THE RELATIONSHIP OF INVENTORY MANAGEMENT PRACTICES ON THE

BUSINESS PERFORMANCE OF HARDWARE STORES IN NAGA CITY

ALISA GABRIELA ORDAS

JOY YSABEL ARMENTA
ERMA JERUSALEM
MAIA RAMORES

SUBMITTED TO THE FACULTY OF IN PARTIAL FULFILLMENT OF THE

REQUIREMENTS FOR THE DEGREE OF

BACHELOR OF SCIENCE IN ACCOUNTANCY

25 AUGUST 2018
 ATENEO DE NAGA UNIVERSITY

CERTIFICATE OF APPROVAL

The thesis attached hereto, entitled “THE RELATIONSHIP OF INVENTORY

MANAGEMENT PRACTICES ON THE BUSINESS PERFORMANCE OF
HARDWARE STORES IN NAGA CITY” prepared and submitted by ALISA
GABRIELA ORDAS, JOY YSABEL ARMENTA, ERMA JERUSALEM and
MAIA RAMORES, in partial fulfillment of the requirements for the degree of BS
ACCOUNTANCY, is hereby accepted and approved by the Committee on Oral
Examination whose signatures appear below on this day

MS. CIELO N. DAIT DR. MARCIAL C. PAGLINAWAN

Member Member

DR. JOEL H. GOGOLA

Adviser

DR. CHRISTOPHER B. ABELINDE

Dean, College of Business and Accountancy

ii
AUTHORS’ BIOGRAPHY

iii
 ACKNOWLEDGMENT

The researchers would like to acknowledge and extend their gratitude to the

following persons:

To Dr. Joel Gogola, their thesis adviser, for the guidance and support

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 TABLE OF CONTENTS
CONTENTS PAGE

Title Page i
Approval Page ii
Author’s Biography iii
Acknowledgment iv
Table of Contents v
List of Tables vii
List of Figures viii
List of Appendices ix
Abstract x

I. INTRODUCTION
Background of the study 1
Statement of the Problem 4
Objectives of the Study 5
Significant of the Study 5
Scope and Delimitations 7

II. REVIEW OF RELATED LITERATURE AND STUDY

Background of Hardware Stores 8
History of Inventory Management 11
Inventory Management 12
Importance of Inventory Management 14
Inventory Management Practices 17
Business Performance 25
Relationship of Inventory Management and Business
Performance 28

III. FRAMEWORK OF THE STUDY

Theoretical Framework 31
Conceptual Framework 36
Definition of Terms 39

IV. METHODOLOGY
Research Design 42
Respondents of the Study 43
Research Instruments 43
Data Gathering Procedure 44
Statistical Treatment of Data 45

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V. RESULTS AND DISCUSSIONS
Business Profile of Hardware Stores 47
Extent of Use of Inventory Management Practice 51
Relationship of Inventory Management Practice and Business
Performance 56

VI. SUMMARY, CONCLUSIONS AND

RECOMMENDATIONS
Summary of Findings 59
Conclusion 62
Recommendations 63
References 67
Appendix 77

vi
 LIST OF TABLES

TABLE PAGE

1 Business Profile of Hardware Stores 47

2 Extent of Use of Inventory Management Practices 51

3 Correlation of Inventory Management Practice and Profit Margin 56

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 LIST OF FIGURES

FIGURE PAGE

1 Relationship of Inventory Management and Organizational 35

Performance and Competitive Advantage

2 Relationship of Inventory Management on Profitability and 36

Operating Cash Flows

3 Conceptual Framework 37

viii
 LIST OF APPENDICES

APPENDIX PAGE

A Letter to the City Treasurer 77

B Survey Questionnaire 78

C Survey Letter 80

D Statistical Results 81

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 ABSTRACT

Ordas, Alisa Gabriela, Armenta, Joy Ysabel, Jerusalem, Erma, Ramores, Maia. (August,
2018). The relationship of inventory management practices on the business performance
of hardware stores in Naga City. Undergraduate Thesis. Ateneo de Naga University.

Adviser: Joel H. Gogola, DBA, CPA

This study is conducted to identify the different inventory management practices

of Hardware stores in Naga City, to measure the extent of use of these practices, and to
establish the relationship between the inventory management practices on the business
performance of hardware stores.

In carrying out this study, self-made questionnaire was used to gather the
appropriate data needed and were distributed to the 24 respondents. After gathering the
data, the researchers analyzed these data by applying appropriate statistical tools. This
study identified 18 inventory management practices commonly used by hardware stores
and are categorized into three, namely, Purchasing, Storage and Selling. The extent of use
of these practices were measured and were correlated with the profit margin of the
business. The results of the correlation between the inventory management practices and
business performance in terms of profit margin were evaluated whether they have a direct
or indirect relationship.

The results of this study shows that the extent of use of the different inventory
management practices as a whole are used in a very satisfactory level. Purchasing has the
highest extent of use, followed by Selling. On the other hand, Storage has the lowest
extent of use among the three practices. In terms of the relationship between inventory
management practices and business performance, it was generally found to have a strong
relationship. All the three categories of inventory management practices established a
direct relationship with the business performance with Storage having the highest
correlation. The results of this study further validate the claims of other studies gathered
throughout this study that applying inventory management has a direct effect on the
business performance in terms of its profitability

Since this study established a direct relationship between inventory management

practices and business performance, it is therefore recommended that proper inventory
management should be applied by hardware stores to ensure better performance of their
business.

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 Chapter I

INTRODUCTION

A. Background of the Study

Inventory is defined as made up of three elements such as raw materials, work-in-

process and finished goods (Arnold 2008, Cinnamon, [Link] 2010 and Gitman, 2009). Each

type represents money tied up until the inventory leaves the company as purchased

products. In other words, inventory is an idle stock of physical goods that contains

economic value. Inventory is a major asset and it represents a large part of investment in

businesses that are involved in selling or manufacturing products. In extraction,

manufacturing, wholesaling, retailing, importing/exporting, and other fields, inventory

constitutes one of the largest controllable assets of a business according to Shen et. al

(2017). Needless to say, inventories play an important role in a business since they

provide the means for the business to continuously exist and achieve its goals which is to

earn profit. According to Subramani et. al (2017), Inventory constitutes one of the

important items of current assets, which permits smooth operation of production and sale

process of a business. With this, managing these inventories is crucial to the operations of

the business.

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 The American Production and Inventory Society defines inventory management

as the branch of business management concerned with planning and controlling

inventories. Inventory management according to Kotler (2002) refers to all activities

involved in developing and managing the levels of inventory so that there must always be

an adequate stock available and at the same time the cost of over or under stocks are at a

minimum level. Management of inventory is crucial to a firm since it plays a decisive

role to enhance efficiency and improve the firm’s competitiveness ability against their

competitors. Different entities have their own practices and strategies when it comes to

managing their inventories but it all comes down in a common purpose which is to ensure

the firm’s growth and firm’s profitability.

Choi (2012) indicates that inventory management is essential in company's

operation in terms of maintaining high service level. Keeping stock of inventory is used

as a strategy to meet customer needs without taking the risk of shortages.

Hardware business has tremendously grown over the years due to the upsurge of

industrialization. The demand for this industry is also incessant in every community since

they provide tools and materials needed to build or improve homes or shelters which is

one of the basic needs in life. Hardware is one of those businesses who has a complex

inventory management practice. They purchase products in large volumes, from small

size products like hinges and nails up to large and heavy steels and sell it either by

wholesale or retail. Storage is crucial in hardware stores. Storing large quantity of

products is never easy plus it is of different kinds. Arranging product may be based on

2
the nature of use, demandability or their prices or anything that is convenient and can

minimize the travel time. Higher level of inventory management practice enhanced the

competitive advantage of the business (Atnafu, 2018).

Naga City has been a regular recipient of “Most Business- Friendly City” award

and was hailed as the country’s most competitive component city in 2015. With the

continuing development and growth of the economy in Naga City, many companies have

chosen Naga City as the place to conduct their businesses. In effect, it has created a great

opportunity for hardware businesses to increase their revenue since the demand for their

products is high because the level of development of construction and infrastructure in

the city has also increased.

As the demand and competition among different Hardware stores in Naga City

arises, the need for an appropriate inventory management practices is essential to enable

the business to improve their profitability. This study is conducted to identify the

inventory management practices used by hardware stores in Naga City and its effects on

the performance of the business in terms of its profitability. Furthermore, this study is

conducted to determine the appropriate inventory management practices that will help in

the maximization of the business’ profit.

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 B. Statement of the Problem

The purpose of the study is to determine the relationship of inventory

management and performance of hardware stores. Specifically, this study aims to answer

the following questions:

1. What is the business profile of hardware stores in Naga City in terms of:

a. Type of Business Ownership

b. Number of Employees

c. Number of Years in Business Operation

d. Capitalization

e. Annual Net Income

f. Net Profit Margin

2. What is the extent of use of inventory management practices by hardware stores

in Naga City?

3. Is there any relationship between inventory management practices and

performance of business?

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 C. Objectives of the Study

This study on The Impact of Inventory Management on the Performance of

Hardware Stores in Naga City seeks to attain the following objectives:

1. To identify the business profile of the hardware store in terms of:

a. Type of Business Ownership

b. Number of Employees

c. Number of Years in Business Operation

d. Capitalization

e. Annual Net Income

f. Net Profit Margin

2. To determine the extent of use of inventory management practices of the store

3. To know the relationship between the inventory management and the

performance of the business

D. Significance of the Study

Inventory Management is one of the important aspects of every business

especially to those involved in the production of goods. This study focuses on the

inventory management of Hardware stores in Naga City and its effects on the

performance of the business.

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 In conducting this study, the researchers aim to give valuable information that

would be helpful to the users. Specifically, this study benefits the following parties:

● Management- This study will help the management to have a better

understanding on how inventory management affects the operation and the

profitability of their own businesses. It will also serve as a guide for hardware

stores to improve their existing inventory management practices and to apply new

methods for the company to meet its goal and have a better business performance.

● Local Government Unit of Naga City- This study will help the local

government in determining the situation of hardware businesses operating in the

city. It will also guide them in assessing their current programs and policies to

help the hardware industry boost company performance through better inventory

management practices. The intervention of the local government will help meet

the city’s economic goal which will allow them to remain as one of the most

competitive cities in the country.

● Future Researchers- This study may serve as a guide for future researchers and

may pique their interests into further exploring inventory management practices

or methods adapted by this complex industry. The information written in this

study may also serve as a reference for future researchers to aid them in their

study.

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 ● Establishing/ Starting Businesses- This study will provide aspiring

entrepreneurs more information about inventory management practices in order to

better prepare them as they engage in the very competitive market of hardware

retailin

E. Scope and Delimitations

This study aims to determine the relationship of inventory management and the

performance of hardware stores within Naga City.

