Page 11 Oeconomics of Knowledge, Volume 4, Issue 3, 3Q, Summer 2012

Inventory Management

and Its Effects on Customer Satisfaction

Mehfooz Ali, Lecturer

Management Sciences Department,
Hazara University Mansehra Pakistan

Muhammad Asif, Lecturer

Management Sciences Department
COMSATS Institute of Information Technology, Abbottabad Pakistan

Faisal Hassan, Umair Khan, Shoaib Khan, Qaisar Shahzad

Waseem Ahmed Khan, Aamir Mehmood, Abid Ali, Junaid Khan
Students of Management Sciences Department,
Hazara University Mansehra Pakistan

Abstract: This study examines how inventory management puts posi-

tive impact on customer satisfaction and how easily we can
check the performance. It also helps retailers to put their in-
ventories in proper order which tells them about demand
and supply of their inventories. Proper inventory manage-
ment system reduces the risk of short of inventories which
reduce the cost of lost customers. The objective of the study
is to minimize the risk of dissatisfaction of customers and
found how to sustain customer satisfaction with the help of
proper inventories system. This paper also outlines signifi-
cant relationship between Customer needs, Quality with vari-
Page 12 Oeconomics of Knowledge, Volume 4, Issue 3, 3Q, Summer 2012

able of prime interest. Poor association has been found be-

tween performance and customer satisfaction.

Keywords: Inventory Management, Customer Satisfaction,

KFC Company.

Introduction
Customer satisfaction entirely depends on the effective supply chain
management which is not an easy task. In past companies used to hold
large inventories to avoid shortage of inventories and to increase the cus-
tomer satisfaction however it has been observed that this “satisfaction” is
subjective to person to person, though effective inventory management
is the only way to increase customer satisfaction. This inventory caused
manufacturers to stockpile large amounts of raw materials, work in pro-
cess, and finished goods. The extra finished goods would be to protect
them from going out of stock.

Large inventories are not the preferred choice to handle the shortage
for big companies. As we know that large inventory incurs three different
types of costs i.e. holding costs, when the inventory comprises of raw
materials; work in process, or finished goods. The inventory cost, is the
range of 20 to 40 percent of annual inventory in rupees. Another varia-
bles associated with the holding cost is the opportunity cost, which com-
prises of any increase in rents due to the need for more space for inven-
tory, higher rates for insuring the inventory, and the cost of goods that
are outdated.

Atkinson said that manufacturers and retailers can incorporate tech-

nology to assist in the managing of this inventory, which is later on used
by almost all the multinational companies. This inventory management
system uses strong applications of good forecasting techniques with ef-
fective incoming and outing inventories. These systems make the inven-
Page 13 Oeconomics of Knowledge, Volume 4, Issue 3, 3Q, Summer 2012

tory management more effective and efficient. According to retail histori-

an, Robert Spector, a critical factor for retailers is that they have to have
a good inventory system. If the retailer does not have a good inventory
system, they will not be able to forecast demands with any kind of accu-
racy. This might result in them running out of stock every so often
(Levinson, 2005).

The study of customer satisfaction has shown that there could be a

disproportional relationship between cause and effect, or between a fac-
tor and its consequence on the organization. For instance, a five percent
increase in loyalty can increase profits by 25 to 85 percent (Cacioappo,
2000). Loyal customers are six times more likely to repurchase or recom-
mend the purchase of the product or service to someone else. Studies
have shown that on average, four percent of the customers will be dis-
satisfied or complain about the product and/or service. Edward Marien,
director of supply chain management at the University of Wisconsin, de-
fines “perfect order” as when a customer finds the right product, destina-
tion, condition, documentation, and cost.

The primary objective of this paper is to study the impact of selected

inventory parameters and management techniques on the performance
of an expanded and comprehensive retail supply chain and to relate them
with the customer satisfaction. Generally we will try to assess the compa-
ny’s inventory management system and then we will relate it to the cus-
tomer satisfaction by concentrating on certain variables. We then study
the sensitivity of supply chain performance to three inventory planning
parameters: Performance Measurement, Customer needs Technology and
Quality.

