EFFECTS OF INVENTORY MANAGEMENT SYSTEM ON PERFORMANCE OF

PETROLEUM STATIONS IN KITALE TOWN, KENYA

By

A Research Proposal Submitted to the Department of Procurement and Logistics in

the School of Entrepreneurship, Procurement and Management in Partial Fulfillment
of the Requirements for the Master of Science in Procurement and Logistics of Jomo
Kenyatta University of Agriculture and Technology

JOMO KENYATTA UNIVERSITY OF AGRICULTURE AND TECHNOLOGY

September, 2016

DECLARATION
I, .., to the best of my knowledge, declare that this proposal is
my original work and has not been presented in any other institution for examination or
award of any degree. That there shall be no reproduction in full or part for any other
purposes other than the academic purposes. That permission must be granted by the author
or Jomo Kenyatta University of Agriculture and Technology library.
Name:...
Signature: ....

Date: .

DECLARATION AND APPROVAL BY THE SUPERVISOR

This proposal has been submitted for examination with my approval as University
Supervisor.
Name:...

Signature: ....

ii

Date: .

DEDICATION
This proposal is dedicated to my all my family members and friends.

iii

ACKNOWLEDGEMENT
First and foremost I thank the Almighty God who saw me through this thesis writing
period. My acknowledgements also go to my lecturers at the Jomo Kenyatta University of
Agriculture and Technology. I am also indebted to acknowledge the role and work made by
my supervisor . for . the unending guidance and support
accorded to me.

iv

ABSTRACT
Organisational performance concern is ever there giving managers nightmares. It
challenges most managers threatening total closure of most organisations due to failure of
achieving financial stability. Developing strategic approaches that enhance the achievement
is always a challenge. In sectors such as petroleum , businesses are unable to meet
customer demand, inventory management systems are poor leading to high rates of
wastages, loss making and may other performance problems. Effects of inventory
management on organisational performance of petrol stations in Kenya have not received
sufficient attention. This knowledge gap inspires this proposed study. A survey of selected
service stations in the town is chosen to determine the effects of inventory management
systems on petroleum stations performance. The study sample will be 200 station operators
and motorists. Systematic sampling will be applied to select four respondents from each
service station. The data collection tool is questionnaire that will be designed and tested by
the researcher for reliability and validity. Five sections are included covering performance,
inventory management system and its four dimensions. The results of the study will benefit
industry players; petroleum institute of east Africa, motorists and regulator (Energy
Regulatory Authority). The expected outcome is that the inventory management systems
four dimensions hold the key to improving performance of petroleum firms in Kitale
region. This happens through the singular and collective contribution of the variables to
performance.
Key words: Inventory management System: Fuel Management System, Fuel Inventory,
Vendor Inventory Management and Statistical Inventory Reconciliation: Petroleum
Stations Performance: Product/Service Quality, Customer Loyalty, Market Share and
Financial Outcomes

TABLE OF CONTENTS
Declaration ...i
Dedication ...ii
Acknowledgement .iii
Abstract ............................................................................iv
Table of contents .v
List of Figures..viii
List of Tables.ix
List of Abbreviation and Acronyms...x
Operational Definition of Termsxi
CHAPTER ONE: INTRODUCTION1
1.0 Overview...1
1.1 Background of the Study..1
1.2 Statement of the Problem..7
1.3 Objectives of the Study.....................................................................................................8
1.3.1 General Objectives.......................................................................................................8
1.3.2 Specific Objectives......................................................................................................8
1.4 Research Hypotheses........................................................................................................8
1.5 Significance of the Study..................................................................................................9
1.6 Scope of the Study..10
1.7 Limitations of the Study..10
CHAPTER TWO: LITERATURE REVIEW......11
2.1 Introduction.11
2.2 Theoretical Framework...................................................................................................11
2.2.1 Theory of Constraints11
2.3.2 Lean Theory...13
2.3.3. Contingency Theory..14
2.3.5 Deterministic Continuous Review.15
2.3 Conceptual Framework...................................................................................................15
2.4 Review of Study Variables.............................................................................................16
2.4.1 Fuel management System..16

vi

2.4.2 Fuel Inventory Management..21

2.4.3 Vendor Inventory Management (VIM)..21
2.4.4 Statistical Inventory Reconciliation (SIR).23
2.5 Organisational Performance............................................................................................28
2.6 Critical Review of Literature..........................................................................................31
2.7 Research Gaps.................................................................................................................34
2.8 Summary of the Chapter.................................................................................................35
CHAPTER THREE: RESERCH METHODOLOGY....................................................37
3.1 Introduction.37
3.2 Research Design......37
3.3 Population of the Study...37
3.4 Sampling Techniques & Procedures...38
3.5 Data Collection Procedure..40
3.6 Data Collection Instruments...41
3.7 Pilot Study...41
3.7.1 Validity of the Questionnaire.41
3.7.2 Reliability of the Questionnaire.42
3.8 Data Analysis and Presentation..42
REFERENCES.43
Research Work Plan 2016-2017...46
RESEARCH BUDGET47
Appendix IV: Map of Kitale Region of Trans Nzoia County, Kenya..48
APPENDICES......49
Appendix I: Managers and Oil Station Operators Questionnaire......49

vii

LIST OF FIGURES
Figure 2.1: Conceptual Framework..16

viii

LIST OF TABLES
Table 3.1: Target Population38

ix

OPERATIONAL DEFINITION OF TERMS

Organisational Performance Ability to identify, integrate and convert planned inputs to
realise intended actual outcomes (Alp, & Tan, 2006).
Financial Outcomes

The results realised related to finances such as profits, loses

and from the operating activities of an organisation (Bashan,
2011)

Customer Loyalty

the degrees in which people choose to use a particular

products or services offering repeat buying. It is portrayed by
consistently purchasing from one organisational product or
brand over an extended period of time (Bashan, 2011).

Product/Service Quality

the ability to develop and improve in internal skills

and capabilities from employees that are required to support
the value-creating internal processes (Alp, & Tan, 2006)

Market Share

This is the percentage proportion of industry total sales that

under coverage and control by a single organisation over a
specified time period (Bolaji, 2003).

Inventory Management System

an approach that is applied in controlling inventory
procured, and in store waiting to transit to the next
production level and streamline the management of inventory
(Bolaji, 2003)
Fuel Management System A
system
that
maintain,
control
and
monitor fuel consumption and stock in any type of industry
that uses transport, including rail, road, water and air, as a
means of business (Buxey, 2003).
Fuel Inventory Control

This is a comprehensive fuel management solution, enabling

companies to dramatically lower the cost of procuring,
managing, and selling bulk fuel (Buxey, 2003)

Vendor Inventory Management

This is a model where buyer provides key information
to a supplier and the supplier takes full responsibility for
replenishing and restocking an agreed inventory of the
material, usually at the buyer's consumption location (Cai,
2009).
Statistical Inventory Reconciliation This is an approved monthly monitoring method for
underground storage tanks (USTs) and piping. The tank
owner/operator provides to the SIR vendor daily inventory,
delivery and dispensing data (Chan, & Cui, 2004).

LIST OF ABBREVIATIONS AND ACRONYMS

ATGs

Automatic Tank Gauges

DC

Distribution Centre

EDI

Electronic Data interchange

ERP

Enterprise Resource Planning

FIC

Fuel Inventory System

FMS

Fuel Management System

JIT

Just-In-Time

MPS

Master Production Schedule

SaaS

Software as a Service

SIR

Statistical Inventory Reconciliation

SMEs

Small and Medium Enterprises

USA

United States of America

USTs

Underground Storage Tanks

VIM

Vendor Inventory Management

xi

CHAPTER ONE
INTRODUCTION
1.0 Overview
This chapter discusses the background of the study, statement of the problem,
significance of the study, limitation of the study, objectives of the study, the research
questions, the scope of the study and the conceptual framework.
1.1 Background of the Study
Business organizations, including petroleum stations, strive to align business objectives
and streamline supply chain operations for both suppliers and their customers. These
businesses desire to create value performance directly from improved inventory turns,
improved service and increased sales (Alp, & Tan, 2006). Further, most of these
organizations desire build strong and stable customer loyalty, increased market share,
steady financial outcomes and responsive and flexible inventory.
The desire to reduce and eliminate stock-outs is unrealizable. But most of these
businesses experience difficulties in realizing such performances. The suppliers are not
able to determine that its customers are about to exhaust their inventory. So the suppliers
are not able to better prepare to replenish the customer (Elena, & Jay, 2000). It also
makes the suppliers unable to better schedule their own production and distribution of
inventory as could be needed by the vendor. Further the current practices use approaches
that only encourage reordering of inventory at the last minute. The specific problem,
which will be discussed in this study, is a variant of the capacitated vehicle routing
problem and occurs in the context of fuel distribution. More precisely, the paper deals
with the daily replenishment-planning problem that the biggest petroleum company is
facing (Adenso-Daz, Gonzlez-Torre, & Garca, 2002).
The company is faced with a particular problem which is demonstrated by the following
procedures in operations. The company has to deliver different fuel types ordered by a set
of petrol stations during the next working day. These stations order one or more fuel

types each time and specify the quantity to be delivered for each product ordered. The
products are incompatible and must be transported in independent vehicle compartments.
In addition, petrol stations specify time windows during which they must be served. The
company delivers products from one or more depots. Each depot is responsible for the
demand of stations located in the same district as the depot. The company assigns a fleet
of vehicles to each depot (Bashan, 2011). These vehicles are compartmentalized and do
not have flow metres. This implies that the contents of a compartment cannot be used to
replenish more than one underground reservoir. Consequently, each compartment of the
delivery vehicle must be filled with one of the products to be delivered on its route. In
this context, the company prepares a replenishment plan for their petrol stations for the
next day (Elena, & Jay, 2000). This plan requires a number of simultaneous and
interrelated decisions to be made. To prepare such a plan, the company must determine
the routes for the delivery of all the demanded products, assign these routes to vehicles,
determine the quantities to be delivered by each route, and load these quantities to the
compartments (Bashan, 2011).
On this point, it should be noted that, in 2013, an Agreement was concluded between the
company and the petrol station managers. According to this Agreement, the quantities
loaded in the compartments can be adjusted up to a given threshold (Bolaji, 2003). This
particular situation occurs quite frequently when the demands of petrol stations are high
in winter. The objective of the replenishment plan is to determine a set of routes
satisfying all customer orders at a minimal routing and service cost. This has often faced
the inability of the supplier to restock leading to interrupting business operations. They
are not able to decide when and how much to replenish (Briec, Kerstens, Prior, & Van de
Woestijne, 2010). Moreover, they order for inventory that is not proportionate to
customer demands. Such order can sometimes too large or too small considering the
customer demand. In some instances, customers visit petrol stations only to find that the
products they are looking for are out of stock.
Further, some still stock what are not in demand hence large volumes of stock-ins are
experienced. Such practices often create low inventory turns; poor fill rates and high