The study focuses on small and medium scale hardware stores within Naga City

only. These businesses sell and manage the inventory of various hardware and

construction materials and supplies. The segregation of products is determined through

the manner of our information gathering. Gathering of information is mainly done

through distribution of questionnaires and oral interviews. Out of the 67 hardware

business population, there are only 24 who positively responded to the research due to

confidentiality, relocation, closure, and unreliable measurement for newly registered

businesses included in the official list.

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 Chapter II

REVIEW OF RELATED LITERATURE AND STUDIES

This chapter discusses the review of related researches regarding the impact of

inventory management on the performance of hardware stores. The review includes

discussions on inventory management, measurements of business performance, and their

correlation.

The purpose of this chapter is to help the researchers and the beneficiaries have a

clearer and deeper understanding on the study.

A. Background of Hardware Stores

General stores emerged in 18th century from which hardware stores came from. It

started as a single room in rural family home or log cabin at the crossroad before moving

into standalone building selling variety of merchandise from food to household

equipment and materials and also agricultural products. During the 20th century, hardware

stores began to diverge when the proprietors extracted hard merchandise from the soft

lines like food and textiles. Hardware merchandise includes variety of products like

household furnishing, builder’s hardware, agricultural implements, machinists’ supplies

and saddlers’ hardware. Bolts, nails and screws transformed along with the hardware

8
[Link] 1940’s, when some hardware stores banded together to form retailers’

cooperatives.

The Hardware Wholesalers (1945) and Cotter & Co (1948) that later became Do

It Best and True Value Co-op in 1973. When the Home Depot arrived in the late 1970s,

many hardware withstands the competition with the help of their co-op. Members

benefited from centralized purchasing power and received assistance with expansion,

remodeling, merchandising, financing, employee training, secession planning, inventory

management, market research and advertising. In the Modern Hardware Store (1929)

Dipman advised the sales engineer to place new items to visible location and staples in

less prominent place. Retailers should minimize the use of counters to let the customer

see and touch the goods and inspect related items. By the late 1920s, hardware stores

refocused on home renovation and many of them incorporated the do-it-yourself idea into

their names. Its idea can be traced to around 1900 with the obsession of American’s in

home improvement. The National Hardware Show presents new products and forecast

market opportunities every year.

The industry of hardware stores in the Philippines may have started when men started

to build and erect houses for protection and comfort, expanding from the simple “sari-sari

store type” that the Chinese have started in our country to a well-organized and profitable

form of business. The market potential for the hardware and construction supply business

has also been apparently seen as the proliferation of housing subdivisions and villages

sprouted. (Co, S). However according to the article by Fritsch (2016), the demand for the

9
hardware industry is very seldom constant. The hardware industry is affected by

seasonality, with the summer months seeing the peak of construction activity.

The product line of hardware stores may be categorized into two, Structural and

Finishing. Under the category of structural materials will fall the following:

 Gravel and sand

 Cement

 Hollow blocks

 Steel bars

 Lumber and wood

 PVC and GI Pipes

 Galvanized iron and roofing sheet

Under the category of finishing materials will fall the following:

 Paints

 Plumbing fixtures

 Electrical and lighting fixtures

 Ceramic tiles and wood parquets

 Aluminum and glass

 Hardware items

The IBISWorld, a website that provides fully researched, dependable and up-to-date

industry intelligence identifies the most important key success factors for the Hardware

Stores Industry which are:

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  Ability to control stock on hand

 Experienced work force

 Having a loyal customer base

Naga City has been one of the fastest-growing economies in the country.

According to the Asian Development Bank (ADB), the city’s economy grew at an

average pace of 6.5% annually for the period 1993 to 1998 ([Link]). Because of the

rise in urbanization and expanding industry coupled with a growing population and

economic growth in the city, the industry of Hardware stores has also been growing

considerably.

B. History of Inventory Management

In the early days of business, according to Tim Crosby, vendors would only tend

to record purchases and count items remaining by the end of the day. Their records will

serve as a guide for their plans to have a more profitable operations in the future. In the

Industrial Revolution, factories and a couple of large businesses have been formed which

to resulted to demand for products to skyrocket. This resulted to an important

breakthrough on the history of inventory management during the year 1889 when

Herman Hollerith invented the first punch card through the use of machines that could

recognize and record complex data for a lot of significant purposes as stated in the article

of Lockard (2012). In the article of Rosistem website entitled “History of Barcodes”

11
stated that the modern inventory management at present started from the invention of the

barcode scanner in 1974 which was made by the National Cash Register Co. This was

first installed at a supermarket in Ohio with a chewing gum as the very first item being

scanned by this system. Evidently, barcode scanners are still being used at present as

companies have been continually developing and improving their inventory management

through computerized inventory control systems.

According to Silver, Pyke and Peterson (1998), since the mid-1980s the strategic

benefits of inventory management and production planning and scheduling have become

evident. The business press has highlighted the success of Japanese, European, North

American firms in achieving unparalleled effectiveness and efficiency in manufacturing

and distribution.

C. Inventory Management

A company’s inventory is one of its most valuable assets since they provide the

means for an entity to continuously exist and earn profits. Inventory has been defined in

many ways. According to the Philippine Accounting Standards (PAS) 2, inventories are

assets which are held for sale in the ordinary course of business, in the process of

production for such sale or in the form of materials or supplies to be consumed in the

production process or in the rendering of services. They encompass goods purchased and

held for sale including for example, merchandise purchased by a retailer and held for

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resale, or land and other property held for resale by a subdivision company and real estate

developer. Inventories also encompass finished goods, goods in process and material and

supplies awaiting use in the production process. In simple terms, Chase, Jacobs and

Aquilano (2004:545) defined inventory as the stock of any item or resource used in an

organization. According to the website Investopedia, in retail, manufacturing, food

service and other inventory-intensive sectors, a company’s input and finished products

are the core of its business, and a shortage of inventory when and where it’s needed can

cause a major loss on the business. At the same time, a large inventory has 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

The American Production and Inventory Control Society (APICS) define

inventory management as the branch of business management concerned with planning

and controlling inventories. Additionally, Kotler (2002) refers to inventory management

as to all the activities involved in developing and managing the inventory levels so the

adequate supplies must be always available and to make sure that the cost of over or

under stocks are at a minimum level. According to Toomey (2000), the role of inventory

management is to maintain a desired stock level for every specific product or items,

where the systems that plan and control inventory must be based on the product,

customer, and the process for product that is available in the inventory.

Inventory management refers to keeping or maintaining the firm’s stocks at a

level that a firm will only incur the least cost and at the same time meeting management’s

set objectives or targets (Kwadwo, 2016). According to Aravinth, K. and Indhu, B(2016),

13
it is the system for planning and controlling all of the efforts necessary to ensure that the

correct quality and quantity of materials are properly specified in a timely manner,

obtained at a reasonable cost and most importantly, available at the point of use when

needed. Inventory management is about ensuring that all input materials of production

available to the firm are maintained at a level where production is not interrupted as well

as ensuring that operational cost is kept at a minimal level without affecting operation

efficiency (Eneje [Link]., 2012). According to Akindipe (2014), Inventory management

involves planning, organizing, controlling and directing. All these coordinated efforts are

meant to ensure achievement of efficiency in all operations of the firm. Such operations

may include procurement, stocking and transportation. Additionally, it involves creation

of a purchasing plan which will help to ensure that all items or materials are available

when needed as well as and tracking the existing inventories and its use (Muhayimana,

2015).

D. Importance of Inventory Management

According to Aiin Kisler (2014), Inventory Management includes the process of

determining the ordering and the ordering cost of the products. It also includes

replenishing of inventory, forecasting of demand and planning (William Stevenson

2002). It aims to decrease the difference between customer demand and product

availability. It is responsible for inventory planning and inventory control from raw

14
materials to the customer. In Metzger [Link] lecture notes, it was stated that the retail

industry would usually face out of stock rates of 5 to 10 % which would results to losses

of 4% in sales. The cause of being out of stock is the lack of inventory visibility. This

further enhances the importance of proper inventory management on the retail industry

such as a hardware According to De Wit’s (2005) dissertation, Inventory is important for

the survival and growth of a company. Failing to achieve an effective and efficient

management of inventory is a disadvantage that may lead to customer loss and sales

decline. Inventory management is important for all business types, especially to those

that operate on relatively low profit margin. Companies can go bankrupt due to poor

inventory management. (Krajewski and Ritzman 1999:544).

Inventory management’s objective is to achieve satisfactory level of customer

service with reasonable inventory costs, and to keep the inventories at optimal level

without shortages or surplus. Inventory management aims to minimize inventory carrying

costs, and provide satisfactory customer service (Ain Kiisler 2014). As stated in Eckert’s

(2007) study, customers would to set out an expectation when transacting with a retail

store. The availability and the quality of the products are the primary factors for the

subjective measurement of customer satisfaction. With a customer’s expectation being

met or exceeded, the company would gain customer loyalty. It must be taken note,

however, that the factors mentioned that could gain customer loyalty will require proper

and systematic inventory management.

Maintaining an appropriate level of inventory is a key issue to firms’ operational

performance. The assumption is that better inventory management is closely related with

15
firms’ better financial performance (Shin et. al, 2015). Inventory management is of high

importance in financial management decision because an excess or shortage of inventory

may bring danger to the company (Duru et. al., 2014). In their study of Inventory

Management, Swaleh and Were (2014) state that Inventory management is crucial to a

firm since it plays a decisive role to enhance efficiency and improve the firm’s

competitiveness ability against the firm’s competitors. Excess inventory consumes a lot

of space, can increase possibility of spoilage, leads to a financial burden and loss while

insufficient inventory has the potential of interrupting business operations. Furthermore,

aside from maximizing efficiency and managing finances, inventory management aims to

keep the perishable products safe and it limit the loss to be incurred once disaster occur.

Furthermore, aside from maximizing efficiency and managing finances, inventory

management aims to keep the perishable products safe and it limit the loss to be incurred

once disaster occur. As opined by Muhayimana (2015), the inventory of a firm is one of

its vital resources and embodies a venture that is tied up until they are sold or used in the

production. Furthermore, it costs finances to store, track as well as to insure inventory.

Inventories which are not managed properly are likely to create considerable financial

problems for a firm, whether it’s an inventory surplus or shortage. Critical decisions

regarding inventory are undertaken by the owners or managers entrusted to run the

business. These decisions will affect the business in terms of its profitability, financial

performance and increased market share which results to the maximization of the profit

of the business. (Luthubua, 2014).

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 E. Inventory Management Practices

Inventory management practices can be described as the system adopted by a firm

to manage the investment made in a stock (Stevenson 2010). The inventory management

practices are concerned with the recording as well as monitoring of level of inventory,

projecting demand in the future in addition to making decision when to order and how it

should be ordered (Adeyemi and Salami, 2010). According to Miller (2010), inventory

management is associated with all activities established to guarantee that customers

access a specific product or service. It enables the coordination of the activities

purchasing, manufacturing along with distribution in order to meet the marketing needs

of ensuring that products are availed to a consumer. In the study of Kinyua, D (2014),

Economic Order Quantity (EOQ) model, ABC model, Vendor Managed Inventory (VMI)

and Just-In-Time model are identified as some of the common practices of a business.

