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 Nigeria. 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.

CHAPTER ONE

INTRODUCTION

1.1                 Background of the Study

Firms are currently facing intensive competition as business environment progressively changes (Umble & Haft, 2003). This allows liberalization of markets and inter-borrowing of operational ideas among peers (Drexl & Kimms, 2013; De Loecker & Van Biesebroeck, 2015). This competition has been identified to be as a result of factors that include internationalization, diminishing resources, artificial intelligence, decreased markets, increased substitutes, ever advancing technology and increased consumer awareness (Sharma, 2009; Sharma & Arya, 2016). All these factors lead to diminishing customer loyalty and market share. Competitive advantage has then become one of the major factors that organizations focus on. In response, firms must develop strategies, techniques and practices that can positively influence their survival and performance.

To attain competitive advantage, Inkpen and Ramaswamy (2005) assert that firms must consider the level of globalization and strategize accordingly. Further, these firms must relook at their capabilities and resources in advancing ways of controlling their market position and remaining relevant. To be competitive and successful, Pagell, Krause and Klassen (2008) and Jaber (2009) argue that organizations must adopt a supportive organizational structure, maximize customer focus, invest in skills, embrace technology and artificial intelligence, calibrate inventory and invest in research and development. However, the decision to focus on either solely depends on the organization’s environment. Firms that are inventory-oriented must then consciously evaluate on ways of enhancing performance and creating more value, especially when it comes to handling and forwarding of the inventory.

Through proper inventory management, firms can then establish optimal productivity that can lead to sound operational performance (Wisner, Tan & Leong, 2014). Gibson (2013) argues that processes instituted must be able to track value along the supply chain and continuously monitor demand, production and supply quantities. Structures and policies should equally be put in place to oversee these processes and systems, and offer accountability. Full operationalization of inventory management contributes to the firm’s objective on effective usage of resources and operating under minimum costs possible.

1.1.1                 Inventory Management Practices

Inventory management practices are policies and procedures developed by firms to ensure delivery of inventory objectives (Magad & Amos, 1986). Ross (2015) equally defines inventory management practices as entity techniques that are systematically integrated along the value chain to enhance cost saving and in time delivery of inputs and outputs. According to Brigham and Gapenski (2013), inventory includes supplies, raw materials, finished stock and work in progress. They further add that inventory management practices enable firms to track and control the inventory. These practices include: Vendor Managed Inventory (VMI), Material Requirement Planning (MRP), ABC Analysis, Just-In-Time (JIT), and Economic Order Quantity (EOQ). VMI is responsible for sharing of inventory and any other information among one’s suppliers and customers (Disney & Towill, 2003). ABC prioritizes inventory into class A, B and C as per frequency of usage and economic weight and then ordering and stocking is done according to the resulting priorities (Mandal, 2012). JIT is an all-round waste elimination philosophy that ensures least possible waste (Suresh, Nallan & Kay, 2012). And lastly, EOQ compliments all other practices by ensuring optimal ordering in quantities and processes (Smith, 2011; Drury, 2013).

The implementation of these practices ensures that the entire supply chain realizes smooth flow and functioning of value addition activities (Miller, 2010; Samak-Kulkarni & Rajhans, 2013). Dobler (2014) argues that effective inventory control leads to better overall performance, increasing total returns and breaking down system complexity. Heizer and Render (2014) indicates that inventory management practices enhance performance through establishing a balance between customer service and stock investment. It is then arguable that the practices protect firms against unplanned procurement and economically infeasible and fraudulent operations. They also enable systemizing of inventory related operations and supporting of product and materials mock. Through poor inventory projections and quantifying, firms can experience loss of revenue via forgone sales, holding costs or forgone value on wastage. It is therefore important for firms to institute inventory management practices to ensure that inventories are optimized and that they effectively respond to demand.

1.1.2                 Operational Performance

Operational performance is the measure of outcomes against objectives, goals and standards of an activity, event or an undertaking (Terziovski, 1999). Wagner & Krause (2009) also defines operational performance as a measure on productivity, waste reduction, environmental responsibility, cycle time and compliance to regulations. Measure of operational performance is very important to firms as it contributes significantly to the overall organizational performance. Operational performance looks at how proficient firm systems are in delivering results. Voss, (1997) and Owiny (2016) indicate that the main objectives of operational performance include cost; quality; flexibility and speed of delivery. Arguably then, organizations that specialize in either of or a combination of two or more of the objectives, realize a differentiated advantage that boosts their desired outcome(s), which in this case is minimized inventory costs. It is therefore essential for firms to institute systems and practices that contribute towards ensuring that inventory handling conforms to operational objectives. The implementation of inventory management practices primarily aim at reducing costs, at the same time ensuring that the other objectives are tracked and involved.