transaction costs. Even though these organizations desire to maintain a high degree of
visibility of goods at the customers location, the current practices in many petrol stations
are poorly coordinated in terms of operational and technical performances. This can be
against development of an environment to encourage customer loyalty, expansion of
market share and steady financial outcomes while also not encouraging creating a
responsive and flexible inventory (Buxey, 2003). Moreover, this inadequate practices and
insufficient studies in this area could create the inability to benefit from inventory as a
value creator and quality enhancer in organizations.
It means that organizations are unable to create strong and sustainable performance from
inventory. Even though this is a challenge, inventory management system can be a driver
of desired performance. According to Cook (2008), inventory management system can
provide tools such as vendor inventory management that can create ability of suppliers
automatic responsibility to replenish and stock the customer inventory at appropriate
levels. This could be critical in minimizing reordering costs, minimizing lead time,
increased demand meeting, continue keeping operations running, and smoothing
requirements among others (Chandran, 2004). But most of petroleum businesses are use
inadequate and inefficient approaches as they fail to apply tools such as inventory
management system tools. Hence the benefits of such tools such as knowing the influence
it can create in businesses performances are yet to be determined in most countries
around the world. Organizations such as Wal-Mart or Tesco that have mastered Vendor
Inventory Management (VIM) provide a benchmark to others on the benefits of vendor
inventory management (Cui, 2004). This technique can enable a vendor at the petrol
station to transfer (Cooper, & Schinder, 2003).
Most businesses use traditional approaches where they forecast sales and then order
enough inventories to meet the sales forecasted (Cooper, & Schinder, 2003). This
approach can be challenging in that the accuracy of forecast is limited, which creates a
risk of buying too much or too little stock, the inventory is purchased and owned
regardless of whether it is sold or it and finally there is limited visibility into whether the
supplier can even meet the order needs for replenish and restock orders. The excess

inventory can be a liability, but also the business cannot sell what it does not have. But
the traditional approaches can lead to purchases of excess inventory to pad the business
against stock-outs hence carrying excess inventory. Making a decision such as what is
less bad for the business, running out of inventory or carrying too much becomes difficult
(Cooper, & Schinder, 2003).
Epictatus and Llanto (2005) argue that creating and maintain contacts with the suppliers
that can be beneficial has proved hard to achieve. The petrol stations act alone. This
forces them not to realize the benefits of such a contact, which can help transfer certain
costs that can create increased profitability. The other areas where petrol stations fail is
fuel inventory monitoring (Geng, & Jiang, 2009). The biggest problem is the costs that
fuel is taking from the profit margins. The technique that would enhance boosting
efficiency and help cut fuel-related costs is insufficient. The ability to be able to have
real-time visibility of all aspects of fuel and fueling activities, to free up drivers and
capture information thats instantly available to any staff who may need it is not currently
realisable. Since the highest expense is fuel, auditing real-time fuel consumption that
would enable maximization of profits from commercial activities is critical yet not
currently achievable. So the desire to acquire technique that enable businesses to lower
the cost of fuel inventory procuring, managing, and selling bulk fuel has not been easy to
attain. It implies activities such as demand forecasting, fulfillment, inventory
management, sales and purchase orders are hard to accomplish (Geng, & Jiang, 2009).
The ability to connect a network of operators in the inventory system to supply chain is a
problem. It means that can a capacity to maximize fuel margins by understanding demand
patterns; optimizing inventory; centralizing supply contracts; determining best price on
market versus contract; determining margin on each sale; and reconciling deliveries,
invoices, payments, and taxes are not possible (Green, 2005). Yet inventory management
system can also help in uniting suppliers, distributors, and buyers in the largest fuel
management network. This can be realized through automating all aspects of the fuel
management process. This process enables customers to address specific challenges in
the fuel supply chain and scale to meet expanding requirements (Indetie, 2003).

This connectedness can enhance achieving reduced run-outs, reduced fuel waste, retains,
and over- & under-payments; Help manage fuel inventory variance, help profitability
outcomes by quickly identifying controllable sources of fuel loss; lower working capital
requirements and fuel costs; streamlined procurement, delivery, sales, and financial
management; greater visibility into fuel inventory, true costs, and margins and improved
security of supply (Indetie, 2003). Since the approaches used are scanty in this area,
knowing the influence of such tools in performance outcomes achievement is not
understood (Greenland, Coshall, & Combe, 2006).
Business organizations such as petrol stations endeavour to achieve a performance level
that is highly competitive over competitors. This can be in terms of meet demand, keep
operations running, lead time, hedge, quantity discount, quality products and services and
smoothing requirements (Green, 2005). The management of the petrol station can divide
into three major parts, which is recording management, inventory management, and
internal control (Indetie, 2003). Because these problems can be directly or indirectly
affect the performance of the business. This study explores more on inventory
management and petrol station performance.
However, most of these organizations fail to deliver on these desired outcomes and
perform poorly leading to loss making, shut down and licenses withdrawal by the
concerned authorities. Such businesses fail to increase their profitability level, market
share and customer demand portfolio. While in some countries, inventory has been a
means of value creation, innovation skills development, competitive edge enhancer, and
profitability driver (Green, 2005). In some countries, inventory presents a nightmare
challenge to managers. The challenge with inventory is the inability to maintain
competitive quality, prices, cost of maintenance and improvement on profitability as sales
turnover will often be very low. This could be creating unnecessary losses to the station.
In some stations, customers rarely visit.
Petrol station enterprises operate mainly on shorter inventory. Inventory consists of a
detailed list of all the items in the station. They include all items that are stored in

warehouses or distribution centres in excess of what the store needs (Hamlet, 2009;
Inman, 2010). Petroleum and other refinery products are important not only to the
functioning of any economy. The efficiency in service and product delivery in this sector
influences the behavior of the entire sector of a country. In periods of high petroleum
prices, heightened public attention is drawn into the functioning of fuel markets with
concerns of possible anticompetitive practices. Further, most customers who visit petrol
stations expect top stop, fill and leave (Geng, & Jiang, 2009). The faster and more
straightforward the visit is the happier the customer will be to return. Smooth operations
at the dispensers and in the shop along with reliable equipment are essential for
successful petrol station, hence the critical role of a one-stop petro station management
package. But most petrol stations experience various challenges such as poor quality
products. This has resulted in closure of many petrol stations in Kenya with their licenses
withdrawn contaminated fuel.
While a global supply chain enables companies to leverage lower production and
transaction costs, there are significant challenges experienced by most of petrol station
enterprises managers in ensuring products and transactions delivered are what the
customers want (Klassen, & Rohleder, 2002). Achieving strong and sustainable
performance is what these managers desire yet this dream has proved hard to deliver by
most managers. This has caused shut down of many petrol stations across the country.
The longer lead times with global suppliers, volatile fuel prices and risks such as
unavoidable delays, make estimating the cost and time associated with transportation
difficult. As a result, companies incur high expedite and inventory costs (Geng, & Jiang,
2009).
To reduce transportation overheads and ensure that the right product reaches the right
location on time, transportation managers require a centralized view into all of their
transportation activities as well as the ability to understand transportations impact on
product inventory (Jones, & Kutsch, 2007). An inventory control system contains a list of
orders to be filled and then prompts workers to pick the necessary items, and provides
them with packaging and shaping information, inventory control may be used to

automate a sales order fulfillment process and also manage in and outward material of
hardware. Automation is the replacement of human workers by technology. For optional
sales and inventory management process, robust functionality is needed for managing
logistic facilities. Ware house management functions for inventory control cover internal
ware house movements and storage and its support helps in the recording and tracking of
materials on basis of both quantity and value (Klassen, & Rohleder, 2002).
This application takes care of all supply orders reducing cost for warehousing,
transportation while improving customer service (). It significantly improves inventory
turns, optimizes flow of goods and shortens routes within warehouse and distribution
centres. It also improves cash flow, visibility and decision making providing efficient
execution of task using this fast and reliable computerized method.
1.2 Statement of the Problem
Many petrol filling station operators rely on a manual petrol stock reconciliation system
to detect leaks from the storage tanks and pipework. The basic idea is that by finding
how much petrol has come out of a tank through the dispensers (by checking the totalised
readings, for example) and taking into account how much has been put into the tank, you
can calculate how much should be left in the tank. If you then measure how much petrol
actually is in the tank you know if there has been a loss or gain that could indicate a leak.
This method of leak detection relies on consistent measurements of the tank contents, the
accuracy of the measurements, and knowledge of the pattern of apparent losses and gains
for your site. Lack of practices that improve on performance of these stations is a threat
to their benefit ability.
A lot of sites still use dipsticks or pump-up gauges to measure the contents of tanks.
Pump-up gauges and dipsticks can only be read to certain accuracy, not usually better
than 50 to 100 litres either way. This includes restocking and replenishing delays since
there is no link between the supplier and the buyers. The readings are still useful because
over a period of time they can be analysed and in some cases very small leaks can be
detected by using special methods. Even without specialist analysis the readings can be

sufficient to detect leaks before a lot of petrol has been lost. Stock losses are to be
expected due to evaporation, shrinkage and the displacement of vapour during the road
tanker unloading process. Typically, an average stock loss of some 0.2% to 0.3% can be
expected. However, at some sites average stock losses can be as high as 0.5% or 0.6%.
Although most sites tend to experience stock losses, occasional stock gains can occur.
There is insufficient evidence of use of approaches that improve performances. Most
inventory management systems used currently are not effective enough to realise desired
results. Therefore there is continued poor performance including strategically apply
inventory management system in improving performance.
Therefore the purpose of this study will be to investigate the effects of inventory
management system on performance of petroleum stations in Kitale region. This will be
explored under the dimensions of inventory management systems and include: fuel
management system, fuel inventory control, vendor inventory management and statistical
inventory reconciliation as independent variables and the performance explored under
customer loyalty, market share, financial outcomes and adaptive capacity.
1.3 Objectives of the Study
1.3.1 General Objectives
The major objective of the study will be to investigate the effects of inventory
management system on performance of petroleum stations in Kitale region.
1.3.2 Specific Objectives
The specific objectives will include:
i) To examine the effects of fuel management system on performance of petroleum
stations in Kitale region
ii) To establish the effects of fuel inventory control on performance of petroleum
stations in Kitale region
iii) To determine the effects of vendor inventory management on performance of
petroleum stations in Kitale region

iv) To examine the effects of statistical inventory reconciliation on performance of

petroleum stations in Kitale region
1.4 Research Hypotheses
H01: There is no relationship between fuel management system and Petroleum Station
Performance
H02: There is no relationship between fuel inventory control and Petroleum Station
Performance
H03: There is no relationship between vendor inventory management and Petroleum
Station Performance
H04: There is no relationship between statistical inventory reconciliation and Petroleum
Station Performance
1.5 Significance of the Study
The study findings may be significant in the following ways; It is hoped that study
findings may be used as basis for further research and investigations in form of literature.
The findings will be useful as it will provide information to managers in different
organizations especially on knowing how to compare actual performance and inventory
management. The findings may also be beneficial to other upcoming researchers to
investigate further about the impact of inventory management on organizational
performance of other organizations other than Petroleum stations in Kitale town. The
study will also be useful to further encourage government to set up educational
institutions to provide training on how to manage inventory in organizations.
The research will help managers to know and be well versed with the impact of inventory
management system on organizational performance and how it will contribute to the
Technical and effectiveness of the organization and in turn create good customer will,
because the organization will be able to respond to customers needs at the right time and
hence customer satisfaction which in turn brings about customer loyalty. The research
will enable managers and other employees to make right decisions as far as supplier

selection is concerned by putting emphasis on supplier relations and inventory

management system.
Once this is achieved, it will reduce the lead time, interchange of ideas between the
supplier and the organization will prevail and thus leading to production of
Organisational goods just according to customers specification because the supplier and
the organization share ideas from time to time by use of Electronic Data interchange,
therefore giving no room to poor Organisational or poor specification of goods. The
findings of this study will be useful as reference material for future studies. It will enable
them to provide critical studies or close the gap not currently covered in this study.
1.6 Scope of the Study
The study is focused in studying petrol stations in Kitale region of Trans Nzoia County. It
will be carried out within a four months period of time during which various stations
serving the people of Kitale region will be visited. These petrol stations most of them
provide services and products that make customers to complain, they are also unable to
keep track of their inventories. Moreover, many of these petroleum stations end up being
shut down owing to poor performances. Therefore, it will investigate aspects like fuel
management system, fuel inventory control, vendor inventory management and statistical
inventory reconciliation as independent variables and the performance explored under
customer loyalty, market share, financial outcomes and adaptive capacity.
1.7 Limitations of the Study
This study expects to meet certain limitations, namely, being new research, difficulties in
accessing participants within Kitale region. Moreover, this region being new from such
studies, the participants may be reluctant to give desired information, however, all
necessary arrangements will be made to ensure that a large sample size was achieved to
allow for statistical testing be carried out and provide valid statistical inferences of the
findings. The other limitation expected will be that of narrowing to Kitale region while
the study would have been done countrywide. However, this would require an

10

arrangement of a longer period than what this project could carry, hence this study only
performed a correlation between variables hence cause effects was beyond its reach.