Additionally, Aro-Gordon, S. and Gupte,J. (2016) in their analysis of related literature in

their study, summarized some of the widely used contemporary approaches to inventory

management system which are: 1. Setting up and monitoring various stock levels 2.

Preparation of accurate inventory budgets 3. Automated inventory system 4. Establishing

proper purchase procedures 5. Inventory Turnover Ratio 6. ABC inventory classification

technique 7. Just-In-Time inventory management technique 8. Bulk-purchase approach 9.

Vendor-Managed Inventory (VMI) 10. Out-sourcing inventory control personnel 11.

Lead-time analysis 12. Software applications and tracking system. In this research, there

17
are three practices under inventory management. These are purchasing, storage, and

selling with significant inventory methods, techniques, and models placed under them.

The first practice, purchasing, is not just about ordering and paying for certain

items or products. Rather, purchasing is the process of ensuring a steady stream of

required materials is on the way to the company when and where they are needed. To

manage a business efficiently, managers/owners require detailed information about the

purchasing volume made from suppliers. Business owners must be able to determine

which products to purchase the most, which of the purchasing employees attains the best

deals. The responsibility involved in purchasing is to buy materials of the right quality, in

the right quantity, at the right time, price and source. (Jayathunga, J., 2009). Included in

the purchasing activities is deciding whom and where to buy the products. It involves

creating relationship with the supplier. As per the study by Bicheno (2004), the goals and

objectives of strategic supplier partnership are waste reduction, lead time condensation,

product improvement and product simplicity. Bulk purchasing is an approach to

managing inventories; the method relies on the principle that if you purchase goods in

bulk, you are able to procure them in much lower costs (Aro-Gordon [Link] 2016).

According to Monczka,et al. (2010), the correct management of the supply chain and the

effective use of strategic purchasing play vital roles in today’s organizations. The

strategic purchasing function of an organization is important to secure and organize the

supply of materials. Additionally, Monczka et al. provide the main responsibilities of a

purchasing function which can be summarized as follows: evaluate and select suppliers,

review materials bought, act as the primary contact with suppliers and decide how to

18
make a purchase. However, besides these main activities, the purchasing function has a

broader range of objectives, such as the support of organizational goals and objectives,

the development of an integrated purchasing strategy in line with corporate objectives,

the support of operational requirements, the efficient and effective use of resources,

supply base management as well as the development of intra-firm relationships

In this research there are two important methods and techniques under the

purchasing practice of inventory management. These are Economic Order Quantity

method, and Reorder point. These two methods are closely associated with each other

and both consider lead time in their model. A simple and general description of Lead

Time is that it the “delay” involved in the inventory management process. As a formula,

the lead time is supply delay plus reordering delay. Supply delay is the time it takes for

the order to be received from the supplier while reordering delay is the time until placing

an order with the same supplier becomes available again (Vermorel 2014). There are

many types of lead time but with the nature of the target respondents, material lead time

would the most significant for retail industries. Lester’s (2017) article entitled “What is

Lead Time, Why is It Important, and How Do You Reduce It?” defines Material Lead

time as the amount of time it takes for a company to place a confirmed order with a

supplier and having it on hand. Poor Lead Time management can greatly affect

inventory. Improper management of this would usually result to stock-outs.

Investopedia’s article about Lead Time mentioned stock-outs as having a large impact on

customer demand.

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 Dr. Kumar (2016) stated in his journal that EOQ or Economic Order Quantity is a

model that is used to calculate the optimal quantity that can be purchased in order to

minimize costs such as holding costs and ordering costs. This model helps small business

owners in making different decisions such as how much inventory to keep on hand, how

many products that one must order each time, and how often to reorder to minimize costs.

Le Roux and Lotter (2003) defined Economic Order Quantity as a tool used to determine

the best time to order the most economic quantity of inventory. This is generally done by

‘assuming’ that there is a fixed ordering cost, the demand of inventory will remain

constant, there is no discount available on the purchases of inventory and only one

product is ordered. Furthermore, according to Lee (2002), EOQ model is an inventory

management technique that identified the most favorable quantity to order, which is in

line with minimizing the total variable expenses that are needed to order as well as to

hold inventories. Economic Order Quantity will prevent overstocking, understocking, and

losses since its formula requires the predicted demand for every products. After using the

EOQ model, the results will give out the reorder point and the purchase quantity for

products. (Sukhia [Link], 2014). The equation for the Economic Order Quantity model is as

follows: EOQ = √(2SD / H); where S is equal to Setup Costs per order (Shipping and

handling cost), D is for Demand Rate (quantity sold per year), and H is for Holding Costs

per year and per unit.

Reorder point or reorder level is the level of stock at which replenishment and

order should be made. It is dependent on the lead time and demand during the lead time

of a product (Iwu et al. 2014). The Reorder Point is closely associated with the Economic

20
Order Quantity. It will advise the managers on when to replenish their inventory based on

demand history. Using this method will allow the inventory on hand to satisfy the

demands of customers while the next ordered batch is already being shipped (Gonzales, J.

2010). In Wong’s (2018) article entitled “The Reorder Point Formula and Calculating

Safety Stock,” the formula for Reorder Point is (Average Daily Unit Sales x Delivery

Lead time) + Safety Stock.

Storage practice or storage control is the process of holding inventories and

keeping track of its movement through the warehouse. This practice generally includes

activities such as picking up newly purchased products, handle and storing products, and

distributing products to stores making them available for display and selling (Vitasek

2018). Storage practices can be closely associated with warehouse management.

Additional activities in warehouse management stated Snuggs’ article entitled “What is

Warehouse Management?” are shipping and receiving goods. In the article, he also

pointed out the difference between mere stock control and warehouse management.

According to him, stock control means that a manager is more inclined to know how

many products that the company needs and when to replenish them. As for warehouse

management, the manager is more inclined on knowing which bins or shelves that the

products are stored and in which order they need to be picked. The layout of the

warehouse or how the materials are being stored can have a large impact on a company’s

profit. If a product is improperly stored in an unsuitable storage facility, the product may

deteriorate and be proven unavailable for selling resulting to waste and losses.

21
 There are three methods included in this study for storage practices. The first

method is the First in First out (FIFO) Storage method, the second is the Two-Bin

Inventory method, while the third method is the ABC Analysis. An article entitled FIFO

Systems retrieved from 3dstoragesystems website stated that the FIFO storage method is

a product rotation activity which assumes that a product that is acquired first is the

product that is first sold or disposed. Applying this to a hardware store may not be very

significant due to the nature of their main products. However, some of their products like

roof coating and paint only have a maximum shelf-life of 2 years if properly stored. FIFO

storage method would now then be significant for storing these type of products. The

FIFO method is further support by Lee (2006) who stated that most businesses uses First

in First Out to enhance the freshness of the merchandise or goods. It is also less

expensive when deterioration is assumed.

The second method, the Two-Bin Inventory System, is defined by

[Link] as an inventory control method in which when the product stored

in bulk in the first bin is used up, the company will make an order to replenish the bin as

the product in the second bin is raised up for selling. This inventory control is most

suitable for items that are small or low in value. The Two-Bin System also provides a

paperless control according to the journal of Pons, D. (2010). According to the article of

Gupta entitled “3 advantages and disadvantages of using Bin cards”, this system allows

the company to have a more effective control over their inventory since it will only

involve two batches. In the recent years, companies prefer computerized inventory

systems that are too complex over traditional inventory systems. Complex computerized

22
inventory systems can be prone to system issues, can be complicated to understand and it

is very expensive. Two-Bin System is the easiest alternative to complex inventory

systems. It is cheap, easy to apply, and prevents stock-out. The system would only

require two storage containers. The two containers would contain the same products of

the same or different quantities. The process of using the Two-Bin method is as follows:

1) The first bin is placed in front of the second bin.

2) Products are drawn from the first bin and sold.

3) The first bin is exchanged with the second bin.

4) Products for the first bin are reordered

5) Products from the second bin are drawn and sold while waiting for the

products on the first bin to be replenished.

6) When the second bin is fully sold out, it is exchanged with the fully

replenished first bin and so forth.

The reorder point purchasing method is also applied in the Two-Bin method. A

storage bin that has been emptied should trigger the purchasing process of the inventory

management. The managers should take note that the quantity of the bin should be

sufficient enough to cover the time it takes to receive the new products. For instance, if it

takes a week for the ordered products to be received, the bin should contain one week

supply of products to satisfy customer demands (Chaneski 2002).

For the third method, ABC analysis, the inventory is categorized into three

namely categories A, B, and C. In the journal “ABC Analysis for Inventory Management:

Bridging The Gap Between Research and Classroom” of Ravinder and Misra (2014), The

23
products placed in the category A are those of high-value and high-demand while the

products in category C are those of low-value and low-demand. The products in category

B logically are placed in between. Items that are placed in ‘A’ 'category would need to

have tighter inventory control compared to B and C. C-items are replenished less

frequently since these are less demanded compared to the other two categories. Just-In-

Time method of purchasing is the most suitable for replenishment in this category.

(Collignon 2012). The level of value, importance and control can be organized through

the use of this analysis. According to Niemand, et. al (2007), Activity Based Costing

(ABC) takes into account that certain activities cause costs and that products are created

by means of these activities. In core, relevant resources are allocated to all products

and/or services in relation to the overall consumption by each activity. ABC analysis is

recommended for retailers who want to understand which of their products are being

stored in the shelves for too long. (Nicasio 2018)

Selling practices in inventory management are put into emphasis with these two

techniques, namely, First in First out (FIFO) method and value added services. The FIFO

method, as mentioned in an article in the [Link], is an assumption that the goods

acquired first are the goods that are also sold first. This method is deemed to be the most

appropriate way to value the company’s inventory. It is also the most logical and

acceptable way in management of inventory. FIFO is a valuation method of inventories

allowed under both IFRS and US GAAP (Comiskey, [Link], 2008). Edori [Link] (2018)

concluded that companies using this method declares higher current asset which means

higher profit for the business.

24
 Servitisation is the increased offering of a combination of goods and services to

add value to the principal product. (Vandermerwe and Rada 1988) According to

Shmenner (2009), It makes the relationship between the customer and retailer better, by

providing this kind of service, there’s higher chance of customer satisfaction in fulfilling

the customer’s needs. Since the services provided by the manufacturer has the ability to

add value to the product, to meet the demands of the customer’s and improve revenue of

the manufacturer, these services are called value-added services. Value-added services

are supplementary products offered to customers, they are added benefits customers

receive when products or services are purchased. This service build customer satisfaction,

when offered free, it builds good will, but when offered for a discounted price alongside

primary products, it increases revenue significantly. (Ashe-Edmunds, 2017) In a

competitive retail environment, it is important for retailers to differentiate themselves

from others to attract customers. Value added products and services are recognized by

most organizations as essential for successful business (Maussang, [Link], 2009).

