FACTORS AFFECTING INVENTORY MANAGEMENT IN THE TELECOMMUNICATION FIRMS IN KENYA: A CASE STUDY OF HUAWEI TECH. (K) CO. LIMITED

SUBMITTED BY:

NANCY CHEPWOGEN

CM16/0002/11

A RESEARCH PROPOSAL SUBMITTED TO THE GRADUATE SCHOOL IN PARTIAL FULFILLMENT FOR THE REQUIREMENT FOR THE AWARD OF MASTER OF BUSINESS ADMINISTRATION OF EGERTON UNIVERSITY

AUGUST 2013

DECLARATIONI hereby declare that the presented research project is my original work and has never been presented either in whole or in part to any other examining body for the award of certificates, diploma or degree.

Nancy Chepwogen

Signature………………………………… Date……………………………………

The Research has been submitted for examination with my approval as a University of Egerton

Supervisor

Name: Mr. Kalui

Signature……………………………… Date……………………………………

ABSTRACTThis paper presents a proposal for a study of factors affecting inventory management in Kenyan Telecommunication firms. The study will be conducted on Huawei Technologies Co. Ltd, a multinational telecommunication company that has subsidiaries in Kenya. The paper introduces the concept of inventory management and examines its importance in telecommunication organizations. In doing so, it seeks to explain the importance of various factors affecting inventory management to telecommunication firms. To determine these factors, the paper reviews current literature related to the topic of study. As it will be noted, there is limited research on factors affecting inventory management in the telecommunication sector, especially with specific focus on Kenyan firms. This explains the need for a study focusing on this issue.The paper proposes to adopt an exploratory research design in conducting a study on Huawei Technologies. The study requires both secondary and primary data. Primary data will be collected using questionaires while secondary data will be searched from secondary sources. Both quantitative and qualitative methods will be used to anlyse data. Apart from this, the paper presents the work plan for the study and the budget that is needed to complete the study.

TABLE OF CONTENTS

DECLARATIONii

ABSTRACTiii

1.0 INTRODUCTION1

1.1 Background to the problem3 TOC o “1-3” h z u

DECLARATION PAGEREF _Toc364148323 h iiABSTRACT PAGEREF _Toc364148324 h iii1.0 INTRODUCTION PAGEREF _Toc364148325 h 11.1 Background to the problem PAGEREF _Toc364148326 h 11.2 Problem statement PAGEREF _Toc364148327 h 21.3 Aims/Objectives of the Study PAGEREF _Toc364148328 h 31.4 Research questions PAGEREF _Toc364148329 h 41.5 Significance of the study PAGEREF _Toc364148330 h 41.6 Scope and delimitation of the study PAGEREF _Toc364148331 h 52.0 LITERATURE REVIEW PAGEREF _Toc364148332 h 62.1 Introduction PAGEREF _Toc364148333 h 62.2 Brief Profile of Huawei Technologies Company PAGEREF _Toc364148334 h 62.3 Inventory Management decisions/Policies PAGEREF _Toc364148335 h 82.3.1 Management of Costs PAGEREF _Toc364148336 h 82.3.2 The right order quantity at the right time PAGEREF _Toc364148337 h 92.3.3 Inventory management methods PAGEREF _Toc364148338 h 102.4 Factors affecting inventory management decisions PAGEREF _Toc364148339 h 122.4.1 Product type PAGEREF _Toc364148340 h 122.4.2 Cost of the product PAGEREF _Toc364148341 h 132.4.3 Lead Time PAGEREF _Toc364148342 h 132.4.4 Role of Technology PAGEREF _Toc364148343 h 142.4.5 Price Incentives (Discounts) PAGEREF _Toc364148344 h 152.4.6 Inventory turnover rate/ Market Demand PAGEREF _Toc364148345 h 172.4.7 Budget PAGEREF _Toc364148346 h 182.5 Theoretical/Conceptual Framework PAGEREF _Toc364148347 h 203.0 METHODOLOGY PAGEREF _Toc364148349 h 233.1 Introduction PAGEREF _Toc364148350 h 233.2 Research Design PAGEREF _Toc364148351 h 233.3 Population PAGEREF _Toc364148352 h 233.4 Sampling Frame PAGEREF _Toc364148354 h 243.5 Data Collection PAGEREF _Toc364148355 h 253.6 Validity of Data collection Instruments PAGEREF _Toc364148356 h 253.6 Reliability of Data collection Instruments PAGEREF _Toc364148357 h 263.7 Research Procedure PAGEREF _Toc364148358 h 263.8 Data analysis and presentation PAGEREF _Toc364148359 h 264.0 WORK PLAN PAGEREF _Toc364148360 h 275.0 BUDGET PAGEREF _Toc364148362 h 285.1 Research Budget Justification PAGEREF _Toc364148364 h 296.0 REFERENCES PAGEREF _Toc364148365 h 317.0 APPENDICES PAGEREF _Toc364148366 h 367.1 Appendix 1: Research Questionnaire PAGEREF _Toc364148367 h 36