The main reason for this research paper is to see how inventory
management can be improved to produce the perfect order. In other
words, how can inventory management be improved to produce custom-
er satisfaction? We discussed earlier that this satisfaction cannot be
measured because of its subjective nature. However in our research we
Page 14 Oeconomics of Knowledge, Volume 4, Issue 3, 3Q, Summer 2012

will try our best to give the possible findings and recommendations.

For this purpose we used the leading multinational company of fast

food in Pakistan, KFC (Kentucky Fried Chicken). We carried out different
surveys and questioners to find out the inventory management process
and the customer satisfaction. Organizations like KFC use modern inven-
tory management processes to utilize new and more refined techniques.
These techniques help to optimize inventories, which decrease inventory
and lower costs, and maximize customer service.

Problem Statement
The problem statement of our research is “how the effective invento-
ry management can effect the customer satisfaction”. This study exam-
ines the relationship between effective inventory management and cus-
tomer satisfaction with the goal of having complete orders and on time
deliveries. This research’s purpose is to find ways to improve inventory
management, thereby increasing customer satisfaction. Lee and Kleiner
(2001) stated that in order to manage inventory management successful-
ly, “retailers should understand customer needs, vendor partnerships,
technology, data integrity, and performance measurements”

Literature Review
Inventory control goes back further than writing there were simpler
inscriptions in Egyptian and Babylonian warehouses and granaries, with
pictures that represented the inventory owner and numbers representing
amounts in stock and taxes due.

In the earliest days of shop keeping, merchants wrote down pur-

chases, or they looked at how many units were gone at the day's end
and then did their best to forecast future needs. Experience and intuition
were key skills, but it remained an inexact method, even when applied to
Page 15 Oeconomics of Knowledge, Volume 4, Issue 3, 3Q, Summer 2012

operations that were quite small by today's standards.

After the Industrial Revolution, efficiency and mass production be-

came the main goals of businesses, along with an improved customer ex-
perience at the point of sale. A team at Harvard University designed the
first modern check-out system in the early 1930s. It used punch cards
that corresponded with catalog items. A computer would read the punch
cards and pass the information to the storeroom, which would then bring
the item up front to the waiting customer. Because of the automated sys-
tem, the machines could also generate billing records and manage inven-
tory. The system proved to be too expensive to use, but a version of it is
in use today in some stores, where merchants place cards with product
information on the aisle for customers to select and bring to the checkout
line. This usually applies to items that are expensive or large and to con-
trolled items, such as medicines.

Merchants knew they needed a better system, and researchers cre-

ated the forerunner of the modern bar-coding system in the late 1940s
and early 1950s. It used ultraviolet light-sensitive ink and a reader to
mark items for sale. Again, the system was too cumbersome and lacked
the computing power needed to make it work. Technology had yet to
catch up with their ideas. The development of affordable laser technology
in the 1960s revived the concept. Lasers allowed smaller, faster and
cheaper readers or scanners. The modern bar code, or the Universal
Product Code (UPC), was born and caught on just before the 1970s. As
computing power became better, the power of UPC codes to help track
and manage inventory improved exponentially.

During the mid to late 1990s, retailers began implementing modern

inventory management systems, made possible in large part by advances
in computer and software technology. The systems work in a circular pro-
cess, from purchase tracking to inventory monitoring to re-ordering and
back around again. Another popular means of automated inventory con-
trol is vendor-managed inventory. In this arrangement, the vendor is re-
Page 16 Oeconomics of Knowledge, Volume 4, Issue 3, 3Q, Summer 2012

sponsible for keeping its products stocked on a store's shelf. The vendor
and retailer work closely together and share proprietary information.

This system also has many advantages for vendors. It allows them
to ensure their products are properly displayed and available, and it also
puts them in close contact with the retailer and its sales data. The feed-
back the vendor receives can play an important role in its marketing, re-
search and development. The urge to make the flow of goods and ser-
vices more efficient is perhaps identical with the urge of civilization itself.
The world's earliest known writing (-5300 years) described inventory
owners, amounts, and suppliers (Dr. Gunter Dreyer of the German Insti-
tute of Archaeology).