F. Business performance

A number of studies applied different organizational performance measure.

Particularly, Steer (1975) has over 17 effectiveness models integrating the organizational

performance measure with various studies. Also, it generalizes the measurement to three

25
categories: Financial Performance, Business Performance and Organizational

Effectiveness.

The importance of measuring business performance had been recognized,

allowing researchers and practitioners to develop different business performance

measurement approaches. (Parkan & Wu 1999:202) The simplest way to measure

performance is to evaluate performance using an indicator basing on a business goal.

This is used by small and medium businesses. (Lesakova 2003) However, performance

can also be measured using a set of indicators or by using just one indicator which

monitors the other set of indicators. Indicators that are regularly used in measuring

business performance are the following: (1) profit, (2) return on investment (ROI), (3)

turnover or number of customers (Wood 2006), (4) design quality and product

improvement (Laura et al.., 1996). It remains that maximizing business profit is one of

the main goals of businesses, profit as one of the most commonly used business

performance measure. However, in consideration with the definition of performance, and

it’s not the only way performance can be measured. The following are some of the

definitions of Business performance:

Colase B. (2009:53) provided a complete definition of performance. In his

perspective, Growth, profitability, return, productivity, efficiency and competitiveness

are the various notions covering performance. According to Smith and Reece (1999), the

general definition of performance is the ability to operate in order to satisfy the desired

goal of a company’s major shareholders and it must be able to evaluate and measure the

accomplishments of the organization. Furthermore, N. Albut and & Albu C. (2005)

26
defined performance in reference with other concepts, such as, performance as means to

accomplish strategic objectives, as an economic concept, the creation of wealth and value

of a business and as an unstable balance between efficiency and effectiveness. In relation

with business activity, performance is the competitiveness of an economic entity to

assure a sustainable presence on the market by reaching a level of efficiency and

productivity. (Niculescu M. & Lavalette G.,1999)

Verboncu I. & Zalman M. (2005:64) further defined performance as a result,

coming particularly from Management, Economics, Markeing, etc. Performance is the

achievement of all the goals that must be informed and communicated to all the parties

throughout the business. Furthermore, it reflects the accomplishments of the business

goals reflected by the financial indicators (Whitmore 1997). International Financial

Reporting Standards (IFRS) noted that the frequently used measure of performance is

profit, as such, profitability investment or profit per share are references for other

performance indicators. (Framework for the Preparation and Presentation of Financial

Statements par. 69)

Based on the above stated, in conclusion, performance can be measured in

different perspectives, as Verboncu and Zalman defined performance. It could be

measured using the Accounting Perspective (David Otley), Marketing Perspective (Bruce

Clark) and the Operations Perspective (Neely, A. and Austin R.). Measurement of

performance in terms of accounting has been the traditional foundation of approaching

performance quantitatively. As such, arguably, there are about three functions of

measuring performance using financial measures. Firstly, it concerns the efficient

27
provision of financial resources in supporting the broader goals of the organization, and

to also effectively and efficiently manage the finance function operation. Secondly,

Finance performance is one of the major objectives in every business organization.

Lastly, it is a form of motivation and control in the business. The financial information

provides an overview of particular operations managed in the business.

The business performance is measured by calculating gross and operating profits.

However, for performance to be reliably measured and compared, the peso amount of

profits is not enough. In gathering the information regarding profit, there will be a huge

gap on the range of income and certain outliers. In order for the performance of the

companies to be compared, net profit margin should be computed by dividing net income

by gross sales. As stated in the website Investopedia, since net profit margin is presented

in percentage rather than the peso amount, it would now be possible to compare the

profitability of different companies without any regard to their size. According to the

article entitled “Gross Margins for Remodeling in the Construction Industry” created by

Stefan (2016), the average gross margin for construction industry is 19 to 20 percent. The

suggested gross margin for an all-around construction company is from 21 to 42 percent.

G. Relationship of Inventory Management and Business Performance

Vedran Capkun (2009) mentioned in his article titled “Inventory Management and

Financial Performance” that there is a positive relationship between inventory

28
management and performance of the business. In the research study conducted by Altan,

M. and Sekeroglu, G.(2014), it is determined that there is a relationship between

inventory management and profitability. According to the results, the more inventories by

the firms converted into money, the more profitability ratios included in analysis. In other

words, if the firms sustain their inventory management policies effectively, they increase

their profits. Abdulraheem et al. (2011) on a narrower study on inventory management in

small business finance sought to determine the impact of inventory management on

selected small businesses in Kwara State, Nigeria. From the analysis of their data on

selected small businesses, they tested the relationship between inventory management

and performance-based profitability of the selected small businesses. The findings

reported a positive relationship between inventory level and profitability of small

businesses wherein the profitability of small businesses increased with the employment

of effective inventory management. This finding agreed with the discovery of

Grablowsky (1976) about the existence of a significant relationship between various

success measures and the adoption of inventory management policies. Abdulraheem et al.

(2011) thus concluded that small businesses were likely to generate higher profit if they

put an effective inventory management system in place. In a related study on the impact

of inventory management on the performance of Malaysian construction firms, Sahari, S.

Tinggi, M. and Kadri, N. (2012) observed that managers act rationally in managing their

inventory efficiently if they are convinced that the practice enhances firm performance.

Their finding was that inventory management was positively correlated with firm

performance and that there was a positive relationship between inventory management

29
and capital intensity. Mathuva (2009) also observed a positive relationship between

inventory management and corporate profitability by using 30 listed firms in NSE.

Kwadwo Boateng Prempeh (2015) mentioned in his study measured the effect of raw

materials inventory management of the manufacturing firms in Ghana and it is revealed

that managing inventory properly has a significant and positive impact on the profitability

of the business. According to Mahidin et al.(2015),an effective inventory management

improves the firm’s total performance through matching inventory management practices

and a competitive advantages especially now that most organizations operates in a more

competitive industries or sectors all over the world. Additionally according to Mahidin et

al.(2015), an effective inventory management improves the firm’s total performance

through matching inventory management practices and a competitive advantages

especially now that most organizations operates in a more competitive industries or

sectors all over the world. Consistent with the claims mentioned, the study of Prempeh,

K. et al, measuring the effect of raw materials inventory management of the

manufacturing firms in Ghana revealed that managing inventory properly has a

significant and positive impact on the profitability of the business.

However, Gaur et. al (2005) in their study of they presented a contrasting result.

They analyzed inventory turnover performance in the retail industry in view of the

correlation of inventory turnover with gross margin. They developed several empirical

models to test and strengthen their hypotheses and reported that inventory turnover was

negatively correlated with the gross margin. They found that inventory turnover in the

retailing industry declined from 1985-2000. Gaur and Kesavan (2014) further extend

30
(Monczka, Handfield, Giunipero, Patterson, & Waters, 2010) the study and retested the

hypothesis made by Gaur et al. (2005) with a larger and recent data set and further

obtained consistent results with the earlier study, stating that inventory turnover was

negatively correlated with gross margin.

31
 Chapter III

FRAMEWORK OF THE STUDY

A. Theoretical Framework

Inventory is the storage of goods to meet demand. However, inventory is also

undesirable since costs such as carrying and holding cost comes with it, thus, it is with

this paradox that Inventory Management becomes a challenging problem. (Vrat, Prem

2014)

Inventory management practices are those used to manage the inventory through

consolidating, tracking, analyzation and reporting when there’s inventory shrinkage or

surplus. Moreover, inventory management is not just confined within a warehouse, rather

it is effective in simplifying cumbersome tasks to avoid nuisances and rather boosts

business performance. Also, effective inventory management would be established as far

as the maintenance, fixing and operations of equipment are involved. (Muhayimana,

2015)

According to Grad Kastav (2014), Optimal management of inventory results in

maximization of the business’s rate of return and minimization of business liquidity and

business risk and effective inventory Management helps in minimizing the inventory as
well as the lowering of costs which further results in the improvement in business

profitability.

In the study conducted by Naomi Gitau (2016), inventory management practices

is categorized into three: Inventory Management System, Strategic Supplier Partnership

and Information Communication [Link] of the three Inventory Management

practices, the results showed that two of the Inventory management practices, namely,

Strategic Supplier Partnership and Information Communication Technology is negatively

related to operation performance.

However, the study concluded that Inventory Management System is significantly

related to operational performance. The study analysis regressed inventory management

practices against operational performance, which resulted to the findings that 23% of

operational performance variation can be explained using variations in inventory

management practices.

In another study, a hypothesis that Inventory policy has no significant relationship

with business profitability has been established and rejected, the results explained

otherwise. The study provided proof that there is significant relationship between

inventory policies and business profitability through COGS (Cost of Goods sold) using

proper inventory management.

Furthermore, the findings indicate business efficiency since the business

profitability improved through Inventory management and control. Moreover, the study

result shows that inventory management and business growth and profitability have a

positive relationship. (Onikoyi, et al. 2017)

 Another study by Prempeh proved that there is a significant effect of inventory

management on business profitability of manufacturing firms. The results of the study

concluded that raw materials inventory management plays a major part on proving the

significantly positive relationship between Inventory Management and profitability of

manufacturing firms.

Figure 2. Relationship of Inventory Management on Profitability and Operating Cash

Flows (The Effect of Inventory Management on Firm Profitability and Operating Cash

Flows of Kenya Breweries Limited, beer distribution firms in Nairobi country, Mwangi)

L. 2016)

Furthermore, most of an organization’s asset is comprised mostly of the inventory

it holds. Most investments are delegated to purchasing inventory, accordingly, it becomes

important to most organization to manage stocks properly by providing a good inventory

management system. A negative effect on an organization’s profitability takes place

when the management inventory system of the organization is poor. Therefore, managing

Inventory has great effects on the overall performance of an organization. (Nzuza 2015)

High Level of Inventory Management

Practices = High Level of Organizational
Performance

High Level of Competitive advantage =

High Level of Organizational Performance

High Level of Inventory

Management = High Level
of Competitive Advantage

Figure 1. Relationship of inventory management and organizational performance and

competitive advantage (The impact of inventory management practice on firms’

competitiveness and organizational performance: empirical evidence from micro and

small enterprises in Ethiopia, Atnafu D., & Balda A. 2018)

Inventory Management Practices are used to manage inventory through

consolidating, tracking, analyzation and reporting when there’s inventory shrinkage or

surplus. Moreover, Inventory Management is not just confined within a warehouse, rather

it is effective in simplifying cumbersome tasks to avoid nuisances and rather boosts

business performance. Also, Effective Inventory Management would be established as far

as the maintenance, fixing and operations of equipment are involved. (Muhayimana,

2015)

This study is anchored on the different Inventory Management theories and

practices, such as, Economic Order Quantity, Two-Bin System, and FIFO method. Some

factors that are also important in the study is the reorder point and lead time.