11

CHAPTER TWO
LITERATURE REVIEW
2.1 Introduction
This section reviews literature on marketing which is a strategy for increasing demand for
a product. Research done on marketing mix are discussed and placed in context of the
study especially marketing mix as applied by firms. It ends with a conceptualization of
the problem under investigation and the operationalisation of variables.
2.2 Theoretical Framework
Different theories have are used to guide this study to help bring clarity to the study of the
effects of inventory management systems on performance of Petroleum stations. The
study borrows from the theory of constraints, contingency theory and lean theory to build
the critical concerns on effects of inventory management systems on performance in
Petroleum stations.
2.2.1 Theory of Constraints
The theory of constraints is a management philosophy that seeks to increase
manufacturing throughput efficiency or system performance measured by sales through
the identification of those processes that are constraining the manufacturing system
(Goldratt, 2004). Kazim, (2008), argues that theory of constraints is based on the
principle that a chain is only as strong as the weakest link or constraint and to elevate and
manage the constraint as necessary.
The difficulties in the theory of constraints are: very long lead times, large number of
unfulfilled orders or they are executed with much extra effort (overtimes), high level of
unnecessary inventories or lack of relevant inventories, wrong materials order, large
number of emergency orders and expedition levels, high levels of devolution, lack of key
customers engagement, frequent changes or absence of control related to priority orders,
which implies on schedule conflicts of the resources (Goldratt, 2004).

12

These are the bottlenecks tea factories are likely to face warranting their application of
inventory management systems in order to enhance their operations to meet the projected
operational performance. The theory is founded on the belief that an organization that
maximizes the output of every machine will not perform as well as one that ensures
optimization of the flow of materials and value created through its operational
performance. Theory of constraints emphasizes focus on effectively managing the
capacity and capability of these constraints if they are to improve the Petroleum stations
performance of their organization.
This can be achieved by Petroleum stations applying appropriate inventory management
systems. Companies have struggled to invest in the technology and organizational
structures needed to achieve to-date systems synchronization that enable coordinated
inventory flows (Fawcett, Ogden, Magnan, & Cooper, 2006). The Theory of Constraints
methodology proposes that Petroleum stations performance is dependent on the
application of inventory management systems in Petroleum stations.
Theory of constraints is a methodology whose basis is applied to production for the
minimization of the inventory. In reality, it is difficult for a tea firm to forecast with
precision the consumption of its specific product at a specific region with sometime prior
to production and supply of the same product. Under Theory of Constraints, performance
measurements are based on the principles of throughput, inventory dollar days and
operating expenses (Umble, Umble, & Murakami, 2006). Theory of Constraints
measurements are based on a simple relationship that highlights the effect of inventory
control system on progress toward the operational performance.
The proof of effectiveness for any inventory control system is the degree to which it
improves Petroleum stations performance of business firms. For tea processing firms to
ensure that the bottlenecks on their operations run smoothly they have to embrace the use
of inventory management systems that can facilitate operational efficiency. This may
result in the acquisition of additional capacity or new technology of inventory control
systems that lift or break the constraints. Improving the performance of the constraint

13

leads to improvement in the Petroleum stations performance of the entire system. The
Petroleum stations depend on inventory as a resource in their operations. The theory of
constraints contributes a lot to the building of literature in this study. Boyd & Gupta,
(2004) in their studies introduced a theoretical model for Theory of Constraints on
Manufacturing Resource Planning and Just-In-Time in manufacturing firms; they suggest
that a positive relationship between each of the three Constraints principles and ideas can
be used to improve Petroleum stations performance of Petroleum stations in Kenya.
Gupta & Boyd (2008) in their research on theory of constraints can serve as a general
theory in operations revealed that theory of constraints provides approaches to operations
that avoid pitfalls of local optimization by reaching a cross functional boundaries in
organizations. They also noted that while the theory appears to meet the criteria of a good
theory, it has not been empirically tested for the most part. Criticism that has been leveled
against theory of constraints includes its sub optimality. Trietsch, (2005), argues that the
theory is inferior to competing approach. The theory to establishing an optimal product
mix that is likely not to yield optimum results Linhares (2009).
2.3.2 Lean Theory
Lean theory is an extension of ideas of just in time. (Kros, Falasca, & Nadler, 2006),
elaborate just in time as a pull-based system designed to align the production and
business processes throughout the supply chain. (Green & Inman, 2005), assessed the
impact of lean theory on financial performance. They say that theory may eliminate
buffer stock and minimize waste in production process. (Eroglu & Hofer, 2011), found
that leanness positively affects profitability of a business firm. They argue that inventory
leanness is the best inventory control tool.
The theory elaborates on how organisations gain flexibility in their ordering decisions,
reduce the stocks of inventory held on site and eliminate inventory carrying costs.
Feinberg & Keane, (2006), discuss their findings of reducing inventories at firm level.
They go on saying that at the aggregate level, the empirical strength of the lean
explanation lies both in the timing and the magnitude of the adoption. However in the
theory, inventory constrains a firms ability to respond to fluctuations in demand

14

(Feinberg & Keane, 2006). Scholarly studies indicate that companies successfully
optimize inventory through lean supply chain practices and systems to achieve higher
levels of asset utilization and customer satisfaction leading to improved organizational
growth, profitability and market share (Waller, Tangari, & Willians, 2008).
Another study suggesting a positive relationship between inventory management and
performance was that of (Eroglu & Hofer, 2011) in which their study focused on US
manufacturing firms covering the period of 2003-2008. They found that leanness
positively affects profit margins. According to Eroglu & Hofer, (2011) firms that are
leaner than the industry average generally see positive returns to leanness. They used
empirical leanness indicator as a measurement for inventory management. Contrary to the
present study, their study focused on assessing the relationship between inventory
performance and overall firm performance. Criticism leveled against the theory is that it
can only be applicable when there is a close and long-term collaboration and sharing of
information between a firm and its trading partners.
2.3.3. Contingency Theory
Most management research focuses on the determinants of performance. The present
study will adopt contingency theory on management of tasks in different operational
settings. The essence of contingency theory is that best practices depend on the
contingencies of situation. According to Carton, (2004) the changes in dependent
measures are considered to represent performance caused by variations in the
independent measures. Following Cartons hypothesized relationship, inventory control
systems are determinants of changes in Petroleum stations performance of Petroleum
stations. In this respect changes in inventory control systems will represent operational
performance.
The essence of Petroleum stations performance is creation of value. Value creation may
be a combination of financial and non financial objectives (Carton, 2004). Successful
Petroleum stations performance of a firm can be equated with successful value addition.
Organizations Petroleum stations performance can be judged by many perspectives.

15

Each Petroleum stations have a unique set of circumstances making Petroleum stations
performance measurement inherently situational. The contribution of inventory control
system in Petroleum stations performance of the organization is focused on financial and
non financial benefits, efficiency of procedures and effectiveness of procurement
activities (Department of public works, 2006). On the contrary Lex, (2006) the theory
faces challenge of being static.
2.3.5 Deterministic Continuous Review
The inventory theory put into practice by most business organisations is that of
deterministic continuous review. This essentially means keeping inventory and stock
items in ordering more when levels begin to drop. This model works best where an
organisation is able to predict customer orders and shipping times. For example, if it
takes a week for items to ship to a store, you need enough inventories to last a week.
Otherwise, customer may conclude that the organisation has a frequency of stock outs
which may cause high rate of customers who turn away due to stock outs.
When it comes to inventory, shipment costs and production schedules must be weighed
against likely customer demand. The objective should be to find the best balance between
having too much stock and being sold out. Rather than adjusting your methods to fit one
theory, you should focus on whichever inventory system is the most cost-efficient for
you. Unless you offer only a single group of products, it may be practical to use more
than one inventory model.
2.3 Conceptual Framework
The Literature on inventory management system reviewed identifies inventory
management system systems as determinants of businesses performance model. Business
performance could therefore be improved if effectiveness levels of inventory
management systems are improved. The model variables interrelationship can be
conceptualized as shown in Figure 2.1.
Independent Variable (IV)

Dependent Variable (DV

Organisational Performance

INVENTORY MANAGEMENT SYSTEM

Fuel management System

Fuel Inventory Control
Vendor Inventory Management
Statistical Inventory reconciliation

16

Product/Service Quality
Customer Loyalty
Market Share
Financial Outcomes

Figure 2.1: Conceptual Framework

The framework model hypothesizes that inventory management systems have an
influence on the product and service quality, customer loyalty, market share and financial
outcomes. It means that to improve performance of organisations, inventory management
system can be a useful tool in achieving this goal. It can be a strategic technique that can
help businesses such as petroleum enterprises to be watchful over their inventory and this
can lead to the realization of healthy performance.
The model is examined by testing the following hypotheses.
H01: There is no relationship between fuel management system and Petroleum Station
Performance
H02: There is no relationship between fuel inventory control and Petroleum Station
Performance
H03: There is no relationship between vendor inventory management and Petroleum
Station Performance
H04: There is no relationship between statistical inventory reconciliation and Petroleum
Station Performance
2.4 Review of Study Variables
2.4.1 Fuel management System
This is an inventory management system that is useful in determining how much fuel is
available and in the station. This can be essential in helping the organisation to determine
the replenishment and restocking time. It can be a means to continue supplying and
meeting customer demand without facing stock outs. It is an innovative fuel tank and
pump gauging systems that can produce the most reliable and accurate automated fuel
control systems. This is important in ensuring complete inventory accountability to total

