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IMPACT OF INVENTORY MANAGEMENT ON THE PROFITABILITY OF FMCG

SECTOR
By
Vinay Pareek
+919595653359
vinaypareek91@gmail.com
Sies College of Management Studies
ABSTRACT
Managing inventory effectively and efficiently for a FMCG company is very important as it
directly affects its profitability. This paper presents relationship between inventory conversion
period and profitability of FMCG Companies. Gross operating profit has been taken as
dependent variable which depends on variables like current ratio, firm size and inventory
conversion period. A sample of five FMCG companies from year 2011-2015 have been taken.
Data has been collected from financial statements of companies available on their websites.
Regression analysis and correlation have been used to analyze various relationships between four
selected variables i.e. gross operating profit, current ratio, firm size and inventory conversion
period. It is observed that there is a negative relationship between inventory conversion period,
current ratio and gross operating profit and also gross operating profit is positively related to firm
size. This positive relationship between gross operating profit and firm size is unexpected.
KEYWORDS
Working Capital, FMCG Companies, Inventory Management, Liquidity and Profitability

IMPACT OF INVENTORY MANAGEMENT ON THE PROFITABILITY OF FMCG


SECTOR
1.0 INTRODUCTION
1.1 FMCG sector: FMCG stands for Fast Moving Consumer Goods and is also called as
Consumer Packaged Goods or CPG. FMCG includes everything from personal care, food
products, household care and many items which we use on daily basis.Indian FMCG market is
open and there is no discrimination with foreign firms to enter the market resulting into plethora
of FMCG brands in Indian market which eventually leads to companies working on very thin
profit margin. This cut throat competition is forcing companies to adopt various methods and
techniques to decrease their overall cost and thus increase profit margins. Considerable amount
of assets gets unnecessarily tied up in working capital reducing liquidity ofthe company.
Inventory makes a major part of working capital. Neglecting proper management of inventory
can severely affect companys profitability and may even lead to shut down. Inventory is stock of
finished goods that company has produced to sell in market. The cash conversion cycle of
inventory should be as small as possible as it ensures continuous flow of cash in company.
Inventory conversion cycle directly affects gross operating profit. This paper is analyzing the
affect of size, growth, composition, and circulation of inventory on profitability of selected
companies.
1.2 FMCG INDUSTRY IN INDIA
FMCG is a multimillion dollar sector and have some big brand names that we use every single
day. These goods have become essential part of our daily life and are referred as fast moving as
they are sold quickly and consumed on daily basis. Examples of FMCG products are soft drinks,
soaps, cleaning products, cosmetics, shaving products. These products tend to be high in volume
and low in cost products.The Indian FMCG industry represents nearly 2.5% of the countrys
GDP and is the fourth largest sector in India and is expected to grow to 456000cr market in 2018.
The sector accounted for 1.9% of the nations total FDI inflows in April 2000- September 2012.
FMCG generates 5% of total factory employment and is creating employment for three million
people, especially in rural India and small towns. The growth of FMCG sector is directly related
to population and Indias population is expected to grow to 1.450 billion by 2030 surpassing

China to become the country with largest population. Hence FMCG sector is expected to
maintain strong growth rate in near future. Rising per capita disposable income and growing
rural market are key growth engines for FMCG market.
2.0 OBJECTIVE OF THE STUDY
The purpose of study is to analyze the effect of inventory size on profitability of FMCG
companies and to compare the selected companies on four variables namely gross operating
profit, current ratio, firm size and inventory conversion period.
3.0 LITERATURE REVIEW
Ramachandran and Janakiraman (2009) in their studyanalyzed the relationship between
working capital management efficiency and earnings before interest and tax of the paper industry
in India. The study revealed that cash conversion cycle and inventory days had negative
correlation with earnings before interest and tax.
SrinivasMadishetti and DeogratiasKibona (2013) have done a study on the impact of
inventory conversion period on gross operating profits of SMEs in Tanzania. Their study sample
included twenty six (26) SMEs from two prime regions of Tanzania. Data was collected of
companies from 31st March 2006 to March 2011. By analyzing they found out that there exists a
negative relationship between gross operating profit and inventory conversion period. They made
the suggestion that management should concentrate on reducing the present ICP of more than 4
months so as to improve the financial performance.
Ashok Kumar Panigrahi (2013) in his study has done an empirical analysis of Indian cement
industries by finding relationship between inventory management and profitability. He has
collected data of five top cement companies in India over a period of 2001-2010. Regression and
correlation analysis have been used to find various relationship between companies.
RallabandiSrinivasu (2014) gave an overview on fast moving, consumer goods retail market,
growth prospect and concluded that FMCG sector after seeing a setback in growth rate is
showing sign of revival. Also since December04, the sales of key FMCG players have