Operational performance is measured by use of either non-financial or financial indicators, with preference made on either depending on industry and organizational structures (Murthy & Sree, 2003). They further add that non-financial measures include measure of qualitative aspects while financial ones measure quantitative aspect. Financial measures include return on investment (ROI), stock-turn rate, annual stock-outs and total periodic inventory handling costs (Johnson & Scholes, 2007). Non-financial measures equally include internal and external customer satisfaction and overall improvement of organizational culture (Chin, 2010). Both dimensions of operational performance measure brings out the organization’s commitment towards quality, cost, flexibility and speed of delivery objectives. However, this commitment must be operationalized along with the implementation of inventory management practices. The measure equally provides support in identifying the milestones taken towards achieving organizational performance goal(s). This study focused on stock-turn rate, annual stock-outs, total periodic inventory handling costs and ROI to measure operational performance related to inventory management practices.

1.1.3                 Small and Medium Enterprises (SMEs) in Nigeria

Definition on SMEs varies from one industry to another. Bolton Committee (1971) defines Small and medium enterprises (SMEs) as business setups with small market share, managed by owners and do not form part of any other large enterprise. Tala (2014) defines SMEs as companies with less than 250 employees and less than 50 million euros in turnover. A number of criteria are considered when determining the right definition of small and medium enterprises. According to Buckley (1989) and Fujita (1998), these criteria include annual turnover, number of workers at a time and value of assets. Gati (2015) and Ngure (2015) have added the nature of premise -including space, sustainability and legality of business. There are also definition that are based on economic status. The United States of America’s (USA) and China identifies SMEs to have a limit of 500 and 2000 employees respectively while in Europe it is less than 250 employees and an annual turnover of not more than 50 million euros (US Small Business Administration Report, 2017; China, 2015; EU Commission Recommendation, 2003).

Small and medium enterprises (SMEs) cluster in Nigeria include micro enterprises and has a range of 10 to 100 employees (Soderbom, 2004; Kamweru, 2012). Early determination by Kinyanjui (1996) and Small and Micro Enterprise Baseline Survey (1999) gave the same upper limit of 100 but reduced the lower limits to 6 employees. Inclusion of micro enterprises in SMEs by the Micro and Small Enterprises Act (Act Number 55 of 2012) reduces the lower limit further to a sole operator. Meaning that the operator may equally be the owner. The upper limits of medium enterprises have also been revised by the Act to 200 employees plus capital assets of about 2 million in Nigerian Naira (subject to revision with time). The Act also creates the Micro and Small Enterprise Authority (MSEA) that is mandated to promote and develop sustainability of these enterprises. This study confines to the definitions provides by the Micro and Small Enterprises Act (Number 55 of 2012) to classify SMEs in Nigeria.

Statistics from the International Financial Corporation Report (2007) shows that SMEs in Nigeria contribute to over 40% of employment and 20% of GDP. The Nigeria National Bureau of Statistics Report (NNBS, 2016) indicate that there exists about 1.56 million licensed and about 5.85 million unlicensed SMEs across the 47 counties. A huge percentage of these SMEs, according to Wafula (2015), operate in wholesale and retail trade. It is also notable from the NNBS Report that motor vehicle and motorcycle repair accounts for 57.1 percent of the licensed SMEs. The SMEs sector in Nigeria, along with MSEA as the regulator, sets an acceleration index upon vision 2030, aiming at playing a significant role in transforming Nigeria to an industrialized middle income country.

However, there exists a sustainability challenge to these SMEs. Micro, Small and Medium Enterprises (MSME) NNBS Survey Basic Report (2016) indicate that about 2.2 million SMEs shut down in a span of five years, with most of them closing at an average age of 3.8 years. Further scrutiny revealed that inventory and performance management related issues mainly cause such closure. It is therefore a proposition of this study that instituting and operationalization of inventory management practices by the SMEs in Nigeria can boost sustainable operational performance and reduce the closure rates.

1.1.4                 Pharmaceutical Manufacturers in Nigeria

Pharmaceutical firms in Nigeria form the largest segment as far as locational distribution within Nigeria is concerned (Export Zone Processing Authority, 2005); at about 60% of the entire industry (Cheroigin, 2014). Unlike the rest of the country, firms in Nigeria consist of three categories that include retailers, distributors and manufacturers of pharmaceutical products. This distinctive status makes Nigeria a powerhouse of the Pharmaceutical Industry, not only in Nigeria but regionally. This statistic has been justified by Pharmacy and Poisons Board (2015) and Nigeria Pharm Expo (2016), asserting that Nigeria hold a regional supply market share of over 50% and most of this power concentrates in Nigeria. Further indications show that out of top 50 ranked pharmaceutical manufacturers in East and Central Africa, 30 of them are in Nigeria, particularly in Nigeria.