17

reconciliation and protection against fuel theft. This is a means of keeping both coming
and going fuel and other inventory and assets covered.
It is capable of driving forward web-enabled applications to provide greater control, less
effort, and better results for environmental compliance, fuel management and equipment
uptime. Limit compliance risk monitoring throughout the year. It is also capable of
creating increased uptime and minimizes service costs through remote diagnostics and
resolution. Maximize profitability and efficiency through real time fuel data and loss
analysis. Furthermore this system has the ability to increase value that experienced
specialists can deliver through detailed analysis, continuous oversight and state-of-the-art
infrastructure that is remotely monitoring tens of thousands of sites around the world
today.
Inventory requirements planning is standard system for calculating the quantities of
components, sub-assemblies and materials required to carry out a production programme
for complex products (Rushton, Phil, & Baker, 2011). The FMS process starts with a
production programme which schedules the products to be completed week by week
during the planning period. It is based on customer orders, sales forecasts and
manufacturing policy (Farrington & Lysons, 2006).
Fuel management systems help manufacturers determine precisely when and how much
material to purchase and process based upon a time-phased analysis of sales orders,
production orders, current inventory and forecasts (Farrington & Lysons, 2006). They
ensure that firms will always have sufficient inventory to meet production demands, but
not more than necessary at any given time. The inventory control system may be critical
to maintaining an appropriate stock level of all products to avoid shortages or oversupply.
This may have the effect of ensuring supply reliability of the business firm. Su & Zhong
(2009), argue that consistent product availability stimulates consumer demand. According
to Kotler & Keller (2006) inventories are a significant portion of the current assets of any
business. The study was conducted in Europe. They noted that business firms hold

18

inventory to ensure uninterrupted business operations. Inventory needs proper control as

it is one of the largest assets of a business.
Fuel management system uses master production schedule which it explodes into a bill of
materials (Jacobs, Berry, Whybark, & and Vollmann, 2011). Allowing for stock and
orders due in, a net requirement of components required is produced. This initiates
purchase and work orders taking account the lead times. The process can be
computerized using specially designed software packages and is appropriate for depended
items for which there is lumpy demand (Rushton, Phil, & Baker, 2011). In
manufacturing firms, a high proportion of operational expenditure is expended on
inventory (Oniwon, 2011). Inventory represents the major component of a Petroleum
stationss operational performance. The study insists that inventory has to be available at
the right time, right place, right quantity, right quality and right place in order for a firm
to generally perform well.
Fuel management system may play a critical role in speeding up production scheduling
execution. Scheduling entails generation of a plan with reference to the sequence of time
allocated for the completion of an item (Cousens, Szweszewski, & Sweeney, 2009).
Production planning involves the acquisition and allocation of limited resources to meet
customers demand over a given time horizon (Quesada, Gazo, & Sanchez, 2012). The
system may regulate the rate at which inventory flow and hence affecting the speed of
firms operations. FMS will even schedule purchase orders and production orders for
just-in-time receipt (Rushton, Phil, & Baker, 2011).
Sticking to scheduling policy can lead to reduced lead times and higher production rates
(Quesada, Gazo, & Sanchez, 2012). According to (Silva, 2013) scheduling preserves
systems capacity utilization and directly affects the speed of response to customer
demand. The inventory control system has implications on effectiveness of scheduling
and scheduling effectiveness has impact on speed of customer service delivery (Silva,
2013). FMS modules take the guesswork out of purchasing by automatically calculating
material requirements, and coordinating purchase orders and production orders for timely

19

receipt. However, Ketchen, Thomas, Hult, & Slater, (2007) state that supply chain
predictability should be sought, but not at expense of creating inflexibility in general
performance of a business firm.
Flexibility is the ability of the firm to react and adapt to changes in the market and
inventory management systems enhance flexibility of operations of the firm (Quesada,
Gazo, & Sanchez, 2012). They assert that this has an effect of enhancing the capability
and speed to providing products that meet individual customers demand. Materials
management concepts enhance communication and coordination by bringing together all
functions which are interrelated (Ondiek & Odera, 2012). Denkena, Apitz, & Liedtke,
(2006), confirmed that the system of controlling inventory has the potential to reducing
inventories, shorten lead time, raise quality and enhance flexibility.
According to Ciambrone, (2008) Fuel management systems are able to improve
scheduling effectiveness. His study indicates that computerized Fuel management
systems can effectively manage the flow of thousands of components throughout a
manufacturing facility. However the study is not clear on the effect of Fuel management
on operational performance. FMS as a tool determines requirements based upon master
production schedule (MPS) a module that offer ways related to inventory more relevant
and current (Rushton, Phil, & Baker, 2011). For instance, production orders may be
scheduled based upon current customer orders or inventory levels, thus accommodating
both make to order and make to stock procedures. The FMS may include product
forecasts, which can be calculated automatically using data from sales or production
history (Rushton, Phil, & Baker, 2011).
Despite its simplicity, FMS systems hold great potential for making significant
contributions in the quest for productivity that would allow firms to compete in an
international marketplace. However, in their zeal to quickly correct several decades of
poor inventory management practices, many organisations rushed to introduce FMS
which they viewed to be magical and simplistic method of doing business (Farrington &
Lysons, 2006). In this context organisations overlooked its implementation which is a

20

very important aspect of FMS systems. It provides integration of related functions into
the system (in particular capacity planning, inventory management and shop floor
control) allows feedback from them, making sure that the production plan is constantly
kept up to date (Baily, Farmer, Barry, Jessop, & David, 2008). He argues that FMS is
termed as enterprise resource planning (ERP) which represents a group of software
programs designed to tie together disparate company functions to create more efficient
operations in the firms.
Enterprise resource planning system is a complete enterprise business solution to
problems of inventory control. According to Jacobs, Berry, Whybark, & and Vollmann
(2011) the enterprise resource planning system consists of software support modules such
as marketing and sales, procurement, distribution, production and inventory control. They
further argue that Enterprise resource planning is the equivalent of the organizations
central nervous system, sensing information about the condition of different parts of the
business and relaying the information to other parts of the business that need it.
Hendricks, Singhal, & Stratman, (2005), researched on the effect of investments in
Enterprise Resource Planning on a firms long term stock price performance and
profitability. Their study was based in USA. The findings of their study indicated mixed
results. Their findings indicated evidence of improvement in profitability but not in stock
returns. According to Ahmed & Ayman, (2011) enterprise resource planning is adopted in
many firms in attempts of improving business performance. Federici, (2009), outlined
reasons for firms acquiring enterprise resource planning systems as providing better
operational and management of information.
There is feedback from vendors, the production shop, and store when a problem arises in
implementing the production plan, which enables adjustments to be made to overcome
these problems immediately (Baily, Farmer, Barry, Jessop, & David, 2008). FMSII is
used for simulation purposes (Emmett & Granville, 2007). The system will simulate the
consequences for order releases, current order schedules, inventories, work in progress,
finished product, labour costs and cash flow. If this is not a viable proposition then an

21

alternative can be tested, and once this found the necessary adjustments can be made
throughout the system. It is used for financial plans, reduction plans and inventory levels
(Emmett & Granville, 2007).
2.4.2 Fuel Inventory Control
Fuel Inventory System (FIC) is a comprehensive fuel management solution, enabling
companies to dramatically lower the cost of procuring, managing, and selling bulk fuel. It
can also cover areas such as inventory management, order management, environmental
compliance and financial management. The model automates all aspects of the fuel
management process including demand forecasting, fulfillment, inventory management,
sales and purchase order management, financial management, and environmental
compliance. Using FIC, fuel procurement and sales managers can maximize fuel margins
by understanding demand patterns; optimizing inventory; centralizing supply contracts;
determining best price on market versus contract; determining margin on each sale; and
reconciling deliveries, invoices, payments, and taxes.
This part of inventory management system is at tool that can unites suppliers,
distributors, and buyers in the largest fuel management network with billions of litres of
fuel inventory managed annually. The solution automates all aspects of the fuel
management process using a modular architecture that enables customers to address
specific challenges in the fuel supply chain and scale to meet expanding requirements. By
partnering with key solution providers in the fuel industry, and seamlessly integrating
suppliers, distributors, carriers, and retailers into the network, FMS delivers automation
across the entire fuel supply chain. Because fuel is a mission-critical aspect of our
customers' businesses, FIC is delivered in a high availability SaaS (Software as a Service)
offering with enterprise-class security, scalability, and fail-over support.
Since the desire of most organisations to reduced run-outs, retains, and over- & underpayments; lower working capital requirements and fuel costs; streamlined procurement,
delivery, sales, and financial management; greater visibility into fuel inventory, true costs,
and margins and improved security of supply

22

This system of Inventory Management provides visibility and forecasting of fuel

inventory. Using inventory data collected automatically via automatic tank gauges
(ATGs), or manually gathered through a central portal, Inventory Management provides
visibility into inventory status, history, usage, and deliveries. Advanced forecasting
capabilities predict run-out and retain situations and automatically generate orders
anticipating fuel needs across all tanks. FMS enables Just-In-Time (JIT) inventory levels
that minimize working capital requirements.
Further, the desire to automate inventory system is also made easier. FMS Order
Management automates purchase order, dispatch, delivery, and sales order processes for
bulk fuel. Order Management enables the creation, tracking, and management of fuel
purchase orders, including those generated by FIC Inventory Management and other
order management systems. For distributors, Order Management also automates bulk fuel
sales order processes with phone and online ordering, accurate price quoting, credit
workflow, margin visibility, and sales order approval processing. Order Management's
Strategic Sourcing module enables buyers to analyze all sourcing options for a given fuel
purchase, considering fully accounted cost, contract ratability, and other factors to present
optimal sourcing options given user-defined prioritization rules.
Order Management dispatches orders directly to carriers, calculating prioritization and
time windows to avoid run-out and retain situations, and enabling split load planning and
diversion processing. For in-house fleets, Order Management schedules truck deliveries,
evaluating round trip times, truck capacity, tanker compartment allocation, and driver
assignments. Fuel distributors can improve profitability by analyzing margins on each
sales order, improving invoice accuracy, and enhancing sales process efficiency. Order
Management also captures electronic and manual delivery, order, and bill of lading
(BOL) information from carriers.
FIC Environment Compliance reduces the cost and mitigates the risk of compliance with
environmental regulations and corporate policies. By gathering and tracking inventory,
sales, and delivery data, Environmental Compliance analyzes variances for improved

23

visibility, tracking, resolution, and reporting of potential non-compliance situations.