LIST OF TABLES

HYPERLINK l “_Toc362840094″Table 1: Target Population PAGEREF _Toc364146853 h 24HYPERLINK l “_Toc362840102″Table 2: Work Plan PAGEREF _Toc364146861 h 27Table 3: Project Budget PAGEREF _Toc364146863 h 28LIST OF FIGURES

Figure 1: Model explaining factors affecting inventory management in the Kenyan telecommunication sector PAGEREF _Toc364146848 h 221.0 INTRODUCTION1.1 Background to the problemInventory represents one of the most important assets in telecommunication firms. The value of inventory to all telecommunication firms (both service providers and manufacturers) has increased tremendously as competition continues to stiffen in the sector. The term inventory in this context refers to tangible items which are added to the process of production, which are to be consumed in the production of goods and services or which are held for sale. As Bozarth and Handfield (2006) explain, proper management of inventory has a significant impact on both the financial and the operational aspects of any telecommunication firm. Inventory management is the practice of planning, organizing and controlling inventory so that it contributes to the profitability of the business (Bozarth & Handfield, 2006). Bliss and Markelevich (2011) define inventory management as “the continuing process of planning, organizing and controlling inventory” that aims at “minimizing the investment in inventory while balancing supply and demand.”

The process of inventory management partly involves management of four types of costs, namely, acquisition costs, procurement costs, carrying costs and stock out costs. The goals of inventory management are to reduce the procurement and carrying costs associated with inventory while balancing supply and demand (Gianpaolo et al, 2005). Secondly, inventory management aims at ensuring that an organization purchases the right quantity of products at the right time. Based on specific influencing factors, an organization can choose to set a minimum amount of stock after which more products are ordered, it may choose to purchase products just in time for sale, it may choose to purchase specific quantity of products after specific time periods or it may use mathematical models to calculate the most appropriate amount of a product to purchase (Bliss & Markelevich, 2011). Further, inventory managers in any organization make choices regarding the right method(s) of inventory management to adopt. There are three main methods of inventory management, namely, perpetual method, periodic method and visual method (Timme et al, 2003).

As Tersin (2009) explains, every successful firm engages in inventory management, through management of costs, management of quantity and adoption of appropriate method of inventory management. But as Tersin (2009) explains, each firm makes different inventory management policies, based on unique influencing factors. To make appropriate and effective decisions and avoid crises associated with inventory management, inventory managers in telecommunication firms must be aware of both the internal and external factors that have an impact on firms inventory management practice (Lee, 2002). Giving consideration to these factors ensures that an organization has the right product at the right time and at the right price in order to meet market demand. It should be noted that all inventory management decisions made in all firms, including in Huawei Technologies, are influenced by specific internal and external factors.

Literature has identified various factors that affect inventory management decisions and policies that are adopted in organizations. They include product type, product cost, lead time, information technology, price incentives, demand and budget. These results are based on different studies focusing on different industries. It is expected that there are specific unique factors that affect inventory management decisions in the Kenyan telecommunication sector.