The Economic Order Quantity (EOQ) was developed by Harris, Ford (1913).

Furthermore, it was defined as the quantity ordered which minimizes the cost between the

holding and reorder cost. (Dervitsiotis 1981, Monks 1996, et al.) According to Ziukov

(2015), It is used to determine the best size to order inventory as to which the ordering

and handling costs are minimized.

Reorder Point is the point where the product needs to be placed an order when

the remaining product units fall below a specific number of units. One of the

considerations for the reorder point is the lead time, this is the gap between the order

point and the delivery time, the number of days the product has been ordered before the

product is received. (Gonzales, Jose, et al. 2010)

According to Grad Kastav (2014), optimal management of Inventory results in

maximization of the business’s rate of return and minimization of business liquidity and

business risk. Effective Inventory Management helps in minimizing the inventory as well

as the lowering of costs which further results in the improvement in business profitability.

The First-in, First-out (FIFO) method assumes that the goods first purchased are

goods first sold. This method helps avoid deterioration and expiration of manufactured

product with known expiration date. FIFO method is known to reduce the impact of
Inflation with the assumption of that the Inflation is constant, wherein the inventory first

used is sold at lower of the retail price from inventory first purchased since the expense

of direct materials is recorded at the purchase price of items sold which is lower than the

current market price expense recorded. Furthermore, FIFO ensures that the ending

balance of inventory reflects the current market prices of the inventory since item first

purchased is item first sold. (Johnsons J., 2016)

Two Bin Inventory control is used to determine the point in which the items

should be replenished. It is used to control the quantity of items to minimize cost. The

first bin contains the items to be sold while the second bin is the safety stock for when the

first bin is fully sold, the second bin is then placed to be sold.

B. Conceptual Framework

Inventory management places an important role in manufacturing and

merchandising businesses. Knowing that inventory is an asset to every business, it can

also be a liability depending on how it is managed by the company. The hardware

industry is one among the businesses that has a complicated inventory management

practice due to its vast selection of products. They purchase variety of products from

household hardware to construction supplies in large volume and sell it either wholesale

or retail. Given the complexity of this industry, proper management of inventory is

required since it places an important role in business operation. Excessive amount of

inventory is not good, so as too little that may disrupt business operation that may cause
poor customer service. Poor levels of customer satisfaction will now greatly affect the

profitability of the business. In order to emphasize the importance of inventory

management, this study will evaluate the impact of inventory management practices of

hardware stores on business performance.

Business Profile
Inventory
 Type of Ownership Management
 Number of years in Practices
operation Business
Performance
 Number of Employees  Purchasing
 Capitalization  Storage
 Average Income  Selling
 Net Profit Margin

Figure 3. Conceptual Framework

To examine the statement of the problem outlined in the introduction, a

conceptual framework is made to serve as a representation of the process undertaken in

determining the inventory management practices presently used by the hardware stores in

Naga City through its bases (the business profile and the inventory management factors)

to evaluate its level of performance based on its net profit margin.

 First, the study identified the business profile of the hardware stores in terms of

types of ownership, number of years in operation, number of employees, capitalization,

actual or estimated annual net income and gross sales. This can be done by conducting an

interview with the owner and providing survey questionnaire. The measurement for

business performance is net profit margin. This will be computed by dividing each

individual annual net income.

With the data gathered, this the inventory management practices in hardware

stores is determined specifically on to what extent that they practice methods of

purchasing, storage, and selling inventories. These practices are associated with different

inventory management methods and techniques such as FIFO method, Two-Bin System,

Reorder Point, Economic Order Quantity, and ABC analysis.

With the thorough analysis of the variables, the research will present and

summarize the impact of the inventory management practices on the performance of the

hardware stores by correlating the inventory management practices used and the net

profit margin. After getting the correlation coefficient, the relationship will be analyzed

and interpreted.
 C. Definition of Terms

These terms that will be used in this study are defined to serve as a guidance for

the researchers and other interested parties.

1. Inventory- These are goods that are products or acquired for the purpose of

selling. In this study, inventory pertains to hardware materials for sale.

Hardware materials are tools, machineries, and durable equipment mainly

used for building and maintenance.

2. Hardware Store- This is a shop that sells tools, articles, equipment etc. that

are used for building, home improvements, gardening and many more. The

store may be a manufacturer, retailer, or wholesaler of hardware materials. In

this study, a hardware store would only refer to retailer or wholesaler of

hardware materials

3. Inventory Management- This pertains to the supervision of the flow of goods

until the point of sale. In this study, the management of inventory is divided

into three practices namely: Purchasing, Storage, and Selling.

4. Supplier- This refers to a person or a company that provides another

company or a person good and services. In this study, a supplier pertains to

another hardware company that sells hardware materials to another business

of the same nature. The hardware goods may come from a manufacturer of

hardware materials or a retailer or wholesaler.

5. Lead Time- This refers to a time it takes for a supplier to deliver the goods

once an order is made. It is also a time until the opportunity to reorder the

products arises. In the study, the specific lead time used is called a “material

lead time” which is applicable for ordering products as a retail firm.

6. First in, First Out Method- It is an assumption that goods purchased or

acquired first are also the goods that are sold first.

7. Last in, First Out Method- It is an assumption that the goods purchased or

acquired last are the goods that are sold first.

8. Two-Bin System- This pertains to an inventory control system where it is

used to determine when the inventory should be replenished. This is usually

used for small or low valued items. In the study, Two-Bin System is referred

to be divided into two batches of inventory. If first batch has been sold

completely, the second batch is put out for selling while the first batch is in

the process of purchasing and order.

9. Reorder point- This refers to the level of inventory that triggers the company

to take action by replenishing the inventory.

10. Economic Order Quantity- This pertains to the order quantity that

minimizes the total holding and ordering costs.

11. ABC analysis- This refers to an analysis that inventories should be grouped

into three categories all in order according to their value and importance. In

the study, the ABC analysis is the practice of segregating products into two

categories which are according to demand and according to product costs.

12. Profit Margin- This refers to a percentage of revenue after deducting all the

expenses. The profit margin in this study will be the means of determining the

relationship of performance and inventory management. Profit margin is used

in order to close the gap of micro, small, medium, and large businesses. The

formula of profit margin is net income divided by the total sales multiplied by

100.

13. Business Performance- This refers to a measure of how well a company is

able to generate revenues through their operation. In this study, performance

is measured based on the profit margin of hardware businesses. This is also

used to evaluate its relationship with inventory management practices.

 Chapter IV

METHODOLOGY

This chapter discusses the procedures and method that will be used by the

researchers to gather relevant data and information. The researchers will conduct

interviews and distribute questionnaires as primary sources of data. As secondary data,

the researchers will gather information from books, journals, and recent published

researches.

A. Research Design

Descriptive method of research will be employed in this study to facilitate the

data gathering and analysis through the information that will be obtained from the

interviews and responses from the questionnaires that will be given to hardware

businesses residing in Naga City. The researchers will use the interview method and

questionnaire method. These methods will be used to determine the impact of inventory

management practices on the performance of hardware stores in Naga City.

The survey questionnaire will contain two sections which are designed to identify

the business profile of hardware stores and their extent of use of inventory management

practices in their normal operation. The data resulting from the answers of the
respondents will be used to statistically measure the relationship of inventory

management practices and performance, particularly the net profit margin.

B. Respondents of the Study

This study will focus on the established hardware stores operating in Naga City

and are registered in list of Naga City’s Office of the City Treasurer as of 2018.

According to the official list of the City Treasurer, there are a total of 67 hardware stores

operating within Naga city. Out of the 67 population, 1 store has closed down, 2 stores

had not been located and was believed to have relocated, and 3 stores were newly

opened. Responses from newly opened stores would not have been significant and would

be unsuited for comparisons since this study measures the performance of the business in

terms of its profit margin per year. The official potential respondents are 61 in total but

only 24 respondents had participated. The questionnaire will be answered by a manager,

owner, or an accountant of the store.

C. Research Instrument

The researchers will conduct interviews and distribute questionnaires as primary

sources to gather relevant information. Books, articles, websites, and related researches

will serve as secondary sources. The survey questionnaire consists of 2 pages constructed
by the researchers. The first page contains questions that will identify the business profile

of the hardware store while the second page contains a 4-point Likert scale questionnaire

that will rate their extent of use of inventory management practices used in their

operations. The responses would be 1 as “Never,” 2 as “Seldom,” 3 as “Often,” and 4 as

“Always.”

D. Data Gathering Procedure

The researchers coordinated with Department of Trade and Industry and the City

Treasurer’s Office based in Naga City in determining the total number of established

hardware stores operating in Naga City and their basic business information, such as

address, name of the owner, and contact information. To test the legibility or

understandability of the questionnaires and to gain some suggestions for the

questionnaire, the researchers sought out 20 test respondents who are familiar with

inventory management and Accounting overall. Afterwards, the researchers will

distribute the questionnaires to hardware stores in Naga City and will assure the owners

and managers that the information given by them will be treated with utmost

confidentiality. The researchers will also be guiding the respondents regarding the

questions in the survey during the distribution of the questionnaire.

E. Statistical Treatment of Data

 The responses on the questionnaire will be statistically analyzed with the data

requirements of the study. Descriptive statistics such as frequency count, percent, and

rank are considered. The level of each variable will be determined with Likert Scale and

the relationship of inventory management practices and performance of the business will

be measured using the Pearson Correlation. After all the statistical data have been

gathered, they will be interpreted using descriptive method. There are three objectives in

gaining data. The first objective is to identify the business profile of hardware stores.

Tallying, frequency count, and percentage will be used to present the data for business

profile. Also, in order to get the data for profit margin of each business, net income will

be divided by gross sales. The second objective is to determine the extent of use of

inventory management practices of the stores by tallying and obtaining the weighted

mean for the three practices with 6 questions each in the survey. The third objective is to

analyze the performance of the business by ranking each net profit margin with 1 as the

lowest rank and 4 as the highest rank. The rank of each profit margins will be correlated

with the weighted mean of the inventory management practices using Pearson Product

Moment Correlation in order to get the correlation coefficient. The correlation

coefficient, 4-point Likert scale, and the net profit margin will be interpreted based on the

figures presented below:

The level of performance of a company is determined based on the rank of the net

profit margin with corresponding interpretations. The level of performance was based on

the article of Stefan (2016) regarding some discussions about gross margins for

construction industry which stated that the average profit margin is from 19 to 20 percent.
 Profit Margin Interpretation
Less than 10% Low Performance
10% - 20% Moderate Performance
21% - 30% High Performance
More than 30% Very High Performance

The satisfaction level for the extent of use of inventory management practice is

interpreted based on the scale of the weighted mean.