Environmental Compliance provides notification and management of ATG alarms via a
central management console and an advanced response protocol. Reporting capabilities
automate the creation and management of regulatory compliance reports.
FIC Financial Management automates critical financial processes associated with bulk
fuel including freight calculation, pricing, invoicing, and reconciliation. Financial
Management gathers manual and electronic bills of lading as well as price feeds from all
major fuel price services providing centralized management of freight contracts. Using
this information, Financial Management accurately calculates product and freight costs.
These costs, as well as any contracted pull obligations, are utilized by FMS' strategic
sourcing capability. Financial Management includes best-in-class tax calculation of
indirect motor fuels taxes ensuring proper invoice calculation. Financial Management
also reduces over-payment by automating the process of reconciling financial
documentation including delivery notification, BOLs, invoices, payment notifications,
and bank drafts using a manage-by-exception approach that minimizes manual effort and
costs.
2.4.3 Vendor Inventory Management (VIM)
Vendor Managed Inventory (VMI) is where the manufacturer is given responsibility for
manufacturing and controlling inventory level at the retailers distribution centre and in
some instances at the retail store level as well (Baily, Farmer, Barry, Jessop, & David,
2008). VMI is a process that falls under the push stock management processes Irungu &
Wanjau (2011). These are processes that can be triggered by a Petroleum stationss
interpretation of an expected demand in inventory and supply is scheduled to meet this
demand. A well designed and developed approach to VMI can lead not only to reductions
in inventory levels in the supply chain, but also to secondary savings arising from
simplification of systems and procedures (Rushton, Croucher, & Baker, 2011).
This is because there is potential for great improvement of Petroleum stations
performance of Petroleum stations. This is due to elimination of delays in both

24

information and material flow for the Petroleum stations. The achievement of delivery on
time is a standard procurement objective. If goods and material arrive late or work is not
completed at the right time, sales may be lost, production halted, and damages may be
invoked by dissatisfied customers (Baily, Farmer, Barry, Jessop, & David, 2008). Failure
to achieve supply on time may slow down the cash to cash cycle, thus reducing the
organizations efficiency or profitability (Baily, Farmer, Barry, Jessop, & David, 2008).
VMI provides the opportunity to develop a much close relationship and binding
relationship among the retailers and the manufacturers as well as giving a much better
visibility of the real demand. The supplier takes the responsibility for operational
management of the inventory within a mutually agreed framework of performance targets
which are constantly monitored and updated to create an environment of continuous
improvement (Baily, Farmer, Barry, Jessop, & David, 2008). Users receive improved
service levels, and cash flows, and vendors enjoy better visibility of changing demand
and greater customer loyalty (Emmett & Granville, 2007).
Reduced administrative costs due to elimination of the need to monitor levels, paper to
computer entries and reduced re-ordering costs (Farrington & Lysons, 2006). This can
lead to significant reductions in inventory holding right through the supply chain
(Rushton, Croucher, & Baker, 2011). The vendor is able to schedule deliveries efficiently,
as it has better visibility of the clients requirements and it can incorporate these
requirements at an early stage its product schedules (Rushton, Croucher, & Baker, 2011).
VMI is likely to smooth demand. Companies that can react promptly and accurately to
the needs of their customers are more likely to attract orders than those that cannot (Baily,
Farmer, Barry, Jessop, & David, 2008). If a company is seeking competitive advantage of
becoming better able to respond to customer needs as they arise, then it follows that the
company will require a greater degree of responsiveness from its own suppliers (Baily,
Farmer, Barry, Jessop, & David, 2008).
VMI information improves forecasts of customers requirement, thereby enabling
manufacturers to plan production to meet customer demand (Farrington & Lysons, 2006).

25

It enhances operational flexibility. It enables production times and quantities to be

adjusted to suit the suppliers (Farrington & Lysons, 2006). While VMI has been voted
best by the retail managers, it has its shortcomings associated with trust, turnover of
suppliers and small scale suppliers who lack financial capacity to implement VMI system
sustainably (Irungu & Wanjau, 2011).
They further argue that sometimes this interferes with customer satisfaction as some
goods on VMI become one-offs due to the high turnover of suppliers because some new
suppliers are yet to develop credibility in their respective area of supply. The VMI
effectiveness as a system is affected by inventory flow, the quality of ICT and quality of
information and sharing but is not affected by the quality of relationship. Most of the
empirical studies addressing the issue of VMI have focused on manufacturing firms and
retailers (Vigtil, 2007; Kauremaa, Smares, & Holmstrom, 2009).
Irungu & Wanjau, (2011), argued that vendor managed inventories systems could be used
to gain competitive advantage by leveraging on inventory supplier reliability and strong
buyer/supplier relationships to grow revenue and reduce risk. Their findings suggest that
vendor managed inventory has been effective in retail supermarkets by improving stock
management, cash flow and risk management. Irungu & Wanjau, (2011), stressed that
vendor managed inventory system has a goal of accomplishing deeper integration and
collaboration between the members of the supply in order to cope with the ever
decreasing time windows for product and service fulfillment and the requirement for
operational improvement of operational efficiency.
Classen, Weele, & Raaij, (2008), testify empirically that implementation of the VendorManaged Inventory system leads to improved service levels rather than cost reductions.
Vendors and clients have linked computer systems often using Electronic Data
interchange (EDI). This allows the vendors to monitor levels of inventory. Further the
Vendor-Managed inventory initiative has the goal of accomplishing deeper integration
and collaboration between the members of the supply chain in order to cope with
requirements for the improvement of operational efficiency (Irungu & Wanjau, 2011).

26

Stevenson (2006) observed that stocking level variability is caused by factors such as
deficient information sharing and deficient forecasts. He found out that variability of
inventory majorly results due to firms not applying the inventory management systems.
He enumerated the effects of inventory variability as inaccurate forecasting leading to
periods of not having enough capacity leading to inadequate customer service and high
inventory costs. Performance of Petroleum stations can be measured from increased
trustworthiness of the firm due to adoption of appropriate inventory control system which
may enhance visibility of demand. Inventory management systems would enhance
procurement efficiency and effectiveness of purchasing function and hence improve
performance of the firm (industry-trade, 2008). Inventory management systems give
feasibility in operation functions.
Vendor inventory management is capable of continuously replenishing and restocking. It
is an inventory management system that can be adopted by Petroleum stations
enterprises. The aim of vendor inventory management is to develop free flowing order
fulfillment and delivery systems, so that pipeline inventories can be substantially reduced
(Baily, Farmer, Barry, Jessop, & David, 2008). According Farrington & Lysons, (2006),
influential thinkers in supply chain management have suggested that inventory is waste
and should be avoided wherever possible.
The reasons behind this view are stocks of material can adversely impact any
organization because they tie up capital. However they did not clarify the solution to
excess inventory held by business firm. It is also argued that stocks are frequently held
for wrong reasons sometimes to mask inefficiencies in the management of organization
(Rushton, Phil, & Baker, 2011). Dimitrios (2008), adds that too little inventory often
disrupt business operations. It is further argued that too much inventory consumes
physical space, creates a financial burden and increases the possibility of damage,
spoilage and loss (Nyabwanga & Ojera, 2012).
Vendor inventory management systems use up-to-the-point-of-sale information systems
to identify real time demand and to pull product through directly from the supplier

27

through the distribution centre (DC) and on the retail outlet (Baily, Farmer, Barry, Jessop,
& David, 2008). VIM systems are thus able to synchronize this flow of product by
focusing on the end-user requirements via the use of real-time demand, linked to flowthrough distribution systems that allow for cross-docking, store ready packaging and
automated handling (Baily, Farmer, Barry, Jessop, & David, 2008).
Inventory is a critical resource and maintaining it is necessary for Petroleum stations.
Inventory control system may be adopted for purposes of reducing storage costs and
factory overall costs. The system provides the organizational structure and the operating
policies for maintaining and controlling goods to be stocked (Jacobs, Berry, Whybark, &
and Vollmann, 2011).
According to their study raw materials ordering frequency is indentified as an important
factor contributing to inventory cost. Frequent ordering in small quantity is considered as
an important strategy for choosing inventory control system (Jacobs, Berry, Whybark, &
and Vollmann, 2011). Inventory control can be defined as the policies and procedures
which systematically determine and regulate which things are kept in stock and what
quantities of them are stocked (Rushton, Phil, & Baker, 2011). For each item stocked
decisions are needed as to the size of the requirement, the time at which further supplies
should be ordered and the quantity which should be ordered.
However decisions regarding the amount of inventory that a company should hold and its
location within a companys logistics network are crucial in order to meet customer
service requirements and expectations (Baily, Farmer, Barry, Jessop, & David, 2008).
According to Kumar & Suresh, (2008) inventory control ensures that the financial
investment in inventories is minimal. They further create a linkage between efficient
utilization of working capital and minimization of cost due to deterioration, obsolescence,
damage and pilferage of inventory. They conclude that inventory control promotes
economy in purchasing.

28

However their study did not indicate the extent to which inventory management systems
reduce cost of the firm. This study proposes to assess the effect of cost reduction on
Petroleum stations performance of the firms. Kumar & Suresh, (2008), argue that
effective control on inventory is a must for smooth and efficient running of the
production cycle with least interruptions. They proceed with their argument that this is
warranted by varying intervals between receiving the purchased parts and transforming
them into final products. They further argue that inventory control would ensure adequate
supply of products to customers and avoid shortages and ensure timely action for
replenishment. Inventory management systems may ensures smooth production and
hence no stock-out.
Fawcett, Ogden, Magnan, & Cooper, (2006) appreciate the fact that companies have
struggled to invest in technology of inventory management systems and organizational
structures needed to achieve data and systems synchronization that enable coordinated
inventory flows. This enhances timely inventory replenishment hence ensuring
availability of supply as demand arises. According to Baily, Farmer, Barry, Jessop, &
David, (2008) it is vital to get the balance of cost and service right. They argue that
specific inventory targets are agreed and it is the responsibility of the manufacturer to
ensure that suitable inventory is always available.
They continue arguing that such depend on timely information and suitable computerized
inventory management systems which have become available in recent years. However
they fail to clarify whether the situation has improved than before or not. Therefore the
current study intends to clarify the same.
2.4.4 Statistical Inventory Reconciliation (SIR)
SIR is a stand-alone leak detection method for underground storage tanks (USTs) that
uses daily inventory, sales and delivery information to provide a certified monthly
compliance result. This system is recognized within the petroleum industry as one of the
most efficient and cost effective means available for leak detection and regulatory
compliance. The system analyzes the tank and connected piping system together to

29

provide an accurate and dependable report on leak detection compliance, inventory and
system status. It is capable of setting the standard for leak detection.
Variance threshold set as low as 1% of throughput. Identified fuel losses are grouped
according to loss category and Customers are notified by E-mail or Web regarding
variance sources, along with the recommendation for resolution of the variance. The
major losses threatening proper functioning of inventory management system is the
inability to detect sources of losses. However, Statistical inventory reconciliation is able
to minimize blend ratio off, blend ratio inverted, programmed incorrectly; meter
mapping, meter calibration error, meter drift; Incorrect tank chart data; water, inventory
too low to register on probe, theft or pilferage; stuck float, communication; catastrophic
or slow leak from pipe, tank, or sump and delivery short, delivery cross drop
In order to manage tank variance threshold, SIR is there to offer solutions. Each tank that
exceeds the specified variance threshold is assigned to the analyst for review. Standard
operating protocols are followed to investigate variances for root causes. These protocols
may include consultation with the customer to request additional information such as
BOL data, meter calibration results, and various other maintenance records for the fueling
system. Once root causes are identified, a recommendation is generated and delivered to
the customer for review. Once the customer implements the recommendation, the analyst
monitors the tanks and confirms variance has returned to threshold. The analyst
documents that the issue has been resolved and closed which is referred to as inventory
management by exception.
To enable customer satisfaction, this system technologically combines with superior
customer service, makes the system best choice. Statistical Inventory reconciliation is a
system for forecasting or projecting requirements for finished products at the point of
demand (Farrington & Lysons, 2006). DRP systems are designed to take forecast demand
and reflect this through the distribution system on a time-phased requirement basis
(Baily, Farmer, Barry, Jessop, & David, 2008). From these projections, aggregated,