1.2 Problem statementAs mentioned earlier, the goals of inventory management are to minimize the amount invested in inventory and the procurement and carrying costs while balancing supply and demand (Lee, 2002). As such, inventory management is a key factor to success in any telecommunication firm because efficient inventory management can keep costs down, improve cash flow, and improve service. Alternatively, inventory mismanagement results in increased costs and expenses and eventual decline in organizational performance (Lee, 2002). This implies that any inventory management policies formulated and implemented within any telecommunication firm might result into positive or negative impact to a firm’s performance. Importantly, the decisions made by inventory managers are not made irrationally. Rather, managers seek information from both internal and external environments of firms in order to make rational and the most effective inventory management policies.

Various studies have been conducted in various parts of the world aimed at determining the various factors that affect inventory management decisions and policies in different industries. They have shown that inventory management decisions in each specific industry are affected by unique factors. This implies that out the factors listed earlier,, there are specific factors that affect inventory management in telecommunication sector in Kenya. However, there is limited research focusing on the factors that affect inventory management, especially in the Kenyan telecommunication sector. Therefore, this study aims at bridging this gap by investigating the factors that affect inventory management in the sector.

1.3 Aims/Objectives of the StudyThe main aim of this research is to investigate factors that affect inventory management in the Kenya telecommunication sector. To achieve this, the study will carry out an empirical analysis Huawei Technologies Co. Ltd

The specific objectives of this research are:

To determine the effect of organizational policy on inventory management in the Kenyan telecommunication sector

To determine the effect of information technology on inventory management in the Kenyan telecommunication sector

To determine the effect of product cost on inventory management in the Kenyan telecommunication sector

To determine the effect of market demand/inventory turnover on inventory management in the Kenyan telecommunication sector

To determine the effect of lead time on inventory management in the Kenyan telecommunication sector

To determine the effect of price incentives on inventory management in the Kenyan telecommunication sector

To determine the effect of product type on inventory management in the Kenyan telecommunication sector

To determine the effect of budget on inventory management in the Kenyan telecommunication sector

1.4 Research questionsHow does organizational policy affect inventory management in the Kenyan telecommunication sector?

How does information technology affect inventory management in the Kenyan telecommunication sector?

How does product cost affect inventory management in the Kenyan telecommunication sector?

How does market demand affect inventory management in the Kenyan telecommunication sector?

How does lead time affect inventory management in the Kenyan telecommunication sector?

How do price incentives affect inventory management in the Kenyan telecommunication sector?

How does product type affect inventory management in the Kenyan telecommunication sector?

How does budget affect inventory management in the Kenyan telecommunication sector?

1.5 Significance of the studyThe main purpose of this study is to determine the factors that affect inventory management in the Kenyan Telecommunication sector. Researchers and academicians have expressed the importance of various organizational internal and external factors in influencing inventory management decisions and hence, their indirect impact on organizational success. The results of this study are particularly useful to inventory managers in Kenyan and foreign telecommunication firms who wish to apply it in the process of formulating and implementing inventory management decisions. The results are of key importance to Huawei Technologies as they will be highly applicable in the process of making inventory management within the Kenyan subsidiaries more efficient and effective. The study may enable this organization to reduce costs and to enjoy more benefits associated with efficient inventory management. Additionally, the study plays a crucial role, in theory and practice, as it endeavors to be part of the contribution the theory of inventory management. It will enrich the literature review of future studies and researchers will therefore find the study resourceful when covering other areas that were not exploited by this study. The report will act as a source of reference and stimulate interest among academicians and thereby encourage further research on inventory management. Finally, this research can be used by the government of Kenya to develop and implement a code of best practice for the telecommunication industry in Kenya.

1.6 Scope and delimitation of the studyThe purpose of this research is to examine factors affecting inventory management in Telecommunications firms. The research will be carried out at Huawei Technologies Company which is situated at the upper hill area of Nairobi, Zep-Re place, Longonot road. The target population includes employees in the procurement, logistics and stores departments in the company. The researcher will rely on a sample of 70 employees who will represent the whole population. The study will be carried out between January and May 2013. Data collection will be conducted through administering of questionnaires and participant observations.

There are several limitations that relate to this study. First, it will be conducted on Huawei Technologies only. Thus, there is no evidence that the results that will be obtained will be typical of all firms in the Kenyan Telecommunication sector. It is essential that future research related to the current one use greater sample and in more than one firm in the Kenyan telecommunication industry. Another challenge is lack of availability of past research focusing on the factors affecting inventory management in telecommunication sector. The researcher will need to rely more on primary data.