Mean Response Interpretation

1.00 to 1.75 Never Not Satisfactory
1.76 to 2.50 Seldom Less than Satisfactory
2.60 to 3.25 Often Satisfactory
3.26 to 4.00 Always Very Satisfactory

The strength of the relationship is determined based on the scale of the correlation

coefficient. Cohen’s kappa is used as the basis for interpretation.

Correlation Coefficient Interpretation

0.00 No relationship
0.01-0.19 Very weak relationship
0.20-0.39 Weak relationship
0.40-0.59 Moderate relationship
0.60-0.79 Strong relationship
0.80-0.99 Very strong relationship
1.00 Perfect relationship
 Chapter V

RESULTS AND DISCUSSIONS

This chapter presents the findings, analysis, and discussions on the impact of

inventory management on the performance of hardware stores in Naga City. The data in

this chapter were derived from the survey questionnaires conducted by the researchers to

answer the problems stated in the first chapter.

A. Business Profile of Hardware Stores

The business profile of hardware stores were identified according to its type of

business ownership, the number of employees, its number of years in business operation,

capitalization, annual net income, and profit margin. The identification of business profile

were have corresponding choices for answers except for annual net income and annual

gross sales in which the answers were given in actual or estimate peso amount.

Table 1. Business profile of hardware stores

Type of Business Ownership f %

Sole Proprietorship 22 92%
Partnership 0 0%
Corporation 2 8%
Total 24 100%
Number of Employees
Not more than 9 workers 13 54%

48
10-99 workers 11 46%
100-199 workers 0 0%
200 or more 0 0%
Total 24 100%
Number of years in Business Operation
Less than 2 years 0 0%
2-5 years 8 33%
6-10 years 4 17%
More than 10 years 12 50%
Total 24 100%
Capitalization
3,000,000 or less 13 54%
3,000,001 to 15,000,000 10 42%
15,000,001 to 100,000,000 1 4%
More than 100,000,000 0 0%
Total 24 100%
Annual Net Income
350,000 to 2,677,999 12 50%
2,678,000 to 5,005,999 5 21%
5,006,000 to 7,333,999 2 8%
7,334,000 to 9,661,999 2 8%
9,662,000 to 12,000,000 3 13%
Total 24 100%
Profit Margin
Less than 10% 2 8%
10% - 20% 11 46%
21% - 30% 4 17%
More than 30% 7 29%
Total 24 100%

49
 Business ownership is divided into three parts namely: sole proprietorship,

partnership, and corporation. It is evident that majority of the stores who participated in

the research are sole proprietorship businesses comprising 92% of the respondents. There

were no partnership businesses among the respondents. The remaining 8% are

corporations.

In terms of number of employees, majority of the respondents have less than 9

workers employed in their store. Sole proprietorship type of business would usually

remain as a small business by general observation, and small business only require a

minimum number of employees working in the store. There are 54% of the respondents

with less than 9 workers while the remaining respondents have a range 10 to 99 workers.

None of the respondents have more than 100 workers since large business are excluded in

the research.

The respondents’ number of years of operation is also included in their business

profile. Majority of the respondents with percentage of 50% are already operating for

more than 10 years. Eight or 33% of the respondents are operating for 2 to 5 years while

the remaining 17% are already operating for 10 years. Some hardware stores registered in

the list of the city treasurer were operating for less than a year, therefore excluded in the

targeted respondents.

50
 Capitalization is divided into four in order to measure the business size of the

respondents. Majority of the respondents with a percentage of 54% are micro sized

businesses. Ten respondents or 42% are small businesses while only 1 respondent is a

medium sized business. As for the annual net income, the range is divided into five. Since

majority of the respondents are micro sized, most of the respondents or a percentage 50%

fall under the net income range of P 350,000 to 2,677,999 while the 12 remaining

respondents were divided on to the higher range of annual net income. The range of the

net income is divided into 5 instead of a lesser number since there is a large gap between

businesses regarding their annual net income. The estimated peso amount gap between

each range is P 2,330,000 which is achieved by deducting the highest peso amount of net

income 12,000,000 with the lowest 350,000 and the difference was divided by 5.

Profit margin is computed by dividing net income by gross sales. The result

would be presented in percentage rather than in peso amount. Profit margin is divided

into a 4 point Likert scale with less than 10% profit margin indicating a “Low

Performance,” a range of 10% to 20% indicating “Moderate Performance,” 20% to 30%

indicating “High Performance,” while more than 30% indicates a “Very High

Performance.” Majority of the respondents with a percentage of 46% has a moderate

performance in their profit margin, while only 8% of the respondents has a very low

performance.

51
 B. Extent of Use of Inventory Management Practice

The extent of use of inventory management practice were identified according to

the store’s purchasing, storage, and selling practices, and each practices were divided into

six questions. A 4-point Likert scale was used to determine the extent of use per practice

with 1 point as the least practiced and 4 point as the most practiced. Afterwards, the

extent of use of the three practices were measured using weighted mean and interpreted

according to the legend given in chapter 4 of the research.

Table 2. Extent of Use of Inventory Management Practices

Areas of Inventory Management Weighted Interpretation

Mean
Purchasing 3.54 Very Satisfactory
Storage 3.20 Satisfactory
Selling 3.51 Very Satisfactory
Average Weighted Mean 3.41 Very Satisfactory

Presented in table 2 are the three practices of inventory management and their

corresponding weighted mean and interpretation. The numbers given serve as the

measurements for the extent of use of inventory management practices of hardware stores

in Naga City. The practices were measured through the use of a 4 point Likert scale; 1 as

the lowest with a response labeled as “Never,” 2 as “Seldom,” 3 as “Often,” while 4 as

the highest labeled as “Always.” The weighted mean is computed individually using the

52
Likert data. Purchasing with a weighted mean of 3.54 has the highest extent of use of

inventory management interpreted as “Very Satisfactory,” Selling practices coming

second with a weighted mean of 3.51 of the same interpretation. The storage practice, on

the other hand, has the lowest extent of use with a weighted mean of 3.20 labeled as

“Satisfactory.” The overall average weighted mean for the three practices is 3.41,

interpreted as “Very Satisfactory.” The responses for the questions, as seen in the

questionnaire, under the three practices were computed with their own weighted mean.

Each practices has six questions under them and they will serve as a reliable

measurement for inventory management. The individual weighted mean for each

questions can be seen in appendix D section of this study.

The first practice under the purchasing, pertaining to purchasing products from

suppliers that offer low prices, has the highest weighted mean of 3.67. Entrepreneurs

would naturally go for purchasing inventories with low costs in order to make their own

businesses more profitable. Although, given the natural urges of entrepreneurs, the

weighted mean for the first question is not a ‘perfect’ 4. This is because, while gathering

data, some managers of hardware stores prefer purchasing products that are of high

quality with an expensive cost as part of their selling strategies. In appendix D,

purchasing products of high quality has a mean of 3.63 which comes second.

On the other hand, the one with the lowest weighted mean of 3.33 is the last

indicator of purchasing which is “ordering products in a quantity that minimizes total

costs.” This particular practice defines the Economic Order Quantity technique, a method

commonly used in inventory management. Though this question has the lowest number,

53
it still implies that they are used to a large extent by hardware businesses with an

interpretation of “Very Satisfactory.” This is consistent with those of Lee (2002). It is

important that hardware stores should focus more on adapting EOQ method in their

operations. According to Lee, Economic Order Quantity technique is commonly used by

organizations since it is efficient in enabling a firm to understand when to order and how

much to order. Sukhia [Link]. (2014) also added that the EOQ method will prevent

overstocking, understocking, and losses since its formula requires the predicted demand.

Jayathunga (2009) also mentioned that owners require detailed information about

purchasing volume made from suppliers in order to manage a business efficiently. The

responsibility involved in purchasing is to buy materials of the right quality, in the right

quantity, at the right time, price and source which clearly defines the Economic Order

Quantity technique. Dr. Kumar (2016) and Lee Roux and Lotter (2003) also define EOQ

in the same way and agree that the EOQ model is beneficial to businesses.

The second to the lowest mean of 3.38 is the indicator of purchasing practice

which considers delivery time as a central issue in ordering products. This indicator

describes the “Lead Time” factor in purchasing. According to Vermorel (2014), lead time

is supply delay plus reordering delay. In an Investopedia article, having a poor lead time

management can greatly affect inventory because improper management of this will

result to stock-outs. Stock-outs will have a large impact on customer demand and lowers

customer loyalty and satisfaction. A lower customer satisfaction would result to lower

business performance or profitability. Additionally, in the study of Bicheno (2004), lead

time condensation is one of the objectives or goals of a strategic supplier partnership.

54
 For storage practices, its overall weighted mean is 3.20 and is particularly low

compared to purchasing and selling. This is interpreted as a “Satisfactory” level only. The

respondents are evidently not too concerned with storage practices as part of their

management of inventory. Given the complexity of the hardware industry, storage

practice is crucial to gain inventory visibility to improve profitability.

Among the six questions, the highest weighted mean of 3.50 with an

interpretation of “Very Satisfactory” is “Expensive products are stored in a more secured

area.” Storing expensive products would avoid the possibility of theft and huge losses.

Putting cheap products out for display in a less secured area will only incur a company

very small losses but putting out expensive products in the same less secured area will

incur huge losses. A separate area should be mandatory for hardware businesses and yet

the weighted mean is only 3.50. The primary cause is that small hardware businesses,

which is the majority of the study’s respondents, do not have enough financial capacity in

investing on another property solely for the purpose of storage.

The indicator with the lowest weighted mean of 2.88 interpreted as “Satisfactory”

is “Products are stored into two batches – if one batch is completely sold, the other batch

is put out for selling.” This particular question defines the Two-Bin method in inventory

management. According to the journal of Pons (2010), the Two Bin inventory control is

most suitable for items that are small or low in value. Hardware stores offer products of

the same value such as nails, screws, etc. If these businesses adapt the Two Bin method,

they may gain more profit from low valued items. In the article of Gupta, one of the

advantages of practicing the Two-Bin method is that it allows the company to have a

55
more effective control over their inventory. Chaneski (2002) emphasized this method as a

cheap and easy alternative for complex computerized inventory systems. Considering that

majority of the respondents are micro or small sized businesses – and they are less

inclined to computerized inventory systems due to expensive costs, Two-Bin method is

the most suitable for their business operations. However based on the results, this is,

unfortunately, less focused by hardware stores in practice.

In terms of selling, its weighted mean is 3.51 with an interpretation of “Very

Satisfactory.” The selling practice comes in second with purchasing on the mainly

focused practice in their business operation. Given that the hardware industry is very

competitive in Naga City, entrepreneurs would put a lot of effort in their selling strategy

than on their storage practices, hoping it could gain customer loyalty through value added

services.