Inventory management systems are designed to monitor product

availability, determine purchasing schedules and cycle out obsolete or
unsold product. The availability of product is just one way in which an in-
ventory management system attempts to create customer satisfaction. A
comprehensive understanding of the impact of inventory control on cus-
tomer satisfaction helps you to create an effective inventory manage-
ment system.

Time to Fulfillment
Good inventory control means that your time to fulfill orders stays
low. If you use your inventory management system to analyze product
sales, you can have your popular items in stock and ready to instantly
fulfill any customer's order. You also know which special orders sell on
occasion and have those products available in a limited quantity to keep
your inventory costs down and to develop a positive reputation for quick-
ly filling special orders.

Inventory management helps you maintain customer satisfaction

when it comes to product returns. When product is returned because it is
Page 17 Oeconomics of Knowledge, Volume 4, Issue 3, 3Q, Summer 2012

damaged or dead on arrival, and it is still under warranty, you can ar-
range with the manufacturer to do an instant swap of the product to keep
the customer happy. If you are the manufacturer, then you should main-
tain extra inventory levels that mirror your return rates to help maintain
customer satisfaction.

Pricing
When you have a well-designed inventory management system, you
are able to reduce the amount of time that products sit on your shelves.
When you don't carry extra inventory for extended periods of time, your
inventory costs decrease. This is a savings that you can pass on to clients
in the form of lower pricing.

In Stock
A good inventory management system means that you have an up
to date inventory count at all times. Part of giving good customer service
is giving accurate information even if the customer does not plan on
making a purchase that day. By being able to give clients accurate inven-
tory information, you improve the image of your company and add one
more element to customer retention.

Methodology
In this research paper we use two methods Questionnaires and in-
terviews to measure the satisfaction level of customers and inventory
management system of KFC. Questionnaire is based on the personal
preferences of customers which help us to know that how much they are
satisfied with KFC products and what the importance of their products in
their life are and how often they visit at their outlets. Through question-
Page 18 Oeconomics of Knowledge, Volume 4, Issue 3, 3Q, Summer 2012

naires we came to know that how KFC can bring continuous improvement
in their products and services.

To analyze the inventory management system of KFC we conducted

unstructured interviews. This unstructured interview was based on the
management of inventories. How employees of KFC manage their inven-
tories to fulfill the demand of the customers. Consumer satisfaction can
be explored by using customer satisfaction performance surveys. The
type of survey has to be qualitative, because it is difficult to use quantita-
tive research methods for customer satisfaction. Open ended questions
help to discover if there is any other issue that may be causing problems
with customer satisfaction. The customer satisfaction can be analyzed by
a customer satisfaction

Variables
The study contains the explanatory variables namely, Customer
Need (To analyze the market situation and customer needs), Technology
(Use of latest technology), Performance Measurement (To measure the
performance of inventory), and Quality ( Which type of quality customers
want). The customer satisfaction is the used as the explained variable.

Theoretical Framework
The theoretical framework is explained with the help of following fig-
ure.

Survey and questionnaire

The measurement of customer satisfaction will not be exact because
it is subjective and in a non-quantitative state, but it will require sam-
pling and statistical analysis (KFC, 2012).
Page 19 Oeconomics of Knowledge, Volume 4, Issue 3, 3Q, Summer 2012

According to “Johnson and Onwuegbuzie” (2004), researchers can

also use a mix of the qualitative and quantitative method to increase the
strength of a study, and to provide stronger evidence through conver-
gence and collaboration, but this one does not allow for that because of
reasons already advanced. This study has utilized mean to measure the
impact of predators on criterion. Greater mean indicates strong impact of
independent variables to dependents according to sample data

Findings
This study has employed questionnaires and interviews to tape the
impacts of independent variables. It enabled to have in depth analysis of
customer expectation and requirements. Questionnaires are based on lik-
ert scale: A) Strongly disagree, B) Disagree, C) Neutral, D) Agree and E)
Strongly agree. A=0%, B=25%, C=50%, D=75, E=100%.
Page 20 Oeconomics of Knowledge, Volume 4, Issue 3, 3Q, Summer 2012

Table 1: Customer satisfaction results:

Independent variables Mean

Customer needs 87%
Performance measurement 63%
Quality 76%

The questionnaires were distributed among 237 customers in Islam-

abad. Results outline/depict that the efficient and effective management
of inventories leads towards higher satisfaction level in customers.