2.0 LITERATURE REVIEW2.1 IntroductionThis section provides an overview of previous studies that have focused on factors that affect inventory management in telecommunication firms in Kenya. As mentioned earlier, the factors affecting inventory management are unique in each industry. Due to unavailability of adequate literature focusing on factors affecting inventory management in telecommunication sector, the researcher found it prudent to include literature derived from studies in other industries. The section also provides a brief critical review of the literature consulted and identifies a research gap. Finally, the theoretical and conceptual frameworks under which the study is based are presented. Before this, the section gives a brief overview of Huawei Technologies and examines three major inventory management areas which rely on policies and decisions of inventory managers.

2.2 Brief Profile of Huawei Technologies CompanyHuawei Technologies Co. Ltd is a multinational company that deals with telecommunication equipments and services and networking with headquarters in Shenzhen in China. It is currently the leading producer of telecommunication equipments globally followed by Erikson. It was established in 1988 as a private company by Ren Zhengfei, an ex-military officer. It produces communication devices which are sold directly to consumers, builds telecommunication networks and consulting services and equipments to firms in foreign countries. Currently, this company services 45 of the 50 largest telecom operators in the world and its products and services are offered in more than 140 countries. It has been rated as one of the fastest growing companies in the telecommunication sector. In 2010, this company recorded a profit of $3.7 billion (Huawei, 2012).

Huawei started expanding internationally in 1997 after it was awarded its first overseas contract to provide network products to Hutchison Whampoa, a Hong Kong company. During the same year, Huawei started producing wireless GSM-based products and launched aggressive marketing campaign in foreign countries. In 1999, it opened its first research and development centre outside China in Bangalore, India, and started producing a wide range of telecom software. Since then, Huawei has increased its overseas expansion and has more than 20 research and development institutes with more than 140,000 employees in various countries including China, India, United States, Sweden, Germany, Ireland, Turkey and Russia. In 2010, the company was recognized by US Magazine (Fortune) in the Global Fortune 500 2010 list dues to its 2009 sales of US$21.8 billion and a net profit of US$2.67 billion (Huawei, 2012).

Huawei has managed to achieve tremendous expansion in its networking solutions and mobile technology through forming partnerships with both local and foreign companies. It formed its first joint venture in 2003 with 3Com Corporation, a Chinese company that dealt with research and development and production and sale of data networking products. It began a joint venture with Siemens, a producer and seller of mobile communication and technology products, in 2005. In 2006, Huawei started a joint venture with Motorola, a producer and seller of mobile communication and technology products, which aimed at developing a research and development centre in Shanghai to develop UMTS technologies. During the same year, Huawei formed a joint venture with Telecom Venezuela to establish a research and development centre in Venezuela and to establish sale channels for telecommunication terminals. It also acquired Symantec, an American security firm, in 2012 which dealt with developing security and storage solutions (Huawei, 2012).

Huawei entered the Kenyan telecommunication industry almost a decade ago and has managed to establish competitive edge over the years. It has been offering its products and services in various branches established in the country and through local distributors with whom they have formed partnership with. The various products offered by Huawei constitute to its inventory and as in any other firm in the telecommunication firm, inventory constitutes one of its important assets. As such, inventory management is one of the key functions of the company’s management. The inventory management decisions made in this company are influenced by various internal and external factors, as in other industries.

2.3 Inventory Management decisions/PoliciesInventory management in any organization is influenced by organizational management policies and decisions. As Tersin (2009) highlighted, different organizations have different policies regarding management of inventories, which are influenced by different factors. To gain a better understanding of this, this paper looks at three inventory management areas in which managers need to make policies, namely, management of costs, purchasing of the right order quantity at the right time and adoption of appropriate method of inventory management.