The highest weighted mean of 3.83 interpreted as “Very Satisfactory” is the

question “Provide value added services to customers to increase sales.” According to

Ashe-Edmunds (2017), value-added services are supplementary products offered to

customers. And added Shmenner (2009), value added services makes the relationship

between the customers and retailer better, and there’s a higher chance of customer

satisfaction in fulfilling the customer’s needs. Maussang [Link] (2009) also confirms that

value added products and services are recognized by most as essential for successful

business. On the other hand, the question with the lowest mean of 3.33 interpreted as

“Very Satisfactory” is “Encourage volume purchases from customers as part of its

marketing strategies.” Encouraging volume purchases from customers would require the

56
entrepreneur to offer a discounter price for the volume sales. With a higher discount

comes with a higher level of customer satisfaction. This is still consistent with Ashe-

Edmund’s (2017) description of value-added services. When products are offered free, it

builds good will, however when products are offered for a discounted price, it increases

revenue significantly. These discounted prices are usually called wholesale prices.

Customers purchasing in wholesale with a business would usually imply that a business

has gain the loyalty of those customers, thus the store can gain more revenue

1. Relationship of Inventory Management Practices and Business Performance

The relationship of inventory management practices and business performance

were measured using the Pearson Correlation Coefficient formula. Purchasing, storage,

and selling practices have their individual correlation coefficient with business

performance and the overall correlation for the whole three practices was also computed.

Their correlation coefficient were interpreted based on the legend stated in chapter 4.

Table 3. Correlation of Inventory Management Practices and Profit Margin

Correlation Coefficient with Profit

Interpretation
Variables Margin
Purchasing 0.40 Moderate Relationship
Storage 0.65 Strong Relationship
Selling 0.43 Moderate Relationship
Overall
Correlation 0.65 Strong Relationship

57
 Table 3 shows the relationship between each individual inventory management

practices with profit margin as well as the overall correlation coefficient of inventory

management paired with the profit margin. The independent variables in the study are the

inventory management practices while the dependent variable is the net profit margin.

The Investopedia website emphasized the importance of expressing profit margin as

percentage. Profit margin gives the possibility of comparing the profitability of various

companies despite their different business sizes. Therefore, to reliably measure the

relationship between inventory management and performance, profit margin is used

rather than the net income that is presented in peso amount. Similar to inventory

management practices, profit margin is measured with a 4 point Likert scale. Less than

10% profit margin indicates “Low Performance,” a range of 10% to 20% is “Moderate

Performance,” 20% to 30% is “High Performance,” while more than 30% is “Very High

Performance.” The table for the frequency of profit margin can be found on the table 1.1.

The average weighted mean of profit margin is 3.

Correlating inventory management with performance requires the average

weighted mean of the three practices and the weighted mean of the profit margin. There

is also a computed correlation individually for the weighted mean of each practices

paired with profit margin. Purchasing practice with a weighted mean of 3.54 based on

table 2 has a correlation coefficient of 0.40 with the profit margin; the coefficient 0.40 is

interpreted as a “Moderate Relationship”. Storage practice with a weighted mean of 3.20

has a correlation coefficient of 0.65 interpreted as “Strong Relationship.” It must be taken

note that with storage practice with the lowest weighted mean compared to the other two

58
practices has significantly the highest impact on performance. If these hardware stores

would engage in improving their storage practices, they may have a higher income

compared to what they have at present. Selling practice with a weighted mean of 3.51 has

a correlation coefficient of 0.43 indicating “Moderate Relationship.” The overall

correlation of inventory management practices and profit margin is 0.65 indicating that

they have a strong positive relationship. This is in accordance with the article of Capkun

and Weiss (2009) in which he stated that there is a positive relationship between

inventory management and performance of the business. Altan and Sekeroglu (2014) also

confirms that inventory management can increase company profits as long as the firm

sustains their inventory management policies effectively. Abdulraheem [Link]. (2011)

conducted a narrower study focusing on small businesses. It was found that inventory

management of smaller businesses also have a positive impact on business profitability.

Several other studies of authors Mathuva (2009), Mahidin (2015), Prempeh (2015) and

Onikoyi (2017) also concluded that there is a positive relationship between inventory

management and business performance. There are several studies resulted in a negative

relationship of inventory management and performance that do not apply in this study.

These are the studies of Gaur [Link] (2005), Gaur and Kesavan (2014), and Monczka [Link]

(2010).

59
 Chapter VI
SUMMARY, CONCLUSIONS AND RECOMMENDATIONS

This chapter summarizes the findings, presents the conclusions and provides

feasible recommendations for a more effective and efficient inventory management

practices that would help hardware stores enhance their business performance.

The main objective of this study is to determine the impact of inventory

management in the business performance. In general, the goal of this study is to

determine and recommend effective inventory management practices to hardware stores

in Naga City to maximize their business performance.

This study specifically sought answers to (1) the Business Profile of Hardware

stores in Naga City along: (a) Type of Business Ownership, (b) Number of employees,

(c) Number of years in business operation, (d) Initial capitalization and (e) Annual net

income; (2) the extent of use of inventory management practices by the Hardware stores;

(3) the relationship between inventory management practices and performance of

business.

A. Summary of Findings

1. Business profile of hardware store in Naga City

 Majority of the respondents are sole proprietors consisting of 92% of the

respondents while the remaining 8% are classified as corporations.

60
 For the number of employees, 54% of the respondents employ not more than 9

employees for their business while 46% have an employee of 10-99 workers.

 Fifty percent of the hardware stores are operating for more than 10 years already

while 33% have been operating for 2-5 years.

 As to the capitalization, majority of the hardware stores are micro-sized business

having a capitalization of P3, 000, 000 or less.

 In terms of annual net income, 50% of the respondents have an annual net income

ranging from P350, 000- P2, 677, 999 while 13% has an annual income ranging

from P9, 662, 000-P12, 000, 000.

2. Extent of use of inventory management practices

 As to the extent of use of inventory management practices, it was generally

assessed to be Very Satisfactory. Of the three categories, Purchasing has the

highest mean average of 3.54. This means that almost all of the hardware stores

use the different practices under purchasing in a large extent.

 Purchasing products from suppliers that offer low prices with the mean of 3.67

has the highest weighted mean among the practices under the Purchasing

category.

 On the other hand, ordering products in a quantity that minimizes total costs such

as cost of holding or storing products, cost of ordering, and cost of inventory

shortages has the lowest mean of 3.33.

61
 The extent of use for Selling was also assessed as ‘Very Satisfactory’. This also

means that the practices under the Selling category provided by the researchers in

the questionnaire are being applied by almost all of the hardware stores.

 Providing added value services to customers has a mean average of 3.83 which

means that the extent of use of this practice is very satisfactory.

 Meanwhile, the practice that garnered the lowest mean average is encouraging

volume purchases from customers as part of its marketing strategies with a mean

average of 3.33.

 Among the three categories of inventory management, Storage has the lowest

mean average which is 3.20. This means that the extent of use of the practices

under this category is satisfactory.

 Storing expensive products in a more secured area has the highest mean average

of 3.5 under storage category.

 Storing products into two batches has the lowest mean average of 2.88 under the

storage category.

3. Relationship of inventory management practices on the business

performance of hardware stores in Naga City

 As to the relationship between inventory management practices and business

performance in terms of profitability, the result of the study established a positive

strong relationship between the two variables which means that an increase in the

62
 extent of use of the different inventory management practices also increases the

performance of the business.

B. Conclusion

Majority of the hardware stores in Naga City are classified as sole proprietorship

with an average employees of not more than 9 workers. Most of the hardware stores are

categorized between micro and small enterprise. Hardware stores in Naga City have been

operating for 2 to more than 10 years already which means that they have already

established their name and that the demand for hardware industry in Naga City is stable

for the past years implying the progressive advancement in infrastructure of the city.

With respect to the findings of the study, the researchers concluded that the extent

of use of the different inventory management practices are very satisfactory. The

inventory management practices provided by the researchers are used in a large extent in

their business operation. Hardware stores particularly practice purchasing products from

suppliers that offer low prices, storing expensive products in a more secured area and

providing value added service to customers in a very satisfactory extent.

The researchers also concluded that inventory management practices have a

significant impact on the performance of the business. The adoption of appropriate

inventory management techniques can improve the profitability of the business. The

results of this study further validates the claims by other studies gathered throughout this

63
research that there is a direct relationship between inventory management practices and

business performance.

C. Recommendations

Based on the result of the study and summary of findings, below are the suggested

recommendations to the following possible beneficiaries:

1. Owners/Management of Hardware Stores

1.1. This research study recommends that Hardware stores should adapt inventory

management practices since it has a significant impact to the profitability of

the business. With the present environment of keener competition and revenue

pressure, the business should manage their resources effectively and

efficiently.

1.2. Under the Purchasing practices, the researchers recommend the owners and

managers to acquaint themselves with the different costs associated with

ordering their products. They should always keep the total cost in a minimal

level when purchasing their products.

1.3. To continue their practice of purchasing their products from suppliers that

offer low prices and at the same time with good quality.

1.4. To maintain their practice of establishing minimum stocks in their store.

1.5. To improve their practice on ordering products in a quantity that minimizes

total costs since it was established in this study that it will help them improve

their performance.

64
1.6. Under the Storage practices, the researchers recommend to put more effort

and focus on the storage practices since the study identified that has it the

most impact on the profitability of their business but it has the least extent of

use among the three categories of inventory management practices.

1.7. To minimize the costs associated with storing the inventories so that they can

take full advantage of their revenue.

1.8. To continue conducting physical inventory count annually and storing

expensive in a more secured area.

1.9. For the medium sized businesses, to apply the Two Bin System in order for

them to have a more effective control over their inventories.

1.10. Under the Selling practices, to continue providing value added services to

their customers like fast delivery and giving discounts.

1.11. To encourage volume purchases from customers as part of its marketing

strategies since this results to a higher customer satisfaction because of the

discounts given from volume purchases.

1.12. Furthermore, the researchers recommend that owners/managers of

Hardware stores should focus on developing competitive skills for inventory

management among their employees through special training programs and

workshops.

65
2. Local Government Unit of Naga

[Link] Local Government Unit of Naga should monitor the situation of hardware

stores through conducting a performance evaluation of the business.

[Link] researchers recommend that they conduct seminars, workshops and

trainings in collaboration with government agencies like Department of Trade

and Industry that will discuss and provide information on the appropriate

inventory management practices to help hardware stores in Naga City improve

in managing and conducting their business.

[Link] implement specific policies that regarding inventory management that

should be followed by the hardware stores.

3. Establishing/Starting Entrepreneurs

[Link]/ starting entrepreneurs may use this research to help them

formulate their policies regarding inventory management. Based on the result

of this research, the researchers recommend that they put an emphasis on the

storage practices for it has the most impact on the performance of the business

but still employ appropriate inventory management practices on Purchasing

and Selling for they also have a direct relationship with the performance of the

business.

