A

PRESENTATION

ON

“IMPACT OF INVENTORY MANAGEMENT ON FINANCIAL

PERFORMANCE OF THE FIRM”

BY

VIPULESH SHARDEO

ADMSN. NO. – 2014MT0349

INDIAN SCHOOL OF MINES

Inventories are the current assets which are expected to be converted within a year in the form of cash or accounts receivables.

It consists of 20-30% of the investment of the total investment of the firm.

An inventory can be classified into three parts:-Raw materialWork-in-processFinished goods

Purpose of inventory control is getting the right inventory at the right place in the right time with right quantity.

INTRODUCTION

According to Rosenblatt, the inventory management costs are the price which is paid by the customer but it is the cost to the owner.

According to Kotler, inventory management is the technique of managing, controlling and developing the inventory levels at different stages so that there is regular supply.

According to Coyle, inventory management is the management of the materials in motion and at rest.

Sometimes, inventory and stock are considered as the same thing. But there is a slight difference between them. Stock is storage kept in specified place.

Inventory Management: Concept

The supplies inventories involves the materials required for the maintenance, repair and operating that do not go to the final product.

Inventory management is also defined as it is the science and art of managing the level of stock of group of items which incurred least costs and also reach the objectives set by the top management.

Inventory management has two goals:First goal is to avail the goods at right place in

right time.Second goal is to increase the production

efficiency.

Contd..

Costs related to inventory:Purchase costs.Ordering costs.Carrying costs.Shortage costs,

Inventory costing methods:FIFOLIFOWAC(Weighted Average Cost)

WAC = Value of material in stock/ Quantity in stock.Standard Price.Current Price.

SOME POINTS RELATED TO INVENTORY MANEGEMENT

Inventory Model:EOQ Model

First developed by F.W. Haris in 1913 but still R.H. Wilson is given credit for this model due to his early in-depth analysis.

Also known as Wilson EOQ Model.The economic quantity is the level fo

inventory which minimizes the total inventory costs.

It is the optimal level of inventories which satisfies the demand constraints and cost constraints.

Q = (2.Co.D/Cc)1/2

Contd…

Assumptions of EOQ model:- There are some assumptions on which EOQ is calculated. These

assumptions are:- There is known and constant holding cost. There is a known and constant ordering cost. The rates of demand are known. There is known constant price per unit. No stock-outs are allowed. Replenishment is made instantaneously.

Inventory Control techniques: ABC Analysis. Minimum level. Maximum level. Reorder level. Just In Time. Outsourcing. Computerized Inventory system.

Contd…

For the case study three major steel manufacturing companies are taken: SAIL, TATA steel, JSW Steel.

Some financial terms are measured and compared like operating profit per share, inventory turnover, net profit, assets turnover and return on assets.

The financial performance of the firm is indirectly goes to its profitability.

After comparing we reach at the point where it is cleared that there is some relationship between the inventory and profitability.

CASE STUDY

Inventory turnover:IT = COGS/ Avg. Inventory.It measures the inventory management is poor

or good.

SOME FINANCIAL TERMS RELATED TO INVENTORY AND THEIR MEASURES

2014 2013 2012 2011 20100

1

2

3

4

5

6

7

8

9

Inventory Turnover Ratio

JSW SAIL TATA

Net profit margin:Deduction of excess revenues to the expenses.

Contd…

2014 2013 2012 2011 2010

-10

-5

0

5

10

15

20

Net Profit Margin(%)

JSW SAIL TATA

Return on Asset:It is nothing but return of Investment.It measures the profitability of the firm.

Contd…

2014 2013 2012 2011 10100

100

200

300

400

500

600

700

800

900

1000

Return on Assets Including Revaluations

JSW SAIL TATA

Asset turnover ratio:Asset turnover = total sales/ Avg. total assets.It measures the efficiency of utilization of

assets.

Contd…

2014 2013 2012 2011 20100

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

Asset Turnover Ratio

JSW SAIL TATA

So we use correlation techniques to ensure the relationship. We found some linearity. The graphs are:

TATA Steel (r= -0.7) SAIL (r = 0.984)

JSW Steel

(r = 0.388)

Contd…

20004000600080000

2

4

6

8

Inventory RatioLinear (In-ventory Ra-tio)

Net Profit

Invento

ry

Turn

over

Rati

o

-10000 0 100000

2

4

6

8

Inventory Ratio

Linear (In-ventory Ratio)

Net Profit

Invento

ry

Turn

over

Rati

o

0

5

10

Inventory RatioLinear (Inventory Ratio)

Net Profit

Invento

ry

Turn

over

Rati

o

With the following data we found that the negative correlation coefficient of TATA Steel shows some negative correlation which is due to TATA went loss due to some other reasons.

There may be due to poor inventory management because its inventory turnover was lesser.

There is positive coefficient value of SAIL which indicates the strongly relationship between inventory turnover and profitability.

JSW Steel also has positive coefficient value which indicates positive relationship.

FINDINGS

A manufacturing firm must install the optimal inventory control techniques or improve their asset turnover and inventory turnover as much as possible.

TATA Steel should take care of inventory management which is responsible for the loss.

Inventory management impacts the profitability and cost of the firm.

JSW Steel should improve its asset utilization.SAIL should improve the inventory turnover

ratio, asset turnover ratio, return on assets.

CONCLUSION AND RECOMMENDATIONS