2.3.1 Management of Costs

As mentioned, there are four types of costs that are associated with inventory, namely, acquisition, procurement, carrying, and stock-out or shortage costs. Acquisition cost is the price a firm pays for the product (Gianpaolo et al, 2005). Procurement costs are the costs associated with purchasing the product: checking inventory, placing orders, receiving orders, stocking the product, and paying the invoices. Carrying costs refer to the storage, handling, insurance, cost of capital to finance the inventory and opportunity costs. Another component of carrying cost is the cost of loss through theft, deterioration, and damage. Acquisition, procurement and carrying costs can be calculated accurately and are an important financial consideration in telecommunication firms’ management (Gianpaolo et al, 2005). These three types of inventory costs generally place little direct stress on busy telecommunication staff but can depress the organization’s operating margins if not monitored appropriately. The shortage or stock-out cost is the cost of not having a product on the shelf when a buyer needs or wants it. This is frustrating to a telecommunication firm that has to explain why the product is not available and is an inconvenience to the buyer. Shortage costs may be difficult to quantify but definitely have an impact on any telecommunication firm (Gianpaolo et al, 2005).

From a financial perspective, effective inventory management decreases the cost of goods sold and operational expenses, resulting in increased gross margins and net profits. As Green (1997) illustrated, saving $100 on the purchase of computer software in a firm will increase the gross margin and net profit by $100 (assuming that operational expenses remain constant). Moreover, having less money invested in inventory improves cash flow. A firm that has merchandise that is not selling or an oversupply of product sitting on the shelf has less cash available to pay expenses and/or invest in other business operations. A firm that is able to reduce its inventory by $100 has that much more cash to spend on day-to-day operations, invest in new services, or place in a savings or checking account. From an operational perspective, effective inventory management is important in meeting consumer demands for both goods and services (Green, 1997). It means minimizing the investment in inventory while balancing supply and demand.

People use inventory management in their everyday lives. Lee (2002) illustrates that when people shop for groceries, they think about what they would like to (i.e., current inventory). From this, they create a grocery list. This list is revised depending on how much money they have, grocery store specials, storage space, and how quickly the food will spoil. They may compare products and shop at various grocery stores. Based on these as well as other factors, they eventually make purchases and evaluate how well those purchases satisfy their needs and wants. The process is repeated and reevaluated on a continuous basis. This is similar to how telecommunication firms purchase their inventory (Lee, 2002). Based on specific influencing factors, telecommunication firms create lists of products they need, revise the lists based on current inventory, determine how much money they have to purchase these goods, evaluate any specials from their vendors and their available storage space and then finally make and evaluate their purchases. Generally, firms try to make informed and rational decisions in order to ensure that they purchase the right quantity of products at the right time and to ensure that they always have adequate inventory.

2.3.2 The right order quantity at the right timeBliss and Markelevich (2011) explain that having too much product ties up a firm’s money without providing an adequate return on investment. On the other hand, having too little product may result in lost sales and profits when the product is not available when consumers want to make a purchase. Not having enough products available also inconveniences firm’s staff and customers and may result in the loss of customers in the future (Bliss and Markelevich, 2011). Thus, not only is having the right product is critical to inventory management, but also having the right quantity at the right time is also essential. The right quantity means having just enough products on hand to cover consumer demand at any given time. Determining the right quantity for any given product is difficult, if not impossible, given that demand may fluctuate unexpectedly (Bliss & Markelevich, 2011). However, it is still important for inventory managers to track consumer demand for their products and monitor trends that may affect their use. While managers may not always have the right quantity on hand, use of such information helps them to anticipate fluctuations in demand (Bliss & Markelevich, 2011).

Based on the characteristic of the target market, a firm’s inventory managers may need to make consideration of three types of stock while making decisions, namely, cycle stock, buffer/safety stock and anticipatory/speculative stock. Cycle stock is the regular inventory that is needed to fulfill orders (Ayad, 2011). Buffer or safety stock is additional inventory that is needed in case of a supply or demand fluctuation. Anticipatory or speculative stock is inventory that is kept on hand because of expected future demand or expected price increase. Buying anticipatory stock is risky in most cases, and therefore, some firms such as pharmacies usually do not carry much anticipatory stock and place higher markups on such anticipatory stock. These types of stock are important to consider when deciding how much to order and when to order (Ayad, 2011). In order to estimate the minimum quantity of goods needed to meet demand, a firm manager or purchasing agent needs to understand the number of items on hand, the point at which to make a re-order and the amount to re-order. Apart from making the right purchases and having adequate inventory at the right time, every firm relies on various internal or external factors to decide the appropriate method of inventory management to adopt.

