful people from each department will be interviewed.

3.4 Data sources

Both primary and secondary sources will used; primary data will be generated by research
himself using methods like direct observation and face to face interviews.
Secondary data source which will be used will include; inventory procurement, store, production
and sales records.

3.5 Data analysis

The collected data will be analyzed qualitatively and quantitatively using graphs and tables in
Microsoft Excel. Basing on the analyses that will be obtained, the system will be designed.

3.6 Design methods

Inventory planning tools like ABC analysis, Pareto analysis, VED analysis and alphabetical
codification will be used during the planning process. Under Inventory control, continuous or
fixed order quantity methods will be used; economic order quantity, safety and reorder levels
will be determined to facilitate proper control of inventory.
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CHAPTER FOUR
4.0 PROJECT TASK SCHEDULE
ID TASK NAME DURATION START FINISH
WKS TIME TIME
1 RESEARCH MORE 4 20/6/21 11/7/21
ON INVENTORY
2 DESIGN 1 30/6/21 5/7/21
QUSTIONNAIRES
3 COLLECT 4 20/6/21 11/7/21
PRIMERY DATA
4 COLLECT 2 6/7/21 11/7/21
SECONDERY DATA
5 OBTAINED DATA 1/7/21 30/7/21
6 DATA ANALYSIS 4 12/7/21 17/7/21

7 CLASSIFY 1 18/7/21 20/7/21

MATERAILS
8 DETERMINE 1 19/7/21 24/7/21
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ECONOMICE
ORDER
9 DETERMINE 1 25/7/21 30/7/21
SAFTY STOCK
10 DETERMINE 1 25/7/21 5/8/21
REODER LEVEL
DETERMINE 1 6/8/21 8/8/21
REPLESHMENT
11
SYSTEM
RESTRUCTURE 3 12/7/21 27/7/21
STORE LAYOUT
12
DESIGNED 21/6/21 21/7/21
INVENTORY MGT
13
SYSTEM
14 CONCLUSION AND 2 9/8/21 11/8/21
RECOMNDATION
14
PARARE 2 12/8/21 17/8/21
PRESENTATION
15

REPORT 2 15/8/21 20/8/21

PREPARATION
16

REPORT 1 21/8/21 25/8/21

HANDILING OVER

17
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5.0 Resource budget

Types of expenditure Description Total Cost

Stationery Stationery
800.00

Internet Internet 4 GB 600.00

Transportation Transportation 1300.00

Total cost   2700.00

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6.0 CONCLUSION AND RECOMENGATIONS

Conclusion and recommendations will be derived from the findings and the designed system.

7.0 References
1. Company production records for 2018 to 2020 Company direct production records for
2018 to 2020 Romel electrical trading financial reports for years 2018 to 2020 and www.
Inventorymanagement.com ,www.wikipedia.org/wik/inventory D. Clay Why bark,
inventory management, Indian University, 2007 Bloomington