According to the responses we can conclude that customers needs

play key role in shaping customer satisfaction. 87% of the respondents
considered customers need are to be addressed while setting any inven-
tory management system. Respondents were sensitive regarding price,
promotion, product, seasonal demand and placement. Results indicates if
products are according to customer needs and wants, reasonable price
and provided on convenient places must be considered.

Performance measurement has a poor relationship with inventory

management according to the sample results. It has been graded as 63%
showing neutral response by respondents. Although performance meas-
urement individually has a poor relationship with customer satisfaction
but it integrated with customer needs and quality have reasonable im-
pact.

According to the results of questionnaires and interviews 76% re-

spondents considered it a significant dimension that brings variation in
the level of customer satisfaction. A result also indicates that their menus
have desired quality products listed on them. As 76% should be more
than 90% to have strongly satisfied customer based via quality. They
may increase their product lines to have better quality perception among
customers.
Page 21 Oeconomics of Knowledge, Volume 4, Issue 3, 3Q, Summer 2012

Customer needs and quality has a strong link with inventory man-
agement while performance measurement has poor or no link with inven-
tory management according to the results of study conducted.

Recommendation
Based on the study, the following are the recommendations for fu-
ture implication.

1. They should develop such prices systems that are reasonable

and affordable for average class and below average class.
2. They should provide the home delivery system improve the
satisfaction level of customers.
3. They should add some more products in their menu list.

Limitation and future prospects

Time period was short so limited but reasonable sample was drawn,
results can not be generalized worldwide. Researchers and scholars may
conduct research under different cultural and demographic conditions.
Data integrity and technology may be used in future studies by other re-
searchers.

Conclusions
The primary objective of this paper was to study the impact of cus-
tomer satisfaction parameters and inventory management techniques on
the performance of an expanded and comprehensive supply chain. Spe-
cifically, we tested the impact of three important Customer satisfaction
parameters which are customer needs, performance measurement and
quality on the customer satisfaction. The results indicate that all the
three parameters have a significant effect on Customer satisfaction.
Page 22 Oeconomics of Knowledge, Volume 4, Issue 3, 3Q, Summer 2012

References
[1] Atkinson, C. (2005, May 9). Today's inventory management. In-
ventory Management Review. Retrieved March 20, 2007, from
http://w ww .inve ntorymanage mentreview .or g/2005/05/
todays_inventor.html.

[2] Blanchard, D. (2007). The perfect order. Industry Week, 256

(1): 24A.

[3] Cacioppo, K. (2000). Measuring and managing customer satis-

faction. Quality Digest. Retrieved March 23, 2007, from http://
www.qualitydigest.com/sept00/html/satisfaction.html.

[4] Levinson, M. (2005, January 1). The link between inventory and
customer satisfaction. CIO Magazine. Retrieved January 20,
2007, from http://www.cio.com/article/14761/
The_Link_Between_Inventory_and_Customer_Satisfaction.

[5] Lin, C. (2006). A study on the organizational innovations in Tai-

wan's logistics Industry. The Business Review, 5(1): 270-276.

[6] RedPrairie (2005). Perfect order metrics- driving collaboration in

the food and beverage supply chain. Retrieved March 10, 2007,
from RedPrarie: http://images.vertmarkets.com/CRLive/files/
d o w n lo ad s /7 e b e 0 e 9 f -e ae 1 - 4 9 5 3 -9 1 4 5 -9 6 8 9 3 3 8 b8 9 c1 /
RedPrairie.pdf.

[7] Tracey, M., Lim, J. & Vonderembse, M. A. (2005). The impact of

supply-chain management capacity on business performance.
Supply Chain Management, 10(3/4): 179-192