30

timephased requirements schedules for each echelon in the distribution system can be
derived (Rushton, Croucher, & Baker, 2011).
Statistical Inventory reconciliation system acts by pulling the product through the
distribution system once demand has been identified (Baily, Farmer, Barry, Jessop, &
David, 2008). According to Rushton, Phil, & Baker, (2011) the system works to the
elimination of inventory. The Statistical Inventory reconciliation system tries to combine
the need for lower inventory investment with improved customer service. According to
Hansen & Mowen (2007) lowering inventory level would give organization a competitive
advantage due to production of quality products at lowering prices and it will respond
faster to customer needs. Businesses seek ways to reduce the time to bring products and
services to market place to gain competitive edge (Hanke & Wichern, 2009).
It enables physical resources requirements to be planned together with production and
purchasing control. It controls the entire logistics system (Baily, Farmer, Barry, Jessop, &
David, 2008). Inventory management systems have effect of smoothing the operations of
the firm hence reducing lead time (Cousens, Szweszewski, & Sweeney, 2009). According
to (Langfield-smith et al, 2009) time delays in production affect Petroleum stations
performance negatively. They assert that cycle-time management can be used as
competitive advantage. However Cousens, Szweszewski, & Sweeney (2009) are of
contrary opinion that reduction of lead time can only be beneficial if does not affect
negatively operations of the firm.
The control system may have an implication on predictability of future demands and
speed of the firms production scheduling to meet customer demand. DRP serves a
central role in coordinating the flow of goods inside the factory with the system modules
that place the goods in the hands of the customer (Farrington & Lysons, 2006). By
analyzing hourly sales, delivery, and inventory data on a daily basis, our analysts can
review and diagnose inventory quickly and accurately. The need to improve on service
delivery goes a notch higher by technology. Statistical inventory reconciliation is capable
of providing hourly delivery, sales, and inventory data in an agreed upon electronic

31

format, such as electronic file or an automatic posting to FTP servers. Predictability of

future demands, resource requirements and consumer needs may contribute to flexible
operational performance. Bowersox, Closs, & Cooper (2007), state that competency of a
firm can be measured by how well it is able to adapt to unpredictable situations.
Accurate forecasting may have an effect on a firms inventory level. Chang & Lin (2010)
state that bullwhip effect is an example of predictive inaccuracy. Hanke & Wichern
(2009), add that capacity of operational activities of the firm will be such that its output
just matches demand. They say that excess capacity is wasteful and costly; too little
capacity means dissatisfied customers and lost revenue. They argue that having the right
capacity requires having accurate forecasts of the demand and the ability to translate
forecasts into capacity requirements. DRP system take forecast demand and reflect this
through the distribution system on a time-phased requirements basis (Rushton, Croucher,
& Baker, 2011). This system has ability to filter tank data with acceptable variances to
isolate variances. The system also performs statistical smoothing routines to normalize
data to enable more efficient investigation by analysts.
According to Quesada, Gazo, & Sanchez, (2012) accurate demand and sales forecasts
help a firm out of stock-out situations and allow a business firm provides high level of
customer service. The control system is fronted as to facilitate accurate prediction of
customer demand and hence timely response to their requirements. DRP provides the
basis for integrating the manufacturing planning and control system from the firm to the
field (Farrington & Lysons, 2006). Statistical inventory reconciliation is referred to as
daily loss advisor. The Daily Loss Advisor tool helps users save money by helping in fuel
loss control. A typical site that loses 1% of throughput to unexplained causes can
potentially save at least 50% of that loss by addressing controllable factors identified by
Daily Loss Advisor.
2.5 Organisational Performance
To reduce stockouts and improve performance, businesses should employ category
management practices and automatic replenishment programs such as continual

32

replenishment planning or vendor-managed inventory (Basuroy, S., Mantrala, M., and

Walters, (2001). To implement category management practices effectively, proper shelf
space allocation must be a priority as the amount of inventory on display may stimulate
demand. Borin et al. (1994) recognizes the effects of shelf space allocation on stock outs
and operating costs and proposes an optimization model for the joint product assortment
and shelf space allocation decision and shows that ignoring the effects of stock outs can
yield less than desired results.
Eroglu et al. (2011) posits that shelf space management has a direct effect on shelf
stockouts and suggests that managers should allocate shelf space not only on the basis of
case pack quantity but also on consumer demand. Deloof (2003) established that
shortening inventory conversion period is a precursor to increasing stock out costs and
will eventually result in loss of sale opportunities hence poor performance. According to
Bourne, Kennerley, & Franco-Santos (2005) performance measurement is traditionally
concentrated on financial measures. In this context Petroleum stations performance is a
measure of change of operations of Petroleum stations or their outcome resulting from
use of inventory management systems.
According to Department of public works (2006) it is significant that what measured is
not only important to the business firm but should also cover all core areas. Petroleum
stations performance provides the basis for a Petroleum stations to assess how well it is
progressing towards its predetermined objectives. According to Atrill (2006) there is
need to analyze the costs of maintaining certain levels of inventory as there are costs
involved in holding too much stock and there are also costs involved in holding too little
inventory. In the cost structure of most of the products manufactured the cost of materials
exceeds 50% of the total cost (Ramakrishna, 2005). Ramakrishna (2005), argues that
inventory control systems provides an opportunity to reduce manufacturing costs and be
treated as a profit centre, this may affect the operational performance of Petroleum
stations.

33

According to Lardenoije, Van Raaij, & Van Weele (2005) financial measures ignore
market dynamics and increased complexity in acquisition of goods and services for
business firms. They are of contrary opinion that firms have to assess the complexity of
acquisition of inventory and on how to control in order to improve Petroleum stations
performance of the firm. According to Dias, (2005) the function of inventory control is to
measure and monitor the stocks on which are major concern to the administrators. The
study challenges the entrepreneurs to find formula to reduce inventory without
compromising production and without increasing cost.
Rajeev (2010) argues that inventory management practice is a way of acquiring
competitiveness. Their study was carried out in Bangalore, India with reference to
machine tools small scale enterprises. Variables of his study were inventory management
system as independent variable, and cost reduction as dependent variable. The findings of
the study indicated positive relationship between variables. The present study has slightly
different variables. Dettoratius, Raman, & Craig, (2013) state that a lot of revenue is lost
due to stock-outs induced inventory inaccuracy.
Salawati, Tinggi, & Kadri, (2012), analyzed the impact of inventory management on
performance. They empirically examined the relationship between inventory management
and firm performance on a sample of financial data for 82 construction firms in Malaysia
for a period 2006-2010. They employed regression and correlation technique to analyse
their findings. Their finding was that inventory management is positively correlated with
firm performance. Their study focused only on general performance of the firms using
financial change as a performance indicator.
A company may sustain competitive advantage by employing appropriate inventory
management systems. According to Rajeev, (2008) there is increasing need for business
enterprises to embrace inventory management systems as a strategy to improve their
competitiveness. Similarly Sushma & Phubesh (2007) in their study of 23 Indian
consumer electronics industry firms established that business inventory management
policies had a role to play in their profitability performance.

34

According to Ogbadu, (2009) profit is an index for measuring performance.

Manufacturing Petroleum stations performance is a combination of practices; hence
several performance measures can be used efficiently. According to Vastag & Whybark,
(2005) the most typical measures of Petroleum stations performance are rejects and scrap,
reworking, labour and machine productivity, product quality, inventory levels and
turnover, unit manufacturing cost, manufacturing cycle time, delivery speed and
reliability. Much literature suggest that inventory management systems effectiveness and
efficiency as measures of procurement performance which map onto Petroleum stations
performance of the organization in terms of competitive advantage, level of profitability,
providing error-free goods and service, cost efficiency and increased level of output.
Therefore the present study will adopt the same performance measurement indicators to
measure Petroleum stations performance in Kenya due to their application of inventory
management systems.
2.6 Critical Review of Literature
Studies available have failed to provide a guide on the area of inventory management
system influence on organizational performance. On the role of inventory management
system on the performance of businesses, Sushma & Phubesh (2007) in their study of 23
Indian Consumer Electronics Industry firms established that businesses inventory
management policies had a role to play in their profitability performance. Lazaridis &
Dimitrios (2005) in their study of 131 companies listed in the Athens Stock Exchange
showed that mismanagement of inventory will lead to tying up excess capital at the
expense of profitable operations and suggested that managers can create value for their
firms by keeping inventory to an optimum level.
Also, Rajeev (2008) in his study of 91 Indian Machine Tool SMEs to evaluate the
relationship between inventory management system and inventory cost established that
inventory management systems have a positive impact on the inventory performance of
businesses and also have an eventual effect on the performance of businesses. Juan &
Mertinez (2002) in their study of 8872 small and medium-sized Spanish firms also

35

demonstrated that managers of firms can create value by reducing the number of days of
inventory.
Inventory management systems help increase operational efficiency of firms; improves
customer service; reduces inventory and distribution costs; and enables businesses track
items and their expiration dates consequently balance between availability and demand
(Pandey, 2004). Considering the limited literature related to inventory management,
particularly of SSEs, the present study assumes significance. To date there are little or no
studies that have been carried out in the Kenyan small scale enterprises context to
establish the quantitative association between inventory management system and
business performance and no model has been developed to show the relationship.
2.7 Research Gaps
Therefore the objective of this study is to bridge this gap by investigating the effects of
inventory management systems and how this affects organisational performance in the
petroleum industry. The present study further validates, using regression analysis, the
impact of the degree of inventory management system on the performance of the
petroleum stations studied.
Various performance measures have been identified yet there is inadequate evidence of
studies that have considered performance measures such as market share, customer
loyalty, product service quality and financial outcomes in the petroleum sector with a
focus on the petrol stations. Moreover, there is lack of study evidence on the dimensions
of inventory management systems proposed for this study. There is no study that focused
on fuel management system, fuel inventory control, vendor inventory management and
statistical inventory reconciliation model. Therefore this study explores to find out how
these dimensions can influence performance of petrol stations in Kitale region.
2.8 Summary of the Chapter
In summary the reviewed literature on inventory management systems reveals that
various factors have influence on organisational performance. These factors have not

36

captured what this study is exploring. At the same time, there are enough literature on the
issues of supply chain management, purchasing and procurement. These literatures
include inventory management. However, the literature identified the failures and poor
performances that organisations record on the same area. But the literature failed to
provide guide on the causes of this failures yet enough evidence that can guide practice is
available.