2.3.3 Inventory management methodsThere are three methods used commonly in telecommunication sector to manage inventory: the visual method, the periodic method, and the perpetual method (Timme et al, 2003). The visual method requires the manager or designated person to look at the number of units in inventory and compare them with a listing of the amount to be sold. When the number falls below the desired amount, an order is placed. The periodic method requires the manager or designated person to count the stock on hand at predetermined intervals and compare it with minimum desired levels. If the quantity is below the minimum, the product is ordered. Usually, a designated person is responsible for checking the shelves and placing orders. The firm manager may have a specific checklist, indicating that the person should conduct a stock review weekly or look for expired products monthly, in addition to placing orders and keeping inventory orders to a specific level. This person will learn the turnover rates for specific products and will develop a skill for purchasing for the firm. This method allows designated person to account for fluctuations in supply and demand. Today, the designated person is likely to use a hand-held electronic device into which item numbers and quantities are entered or a hand-held scanning device that scans the barcodes on the product packaging or shelf labels (Silver, 1998). These devices then can be used to submit an order electronically.

Although the visual and periodic methods are still used today, perpetual inventory systems are common in most telecommunication firms. These perpetual systems are computerized inventory management systems. Perpetual inventory management systems are the most efficient method to manage inventory. This method allows the inventory to be monitored at all times. A perpetual system can tell precisely the amount of inventory on hand for any product at any time. Moreover, the firm manager can quickly assess the value of current inventory. Computer systems can be used to calculate the most economic order quantity (EOQ) and reorder point so that a product is reordered automatically when the inventory falls below a minimum standard (Tersin, 2009). This type of system significantly reduces procurement costs. Although the computer can be programmed to order products automatically, it is important for organizational staff to monitor inventory daily and to make corrections for variances owing to fluctuations in supply and demand. To maintain a perpetual inventory system, all purchases and sales must be entered into the computer system (Tersin, 2009). A clerk can enter data from purchases, or the computer dispensing system can be interfaced with the computer order system. The interface allows for the inventory to be reduced when a product is dispensed. The sales data can also be entered at the point of sale by devices that use optical scanning and barcode technology. Point-of-sale (POS) devices are advantageous in that they improve the accuracy of pricing and inventory data. They eliminate the need for price stickers, reduce the frequency of pricing errors, and automatically track inventory. Regardless of which method is used, most telecommunication firms need to conduct a physical inventory at least annually. The choice of the method to be adopted is dependent on organizational policies, which are also dependent on various factors in organizations.

2.4 Factors affecting inventory management decisionsNumerous studies have paid attention to the concept of inventory management as well as the factors that influence inventory management in various industries. The key impacts of these factors are reflected in an organization’s degree of inventory control and the level of inventory held (Rajeev, 2010).

2.4.1 Product typeAn empirical study conducted by Tompkins and Harmelink (2008) across various industries in Europe found that inventory management decisions and policies are influenced by the type of product that an enterprise deals with. Products that are perishable such as fruits and cabbages require a different stock management policy than cloths, which are not perishable (Tompkins & Harmelink, 2008). A manager of products that have a short shelf life has to give consideration of expiry date before deciding the amount to stock. At the same time, producers of implantable medical products require a different inventory management policy than producers or retailers of perishable products. An implantable medical product requires a serial number on the products as well as the outer packaging, which may not be necessary for products such as cabbages and fruits (Tompkins, & Smith, 2010). When formulating and implementing inventory policies, a producer or a retailer of implantable medical products must make consideration of the serial number of each item and track the items using their serial numbers as they move in and out of the store. In a study of inventory management practice in pharmaceuticals in the US, Tompkins and Smith (2010), found that generic pharmaceutical products have lower costs of acquisition than brand-named products. Thus, brand-named products require greater attention and attract higher inventory control costs than their generic counterparts. The above finding are echoed in a study conducted by Njoga (2013) the factors affecting effective stores management in the Kenyan public sector. Njoga (2013) noted that type of product highly affects inventory management decisions.

2.4.2 Cost of the productMost firms employ different inventory management policies based on the cost of product. In most cases, high-value pr