According to the Nigeria Poisons Board (2018), there exists 24 pharmaceutical manufacturing companies in Nigeria as illustrated in section A of appendix III. The companies are fairly distributed within Nigeria central business district and metropolitan. The pool included large multinational and local manufacturers as well as subsidiaries. Some of the manufacturers equally handle their first tier product logistics to various warehouses before duly registered pharmaceutical distributors take over the distribution chain. Out of the 24 companies, 16 belong to small and medium manufacturer category as indicated in section B of appendix II. However, the level of differentiation between small and medium manufacturers is highly indistinctive due to the rapid growth experienced in the industry. In fact, most of the medium manufacturers are slightly distinguishable from big manufactures and with the rapid growth rate expressed by Pharmaceutical and Health

Report (2016) and Macharia (2016). The growth rate of these companies has been attributed to reputation on good manufacturing practices that are put forth and advocated by the Nigeria Poisons Board as well as smart operations that are based on verified inventory management practices.

1.2                 Research Problem

Proper inventory management practice(s) is one of today’s major business success factors (Gupta & Gupta, 2012), as supply chains, Pharmaplus Pharmaceuticals and other firms struggle with the challenge of calibrating a sustainable balance between holding inventory, inventory holding costs and demand. Ideally, these firms could want to have standby inventory to immediately execute supply as demand arises. However, this perspective equally raises the question of how economical it will be to undergo holding costs at the expense of unrealized demand (Ngumi, 2015). Excessive inventory takes up physical space, drives up storage costs and increases risk of damage, theft, spoilage and loss. Too little inventory also results to poor customer service as customer’s needs cannot be met on time (Axsater, 2006). As indicated by Jaber (2009) striking an effective balance between inventory and demand enhances business efficiency, promoting operational performance and competitiveness.

In Nigeria, SME’s play a vital and significant role in contributing to economic development, creation of employment and subsequently alleviation of poverty. Despite the huge contribution these businesses make to the economy, the Nigeria National Bureau of Statistics Reports (2016, 2017) estimates that about 2.2 million SME’s shut down in every 5-year span. Unfortunately, some of the major reasons for this shut down trend include inventory management related problems. Among these SMEs we have pharmaceutical manufacturers, who have taken a step towards inventory management practices to eliminate this threat and sustainably boost performance.

Various scholars have undertaken studies on inventory management practices and operational performance. Internationally, Rajeev (2008) sought to establish if inventory management practices affect economic performance of SMEs in Bangalore. The study established a significant and positive association between economic performance indicators and inventory management. It was also established that SMEs with sufficient inventory management comparatively perform better. A study carried out by Harishani (2010) in Sri-Lanka, determining whether inventory management practices have any importance in the food processing supply chains, indicate that supply chains that lack the practices experience high costs and poor partnerships. Samak-Kulkarni and Rajhans (2013) equally determined the optimal inventory model that can minimize inventory costs on records, concluding on Wagner-Whitin model.

Locally, Kinyanjui (2016) looks at the correlation between performance and inventory management practices among World Food Programme partners. Findings show a high positive correlation with Just-In-Time and Economic Order Quantity contributing more than other practices. Ontita (2016) on textile firms’ performance and inventory management approaches establishes that many approaches are used but lack of policy frameworks delay and cripple the implementation processes. Wanyonyi (2017) on the other hand sought to establish if service delivery in major supermarkets has anything to do with inventory management practices. Findings show that the practices have enabled positive and concrete relationships with suppliers, ascertaining timely transactions.

This shows how extensive inventory management has been evaluated. However, none of the analyzed studies links inventory management to operational performance of Small and Medium Enterprises in Nigeria. Many have dealt with the practices but on different contextual, hence the research gap. This study sought to bridge this research gap. To effect this, the study was guided by the following questions: To what extent are inventory management practices applied by small and medium pharmaceutical manufacturers in Nigeria? What impacts do inventory management practices have on operational performance of small and medium pharmaceutical manufacturers in Nigeria?

1.3                 Research Objectives

The general objective of the study is to find out the influence of inventory management practices on the operational performance of Small and Medium Enterprises in Nigeria. Specific objectives include:

1. To establish the extent to which small and medium pharmaceutical manufacturers in Nigeria use inventory management practices.
2. To establish the relationship between inventory management practices and operational performance of small and medium pharmaceutical manufacturers in

1.4                 Value of the Study

The findings of this study will inform small and medium pharmaceutical manufacturers on the positioning of inventory management practices on their operational performance, citing the possible areas that require improvements. The company can use the study to diagnose the processes involved, if required.

This study will benefit policymakers, especially the Micro and Small Enterprise Authority, as they seek to enact policies that promote growth and survival of SME’s in Nigeria.

The study will also form a basis for further studies in the field of inventory management and its linkage to a firm’s performance especially for SME’s in Nigeria. Further boosting researchers with more literature on already existing knowledge in the field of small and medium enterprises.