37

CHAPTER THREE
RESERCH METHODOLOGY
3.1 Introduction
The main objective to achieve in the proposed study was to determine whether capacity
management has an effect on service quality with reference to petroleum distribution. To
achieve this, decisions have been made concerning research design. Data source, data
collection method and statistical analysis were performed. This chapter sets out the
decision points.
3.2 Research Design
The specific objective of this study are to examine the effects of fuel management system
on performance of petroleum stations in Kitale region; to establish the effects of fuel
inventory control on performance of petroleum stations in Kitale region; to determine the
effects of vendor inventory management on performance of petroleum stations in Kitale
region and to examine the effects of statistical inventory reconciliation on performance of
petroleum stations in Kitale region. These objectives concern a situation at one point in a
given context thus the study will employ an empirical design (Cooper & Schinder, 2003).
The problem has been reduced to a research question. Formalized research with data at a
fixed point will be conducted thus the nature of the research will be cross-sectional. To
allow generalization of the research findings to several oil firms a descriptive survey
research will be conducted to answer the what and how relationships of the proposed
study variables Cooper and Schinder (2003). This design will be used because it is more
precise and accurate as it involves description of events in a carefully planned way
(Babbie, 2004). It also portrays the characteristics of a population in their natural setting
fully (Chandran, 2004). The unit of analysis is proposed to be the individual firms in the
oil distribution sector.
3.3 Population of the Study
The population of study will consist of all operators, branch managers and customers of
these petrol stations. This will consisted of the oil distribution companies registered in

38

Kenya, with local network operations and have their head offices in Kitale and their
network customers based in Kitale region for convenience. There are 12 oil companies
with network stations in Kitale. The respondents representing the oil companies will be
the operation managers or their equivalent of each company while the station managers
represented the customers. This is because most of the inventory decisions are made by
those in charge of the operations of the firm. The customers population will obtained
from visits to the 100 branded petrol stations in Kitale region.
Table 3.1: Target Population
Name of company
Total Kenya
Shell
Kenol Kobil
Libya Oil
Hashi
Gulf
Petro
Tosha
Olympic
Oilcom
Delta
Gapco
TOTAL

Number of service stations

25
15
14
10
2
4
4
4
6
3
7
6
100

Target Population
4*25 =100
4*15=60
4*14=56
4*10=40
4*2=8
4*4=16
4*4=16
4*4=16
4*6=24
4*3=12
4*7=28
4*6=24
4*100=400

3.4 Sampling Techniques & Procedures

The entire population of 16 operation managers will be used to represent the oil
companies and their customers. Stratified proportionate random sampling technique was
used to select the study sample based on the name of the companies. According to
Chandran (2004), stratified proportionate random sampling technique produce estimates
of overall population parameters with greater precision and ensures a more representative
sample is derived from a relatively homogeneous population.
Stratification aims to reduce standard error by providing some control over variance.
From each stratum the study used simple random sampling to select a sample of 30%of
the population (64 service stations). Kotler (2011) argues that samples of about 30% of a

39

population can often give good reliability. The random sampling is influenced by the
central limit theorem which indicates that if random samples of observations are selected
from any population at different points in time or other the sampling distribution of the
means will be approximately normal (Kothari, 2004). A formula propounded by Cochran
(1963) will be used to determine the size as follows;

Where; n is the sample size

N is the population size
is the level of precision (95%; e = 0.05)
Given that N=400 (see Table 3.1); 2 =0.052 Therefore n= 400 (1+ (400*0.052) = 200,
hence from the above a sample of 200 and another 200 customers randomly selected on
visit to these petrol stations will form the respondents sample size for this study. The
Institute of Economic Affairs (2009) defines a sample size as a function of logistics and
homogeneity or heterogeneity of the population.
According to Sekaran (2006) adequacy, means the sample should be big enough to enable
reasonable estimates of variables to be obtained, capture variability of responses and
facilitate comparative analysis. Kothari (2004) recommends any large sample to be at
least 10% of the target population. The sample of 200, which is 50.0% of target
population, was therefore adequate to address the objectives of the study. The sub-sample
in each stratum will be calculated by multiplying the stratum population with the sample
proportion.
The sample size of this study will be 200 respondents, which will be picked through
stratified random sampling. Using confidence level of 95%; level off error of 5% and the
target population of 400, the stratified random calculator generated a population of 200.
This will be confirmed by the calculation of the formula given below that generated 200.
The participants will be asked to voluntarily participate in the study by answering a
questionnaire and the interview questions. This sample size produced adequate data for

40

analysis and in making conclusive generation. Simple random sampling method will be
used to select respondents from various strata. Gay (2002) identifies random sampling as
the best form of sampling as it allows all members of population to have an equal and
unbiased chance of appearing in the sample.
3.5 Data Collection Procedure
Data will be collected from operation managers who will be requested to complete the
questionnaire to determine the effects of inventory management system on organisational
performance and sampled customers who gave information on perceived service quality.
The questions to ask are based on indicators used in (Adenso-Diaz et al., 2002, Klassen
and Rohleder 2002 and Armistead and Clark 1994 for the various inventory management
system , Zeithaml et al (1990) for indicators of product and service quality and Bitner et
al. for customer loyalty. To avoid influencing participants, the questions will be set in
such a way that there will be no correct or wrong answer and the participants would not
know what is sought.
The questionnaire contains administration, classification and the performance mix items
constructed with categorical and ordinal responses. The likert scale will be a 5- point
scale from 1 strongly disagree to 5 strongly agree. Two sets of questionnaires will be
developed one for the motorists and the other for the attendants supervisors and
managers at the service stations. The questionnaire for managers and supervisors and
attendants will collect data on inventory management system and vendor performances of
automotive fuels per month on average. A comparison is intended to be done between the
responses of motorists visiting the various stations. In order that a fair comparison is
made, on the influence of the various marketing efforts on sales, an equal number of
respondents will be sampled from the stations.
The procedure will be to personally visit the stations and with research assistants to
administer the questionnaires to the stations management as well as motorists over a
period of four weeks. The motorists will be given the questionnaire after an introduction
and explanation of the purpose of the data collection exercise.

41

3.6 Data Collection Instruments

The instruments that were used are the questionnaires and interview schedule. The
questions covered areas of objectives of this study and the conceptual framework. Both
primary and secondary data will be used to obtain information for the success of this
research. Primary data were obtained through self- administration of questionnaires and
observations. These two methods will be identified because of their advantages and
ability to compliment the other. The respondents will be required to fill the designed
questionnaire so as to assist the researcher with the data that will be needed in the study.
The questionnaire was the main tool used in the research. The questionnaires will
consiust structured and semi structured questions and statements. Secondary data will be
obtained from research journals and the company reports and documents.
3.7 Pilot Study
A pilot study was conducted in a similar environment with 30 respondents drawn from
Panar Seed Company. The process was repeated again using the same respondents after
an interval of one week for reliability. Mugenda and Mugenda (2006), defines reliability
as a measure of the degree to which a research instrument yields consistent results or data
after repeated trials. A re-test method assessing reliability of data involves administering
the same instrument twice to the same subjects.
Content validity of the instruments will be determined through piloting, where the
responses of the subjects will be checked, against the research objectives. Mugenda and
Mugenda (2006), defines validity as the accuracy and meaningfulness of inferences,
which are based on the research results. For a research instrument to be considered valid,
the content selected and included in the questionnaires must be relevant to the variable
being investigated, (Neuman 2000).
3.7.1 Validity of the Questionnaire
Determining validity of the instrument will be indispensable characteristics of
measurement that must be considered in establishing the appropriateness and usefulness
of instruments of measurements. Although this instrument will be valid, face and content

42

validity of the instruments were established again by a panel of expert. Researchers

generally determine validity by asking a series of questions, and often look for the
answers in the research of others (Orodho, 2008). A pilot study will be carried out to
determine the validity of the questionnaire; a pilot study will be conducted in a similar
environment prior to the actual research. The participants in the pilot study will not take
part in the actual study.
Therefore validity of the instrument was realized after the researchers had examined the
content of the instruments, through judgment of experts and the supervisors validations,
which guided the researchers. The study applied different techniques to assess the
Cronbachs (1951) reliability coefficient alpha and to assess face and construct validity.
In order to ascertain face validity, an initial questionnaire was passed through the routine
editing after it was given to the panel of experts. They were asked to respond to the
questionnaire. Very few comments were received and some minor changes were done to
enhance the clarity.
3.7.2 Reliability of the Questionnaire
A reliability of the measuring instrument addresses the question of whether the results of
the measuring processes are consistent on occasions when they should be consistent
(Trochim, 2006). It is a statistical concept that is related to consistency and dependability,
that is, consistency in obtaining the same relative answer when measuring phenomena
that have not changed (Burns and Bush, 2010). Questionnaires have a very limited
purpose as they are often one-time data gathering methods with a very short life,
administered to a limited population (Norval, 2006). The following are important parts of
reliability: test-retest reliability (coefficient correlation of stability). Consistency is
estimated by comparing two or more repeated questions of the measuring instruments.
This gives an indication of the dependability of the result on one occasion which may
then be compared with the results obtained on another occasion and internal consistency
reliability. This indicates how well the test items measure the same thing (Blumberg, et
al., 2005). In this study reliability of the questionnaire was determined using a sample of
respondents. The items were measured by a 5-point Likert-scale, which ranged from

43

strongly disagree (1) to strongly agree (5). Reliability analysis was subsequently done
using Cronbachs Alpha which measures the internal consistency to establish if certain
items within a scale measure the same construct. Cronbach Alpha was established for
every variable.
3.8 Data Analysis and Presentation
The data obtained will be analyzed through descriptive statistics. Once the questionnaires
are filled, they will be edited in the field and also at home, coded, classified and entered
into a statistic software (SPSS 20) for descriptive analysis to discover correlations and
differences between the variables and sources . The mean and standard deviation were
used to represent the variables in form of tables. Correlation analysis will be used to test
the interaction between service context and service quality and capacity management
approach and service quality.
The significance of coefficients for each independent variable will be indicated by the PValue. The extent and nature of the relationship will be indicated by the coefficient and
its direction. Discriminant analysis will be used to test the mediating effect of service
context on the relationship between capacity management approach and service quality.
Regression analysis will be used to test the relationship between capacity management
approach and service quality. Differences will be tested using ANOVA for the oil
marketers classified into the big and small oil marketers depending on market share.
Hypothesis test will be conducted at the 0.05 level. Results of analysis will then be
displayed using statistical summary tables, charts and graphs.

44

REFERENCES
Adenso-Daz, B., Gonzlez-Torre, P. and Garca, V. (2002). A capacity management
model in service industries, International Journal of Service Industry Management, Vol.
13 (3), 286 302.
Alp, O. and Tan, T. (2006). Tactical Capacity Management under Capacity Flexibility in
Make-to-Stock Systems. Working Paper.
American Marketing Association. (2008). Definition of Marketing and Expected Product
Quality, Journal of Consumer Research, 16 (December), 344353.
Bashan, B (2011) Service marketing Mix, from www. Marketing91.com, accessed on 4th
December,2011.
Armistead, C. G. and Clark, G. R. (1991). Capacity management in services and the
influence on quality and productivity performance, Cranfield school of management
working paper 56/91.
Armistead, C. G. and Clark, G. R. (1992b). Service quality: The role of Capacity
management, Cranfield school of management working paper 30/92
Armistead, C. G. and Clark, G. R. (1994). The coping management strategy in services
and the influence on quality performance, International Journal of Service industry
management, Vol.5 (2), 5-22.
Antonacopoulou Elena, Kandampully Jay, (2000) "Alchemy: the transformation to
service excellence", The Learning Organization, Vol. 7 No.: 1, pp.13 22
Babbie, E. (2004). The practise of social research (10th Ed). Thomson Belmont CA:
Wadsworth Publishing Company.
Berry, L. L., Zeithaml, V. A. and Parasuraman, A. (1990). Five Imperatives for Improving
Service Quality. Sloan Management Review, Vpl 9 (3), 33-44.
Bitner Mary Jo , Bernard H. Booms, Mary Stanfield Tetreault (1990). The Service
Encounter: Diagnosing Favorable and Unfavorable Incidents, Journal of marketing,
vol.54 pp71-84. 39
Bolaji, K.(2003). Oil and the politics of natural resources governance in Nigeria, paper
prepared at the 14th Biennial Congress of the African Association of Political Science
(AAPS) held in Durban, South Africa June 26-28
Briec, W., Kerstens, K., Prior, D., and Van de Woestijne, I. (2010). Tangency capacity
notions based upon the profit and cost functions: A non-parametric approach and a
general comparison. Economic Modelling, 27(5), 1156-1166.