[Link] researchers would also recommend starting entrepreneurs to look into

specific inventory management methods or techniques such as First in First

out method, Two-Bin System, Reorder Point, Economic Order Quantity, and

ABC analysis before pursuing a retail business such as a hardware store.

66
4. Future Researchers

[Link] researchers may use this research as a guide to further study the

relationship of inventory management and the performance of the business.

The researchers recommend that they consider other measure of performance

of the business aside from profitability like the competitive ability and

operational efficiency.

[Link] researchers also recommend that they study further the impact of specific

inventory management methods such as Economic Order Quantity, Two-Bin

method, and ABC analysis.

67
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Appendix A Letter to the City Treasurer
Office of the City Treasurer
Naga City Hall Complex
Naga City

Dear Sir/Madam:

Greetings of Peace!

We are students of Ateneo de Naga University enrolled in Business Research and

Feasibility Studies (BREM400A). As a course requirement, we are required to conduct a
research regarding a topic within the scope of accounting. Our research group has
decided to conduct a study entitled “The Impact of Inventory Management on the
Performance of Hardware Stores in Naga City.”
In view of this, our group would like to request a list of the latest registered
hardware stores operating in Naga City. We need this information to verify our chosen
respondents and ensure the validity of our research. The following are the information
that we need:
1. Name of the Hardware store
2. Address and contact number of the business
3. Owner of the store
4. Date registered / Number of years of operation
We sincerely appreciate your consideration of our request. Rest assured that all
information you will entrust to us will be kept confidential.

Sincerely,

Alisa Gabriela S. Ordas

Group Representative

Noted by:

Mr. Delfin A. Baylon, MBA, CPA

Adviser

78
Appendix B Survey Questionnaire

This is a survey questionnaire for the research entitled “The Impact of Inventory
Management on the Performance of Hardware Stores in Naga City.” The purpose of
which is to gather relevant information from the owners or managers of hardware stores
in Naga City.

Please write the answers on the spaces provided below.

Name of Business: _______________________________________

Location: ______________________________________________

Type of Business Ownership:

 Single Proprietorship
 Partnership
 Corporation

Number of Employees Gross Sales (Actual/Estimate)

 Not more than 9 workers ____________________________
 10 – 99 workers
 100 – 199 workers
 200 or more

No. of years in business operation Annual Net Income

 Less than 2 years _____________________________
 2-5 years
 6-10 years
 More than 10 years

Capitalization (Assets before financing)

 P3,000,000 or less
 P3,000,001 to P15,000,000
 P15,000,001 to P100,000,000
 More than P100,000,000

79
 Answers for the questions below will provide information regarding the inventory
managing practices of hardware stores. Please be notified that all questions pertain to
hardware products only.
Instructions: Please check the column of the rating that best describes the
inventory management practice that your business employs

1-NEVER 2-SELDOM 3-OFTEN 4-ALWAYS

1 2 3 4
1. Purchases products from suppliers that offer low prices.
2. Purchases products in volume to avail discounts.
3. Purchases products that are of high quality.
4. Purchases products based on established minimum stocks in your
store.
5. Considers the delivery time as a central issue in ordering products.
6. Practices ordering products in a quantity that minimizes total costs
such as cost of holding or storing products, cost of ordering, and cost
of inventory shortages.
7. Conducts physical inventory count at least annually
8. Segregates products according to which are the least or most
demanded.
9. Products are stored into two batches – if one batch is completely sold,
the other batch is put out for selling.
10. Temperature is considered in storing products.
11. Expensive products are stored in a more secured area.
12. Stores defective/damaged products in a separate room for
replacement by supplier.
13. Products are sold following FIFO [1] method (First In, First Out).
14. Products are checked for any damages before being sold.
15. Encourage volume purchases from customers as part of its marketing
strategies.
16. Provides added value services to customers to increase sales (ex. free
delivery, replacement of defective products, etc.)
17. The store offers a complete set of products.
18. The store provides efficient services to customers (fast delivery).

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Appendix C Survey Letter

81
Appendix D Statistical Results
1. Profile of Hardware Stores in Naga City
Types of Ownership:
Valid Cumulative
Frequency Percent
Percent Percent
Single Proprietorship 22 91.7 91.7 91.7
Valid Corporation 2 8.3 8.3 100.0
Total 24 100.0 100.0

Years of Operation:
Valid Cumulative
Frequency Percent
Percent Percent
2-5 years 8 33.3 33.3 33.3
6-10 years 4 16.7 16.7 50.0
Valid
More than 10 years 12 50.0 50.0 100.0
Total 24 100.0 100.0

Number of Employees:
Valid Cumulative
Frequency Percent
Percent Percent
Not more than 9 13 54.2 54.2 54.2
workers
Valid 10-99 workers 11 45.8 45.8 100.0
Total 24 100.0 100.0

Average Annual Net Income:

Valid Cumulative
Frequency Percent
Percent Percent
350,000 to 2,677,999 12 50.0 50.0 50.0
2,678,000 to 5,005,999 5 20.8 20.8 70.8
5,006,000 to 7,333,999 2 8.3 8.3 79.2
Valid
7,334,000 to 9,661,999 2 8.3 8.3 87.5
9,662,000 to 12,000,000 3 12.5 12.5 100.0
Total 24 100.0 100.0

2. Inventory Management Purchasing Practices Rating

82
 Criteria Weighted Mean Rank
3.67
1. Purchases products from suppliers that offer low prices (Very 1
Satisfactory)
3.58
2. Purchases products in volume to avail discounts (Very 4
Satisfactory)
3.63
3. Purchases products that are of high quality (Very 2
Satisfactory)
3.63
Purchases products based on established minimum
4. (Very 3
stocks in your store
Satisfactory)
3.38
Considers the delivery time as a central issue in ordering
5. (Very 5
products
Satisfactory)
Practices ordering products in a quantity that minimizes 3.33
6. total costs such as cost of holding or storing products, (Very 6
cost of ordering, and cost of inventory shortages Satisfactory)
Average Weighted Mean 3.53

1. Purchases products from suppliers that offer low prices

N Valid 24
Missing 0
Mean 3.67
Median 4.00
Mode 4.00

2. Purchases products in volume to avail discounts

N Valid 24
Missing 0
Mean 3.58
Median 4.00
Mode 4.00

83
3. Purchases products that are of high quality
N Valid 24
Missing 0
Mean 3.63
Median 4.00
Mode 4.00

4. Purchases products based on established minimum stocks in your store

N Valid 24
Missing 0
Mean 3.63
Median 4.00
Mode 4.00

5. Considers the delivery time as a central issue in ordering products

N Valid 24
Missing 0
Mean 3.38
Median 4.00
Mode 4.00

6. Practices ordering products in a quantity that minimizes total costs such as cost of
holding or storing products, cost of ordering, and cost of inventory shortages
N Valid 24
Missing 0
Mean 3.33
Median 3.00
Mode 4.00

3. Inventory Management Selling Practices Rating

Products are sold following FIFO method (First In, First 3.50
1. 4
Out) (Very

84
 Satisfactory)
3.58
Products are checked for any damages before being
2. (Very 2
sold.
Satisfactory)
3.33
Encourage volume purchases from customers as part of
3. (Very 6
its marketing strategies
Satisfactory)
3.83
Provide added value services to customers to increase
4. (Very 1
sales
Satisfactory)
3.38
5. The store offers a complete set of products (Very 5
Satisfactory)
3.58
6. The store provides efficient services to customers (Very 3
Satisfactory)
Average Weighted Mean 3.53

1. Products are sold following FIFO method (First In, First Out)

Valid 24
N Missing 0
Mean 3.50
Median 4.00
Mode 4.00

2. Products are checked for any damages before being sold.

Valid 24
N Missing 0
Mean 3.58
Median 4.00
Mode 4.00

3. Encourage volume purchases from customers as part of its marketing strategies

85
 Valid 24
N Missing 0
Mean 3.33
Median 3.00
Mode 4.00

4. Provide added value services to customers to increase sales

Valid 24
N Missing 0
Mean 3.83
Median 4.00
Mode 4.00

5. The store offers a complete set of products

Valid 24
N Missing 0
Mean 3.38
Median 3.00
Mode 3.00

6. The store provides efficient services to customers

N Valid 24
Missing 0
Mean 3.58
Median 4.00
Mode 4.00

4. Inventory Management Storing Practices Rating

3.33
1. Conducts physical inventory count at least annually (Very 2
Satisfactory)
Segregate products according to which are the least or 3.25
2. 3
most demanded (Satisfactory)
Products are stored into two batches - if one batch is 2.88
3. 6
completely sold, the other batch is put out for selling (Satisfactory)

86
 2.92
4. Temperature is considered in storing products. 5
(Satisfactory)
3.50
5. Expensive products are stored in a more secured area (Very 1
Satisfactory)
Stores defective/damaged products in a separate room 3.25
6. 4
for replacement by supplier (Satisfactory)
Average Weighted Mean 3.19

7. Conducts physical inventory count at least annually

N Valid 24
Missing 0
Mean 3.33
Median 3.00
Mode 4.00

8. Segregate products according to which are the least or most demanded

N Valid 24
Missing 0
Mean 3.25
Median 3.00
Mode 4.00

9. Products are stored into two batches - if one batch is completely sold, the other batch
is put out for selling
N Valid 24
Missing 0
Mean 2.88
Median 3.00
Mode 4.00

10. Temperature is considered in storing products.

N Valid 24
Missing 0
Mean 2.92
Median 3.00

87
Mode 4.00

11. Expensive products are stored in a more secured area

N Valid 24
Missing 0
Mean 3.50
Median 4.00
Mode 4.00

12. Stores defective/damaged products in a separate room for replacement by supplier

N Valid 24
Missing 0
Mean 3.25
Median 3.00
Mode 4.00

88
5. Correlation between Inventory Management Practices and Profit Margin
Profit Margin
Purchasing Storing Selling
Range
4.00 3.67 3.83 4
3.33 3.00 3.67 3
3.83 3.50 4.00 4
3.83 3.17 3.00 2
3.83 3.67 3.67 3
3.00 3.50 3.50 2
3.50 3.00 3.00 4
3.67 3.33 3.00 2
2.67 2.50 4.00 1
3.83 1.67 3.00 1
3.83 3.33 3.50 2
2.33 2.17 3.17 2
3.83 3.17 3.50 4
4.00 3.67 3.83 3
3.17 4.00 3.50 4
3.33 2.50 3.00 2
3.69 3.00 3.50 2
3.50 3.17 4.00 3
3.00 2.83 3.00 2
4.00 4.00 4.00 4
4.00 3.83 4.00 4
4.00 3.33 3.50 2
3.17 3.50 3.50 2
3.50 3.33 3.50 2

Legends:
Range
1 Less than 10% Low Performance
2 10%-20% Moderate Performance
3 21%-30% High Performance
4 More than 30% Very High Performance

89