45

Buxey, G. (2003). Strategy not tactics drives aggregate planning. International Journal of
Production Economics, 85 (3) (2003), pp. 331346
Chandran, E. (2004). Research Methods. Nairobi: Starbright services limited.
Chan T, Cui G (2004). Consumer attitudes towards marketing in a transitional economy:
a eplication and extension. J. Consumer Mark. 21: 10-26.
Chase, R. B. and Bowen, D. E. (1991). Service Quality and the Service Delivery System,
in Service Quality: Multidisciplinary and Multinational Perspectives,
Brown, S.W., Gummersson, E.,Edvardsson, B., Gustavsson, B. (Eds). Massachusetts:
Lexington Books
Cook, S. 2008. Customer care excellence; How to create an effective customers focus, 5th
edition
Cooper, D., & Schinder, P. (2003). Business Research methods (8th Ed.). new delhi: tata
mcgraw hill.
Epictatus E.P. and G.M. Llanto (2005) Competition Policy and Regulation in Power and
Telecommunications. Philippines Institute for Development Studies. Discussion Paper
Series No. 2005-18, Makati.
ERC (2008) Energy Regulatory Commission Strategic Plan 2008 2012. Nairobi
Government Printer, Nairobi
Geng, N., and Jiang, Z. (2009). A review on strategic capacity planning for the
semiconductor manufacturing industry. International Journal of Production Research,
47(13), 3639-3655.
Green, L. (2005). Capacity Planning and Management in Hospitals. Operations Research
and Health Care, 70(2), 15-41.
Greenland, S.; Coshall, J. & Combe, I. 2006. Evaluating Service Quality and Consumer
Satisfaction in Emerging Markets. International Journal of Consumer Studies, 30 (6),
582-590. 40
Indetie L (2003) Emergence of Independent Petroleum Dealers in Kenya. IPRA Special
Innovation on Market Structure Journal of Marketing Research, 41 (May), 166-183.
Johnston, R. (1995). The determinants of service quality: satisfiers and dissatisfiers,
International Journal of Service Industry Management, Vol. 6 (5), 53 71.
Jones, P. and Kutsch, D. (2007). Essentials of Capacity Management, New York: John
Wiley & Sons, Inc.

46

Klassen, K. J. and Rohleder, T. R. (2002). Demand and capacity management decisions in

services. How they impact on one another, International Journal of operations and
production management, Vol.22 (5), 527-548.
Kothari, C. R. (2004). Research Methodology: Methods and Techniques. New Delhi:
New Age International Publishers.
Li, L., and Markowski, C. (2006). An analysis of hospital capacity management patterns
using Miles and Snow's typology. International Journal of Manufacturing and Enterprise
Development, 3(4), 312-338.
Newbery D.M. (2004) Regulation and Competition Policy: Longer-Term boundaries.
Utilities Policy 12: 93-95
Ochieng', J. P. (2006). Investigation of capacity management strategies : the case of
Kenya Airways. Unpublished MBA Project. University of Nairobi.
Ongondo, E. W. (2013). Effect of Capacity Management Strategies On Service Quality
in Safaricom. Unpublished MBA Project. University of Nairobi.
Old Mutual Securities Research (2013). Kenya Oil and Gas sector. Initiation of Coverage
Parasuraman, A., Zeithaml, V.A. and Berry, L.L. (1985). A conceptual model of service
quality and its implication for future research, Journal of Marketing, Vol.49 (3), 41-50.
Petroleum Institute of East Africa. (2012, 2013), petroleum insight 41
Rudberg, M., and West, M. B. (2008). Global operations strategy: Coordinating
manufacturing networks. Omega, The International Journal of Management Science,
36(1), 91-106.
Tan, T., and Alp, O. (2009). An integrated approach to inventory and flexible capacity
management subject to fixed costs and non-stationary stochastic demand. OR Spectrum,
31(2), 337-360.
Van Mieghem, J. A. (2003). Capacity management, investment, and hedging: Review and
recent developments. Manufacturing and Service Operations Management. 5 269-302.
Wong, A. 2000. Integrating Supplier Satisfaction with Customer Satisfaction. Total
Quality Management, 11 (4/5/6), S427-S432.
Yang, Z. and Fang. X. 2004. Service quality dimensions and their relationships with
satisfaction, A content analysis of customer reviews of securities brokerage services.
Zeithaml, V. and Bitner, M. (2003). Service Marketing: Integrating Customer Focus
across the Firm, New York: McGraw-Hill.
Research Work Plan 2016-2017

47

Work Description

Mar-Aug

Proposal Development
Proposal defense
Proposal Correction & Consultation
Proposal submission to Graduate
School
Permit requisition
Data collection, editing, entry and
analysis
Thesis writing up and consultation
with supervisors
Thesis submission and Defense
Thesis Correction, Binding and
Resubmission

48

Sept-Oct

Oct

Nov

Dec

Feb

MarApr

RESEARCH BUDGET
ITEM

KSHS

External Hard drive

25,000

Transport

35,000

Typing and binding

15,000

Photocopying

10,000

Stationery

12,500

Facilitation

45,000

Contingencies

15,000

Total

157,500

49

Appendix IV: Map of Kitale Region of Trans Nzoia County, Kenya

50

APPENDICES
Appendix I: Managers and Oil Station Operators Questionnaire
You have experience and knowledge that would be helpful in establishing the Effects of
Inventory Management System on Organisational Performance in petroleum sector. The
outcome of this study is expected to inform the documentation of inventory management
system appropriate for the petroleum distribution sector in future. Kindly spare a few
minutes of your valuable time to answer the questions below. The study is intended for
academic purposes only. The information given will be treated with utmost
confidentiality and the results will be analyzed and reported in summary .You will not be
required to give your name or any form of personal identification.
INFORMATION ON EFFECTS OF INVENTORY MANAGEMENT SYSTEM ON
ORGANISATIONAL PERFORMANCE
SECTION I: DEMOGRAPHIC INFORMATION OF PARTICIPANTS
Please indicate your relevant experience of service in this sector
0 to 5yrs
()
5 to 10yrs
()
10 to 15yrs
()
15 yrs and above
()
What is your level of level of the highest qualification by this time of study?
Primary/Secondary Certificate
()
Diploma/Higher
()
Undergraduate
()
Masters
()
PhD
()
Others ( ) Please specify:.
Types of Petrol brand products offered
Unleaded
Super Petrol
Regular petrol
Diesel
Kerosene

(
(
(
(
(

)
)
)
)
)

Identify the brand product that is popular with customers

Unleaded
Super Petrol
Regular petrol
Diesel

(
(
(
(

)
)
)
)

51

()

Kerosene

SECTION II: INFORMATION ON PERFORMANCE OF PETROL STATIONS

State the degree of your agreement with the following performance
dimensions as influenced by inventory management system
Dimensions
Financial outcomes
Market share
Product-service quality
Client Loyalty

()

SD
()
()
()
()

D
()
()
()
()

NA
()
()
()
()

A
()
()
()
()

SA
()
()
()

Strongly Disagree (SD); Disagree (D); Not Aware (NA); Agree (A) and Strongly
Agree (SA)

State the dimension most used in your organisation to measure

performance
Financial outcomes
()
Market share
()
Product/Service Quality
()
Client Loyalty
()
10. Please rate the degree of your agreement with the following
statements as related to the influence of inventory management
system on performance
Statement
SD D
N
A
SA
There are steady returns on investment
()
()
()
(
)
()
The firm runs on minimum costs of inventory
that improves on profitability
()
()
()
()
()
repeat purchases enhance stable sales
()
()
()
(
)
()
Reduced wastages enable sales maximization ( )
()
()
(
)
()
This petrol station is able to give value for money
()
()
(
)
()
()
Ability to satisfy customer needs
()
()
()
(
)
()
We are capable of fulfilling our customer needs ( )
()
()
(
)
()
Our services are fast and quick
wasting no customer time
()
()
()
(
)
()
Repeat buys since inventory is always available ( )
()
()
(
)
()
Prices are often customer pocket friendly
()
()
()
(
)
()
52

Stockoputs is never our problem

()
()
()
Our branch networks have increased
()
()
()
We take brands needed by customers to new market ( )
()
()
Ability to respond to market changes and
customer demands
()
()
()
SECTION III: INFORMATION
SYSTEM
1. Fuel Management System

ON

INVENTORY

()

()

()

()

MANAGEMENT

SA
A
N
Reduced run-outs, retains, and over- &
under-payments
()
()
()
Lower working capital requirements and fuel costs( ) ( )
()
Streamlined procurement, delivery, sales,
and financial management
()
()
()
Greater visibility into fuel inventory,
true costs, and margins
()
()
()
Stops fuel thefts
()
()
()
Improved security of supply
()
()
()

SD

()
()

()
(

()

()
()
()

()
()
(

SD

()

()

()

()

()

()

SD

2. Fuel Inventory Control

SA
A
N
The ability to automatically detect and notify
daily, weekly, and monthly inventory variances
()
()
()
Exploration of inventory, delivery, and sales
details to identify potential problems
()
()
()
Capability to do Full variance analysis
()
()
()
It enhances centralized policy-based management( ) ( )
()
Software-based statistical analysis detects
measurement errors and creates new tank
strapping chart
()
()
()
3. Vendor Inventory Management
SA

53

Fewer Stock-Outs are experienced

()
Increased Inventory Turn (Less Inventory) ( )
Improved Forecasting Ability
()
More Accurate Ordering and Fulfillment
()
More Stable Supply Chain
()
Closer Partnerships development
()
Improved Customer Experience
()
Better Manufacturer Knowledge
()
4. Statistical Inventory Reconciliation
SA
A means of leak detection
()
Superior customer service
Improves fuel inventory management
()
Potentially enables avoiding extensive
environmental damage
()
This uses daily inventory, sales and delivery
information to provide a certified monthly
compliance result.
()

()

()

()

()
()
()

()
()
()

()
()
()

()
()
(

()

()

()

()

()

()

()

()

()

()

()

()

A
()

N
()

D
()

SD
(

()

()

()

()

()

()

()

()

()

()

Appendix II: Customers of Petroleum Stations Questionnaire

You have experience and knowledge that would be helpful in establishing the Effects of
Inventory Management System on Organisational Performance in petroleum sector. The
outcome of this study is expected to inform the documentation of inventory management
system appropriate for the petroleum distribution sector in future. Kindly spare a few
minutes of your valuable time to answer the questions below. The study is intended for
academic purposes only. The information given will be treated with utmost

54

confidentiality and the results will be analyzed and reported in summary .You will not be
required to give your name or any form of personal identification.
SECTION I: DEMOGRAPHIC INFORMATION OF PARTICIPANTS
What is your level of level of the highest qualification by this time of study?
Primary/Secondary Certificate
()
Diploma/Higher
()
Undergraduate
()
Masters
()
PhD
()
Others ( ) Please specify:.
State the level of your customer visits to this petrol station
Regular
()
Sometimes
()
This is my first time
()
Please indicate your level of purchase of relevant experience of service in this sector
Less than 1 year
()
1-3 yrs
()
3-5 yrs
()
5 to 7 yrs
()
7 and above yrs
()
State the type(s) of Petrol brand products you like purchasing from this station
Unleaded
()
Super Petrol
()
Regular petrol
()
Diesel
()
Kerosene
()
Identify reasons why you like visiting this station
Fast and quick services
(
Quality products
(
Pocket friendly Prices
(
The station has few stockouts
(
Convenience of the variety of brands availability
None of the above

55

)
)
)
)
()
()