increased, with help of stronger distributional efforts, cut throat competitive strategies, intense
sales promotional efforts brands have been able to penetrate deeper into market.
VipuleshShardeo (2015)has analyzed the impact of inventory management on the financial
performance of the firm. Analysis is done on three major steel manufacturing companies of India
and inventory turnover has been correlated with profitability of the firm using correlation. The
conclusion drawn is that inventory is the most important part of a business and to sustain in
current competitive market, cost incurred in inventory should be kept as least as possible.
4.0 RESEARCH METHODOLOGY
In this section, the sample size, estimation techniques, research variables, data source and
hypothesis development are presented.
4.1 DATA SET AND SAMPLE
A sample size of five Indian FMCG companies listed in BSE has been purposefully selected for
the study purpose. The data for the study period 2011-2012 to 2014-2015 have been collected
from secondary sources i.e. annual reports of the companies as well as from the website
moneycontrol.com have been taken. On the basis of financial information available and total
assets five large FMCG companies have been selected for the study. Tabulation, classification
and editing of the data collected have been done as per requirements of the study.
4.2 HYPOTHESIS OF STUDY
In accordance to objective following hypothesis is being set up
1. H1: Proper inventory management increases the profitability of company.
2. H2: Negative relationship exists between gross operating profit and inventory conversion
period.
3. H3: There is no significant difference between four variables of selected companies.
4.3 TOOLS AND TECHNIQUES
For assessing the size, composition, circulation and growth of the inventory position, mean,
Standard deviation and Co-efficient of variation is used. To find out the relationship between
sales and inventory, linear regression analysis, Karl Pearsons co-efficient of correlation is used.

Comparison of selected companies with respect to four parameters has been done by one way
ANOVA.
4.4 DETAILS OF SAMPLE COMPANIES
Sr.No.

Company Name

Size Group

Headquarter

Year of incorporation

ITC

Large

Kolkata

1910

Godrej

Large

Mumbai

1897

HUL

Large

Mumbai

1933

DABUR

Large

Uttar Pradesh

1884

Mumbai

1959

5
Pidilite
Large
Table 1: Details of Sample Companies

4.5 KEY RESEARCH VARIABLES: The key variables used in identifying the impact of
inventory management on profitability of selected FMCG companies of India include gross
operating profit, firm size, current ratio and inventory conversion period. The dependent variable
is gross operating profit and the remaining variables are taken as independent variables.

Variable

Type

Expected
coefficient sign

Inventory conversion
period (ICP)

Independent variable

Negative

ICPGOP

Current ratio (CR)

Independent variable

Positive

CR GOP

Rationale

FS GOP
Firm size (FS)
Independent variable Positive
TABLE 2: KEY VARIABLES AND THEIR EXPECTED IMPACT ON GROSS
OPERATING PROFIT

INDEPENDENT VARIABLE

Variables which can be controlled and manipulated are called independent variables. These are
those variables which researchers think have major impact on other dependent variables. In this
study we have taken inventory conversion period, firm size, current ratio and inventory
conversion period as independent variables in our study.
DEPENDENT VARIABLE
These are called dependent variable as they depend on variations in independent variables and
respond to independent variable. Gross operating profit is the dependent variable in our study.
VARIABLE MEASUREMENTS
The following below are the measures pertaining Inventory management and firms profitability:
No. of Days Inventory = (average Inventory/Net Sales) x 365
Firm Size = Natural Logarithm of Sales
Current Ratio = Current Assets/Current liabilities
GOP = Operating Profit / Total Assets
5.0 Data Analysis
5.1 ESTIMATION TECHNIQUE (REGRESSION ANALYSIS)
For finding relationship between profitability of FMCG companies and inventory conversion
period regression analysis is being used. Regression analysis is a statistical process for
determining relationships between dependent and independent variables. To investigate the
impact of Inventory conversion period on profitability, the model used for the regressions
analysis is expressed generally as
Gross operating profit = (Inventory conversion period, Current ratio, Firm size)
In the above general equation the GOP is the dependent variable and it is influenced by the
independent variables i.e. ICP, CR and FS
REGRESSION MODEL

GOP = 0 + 1(Firm Size)it + 2(Current Ratio)it + 3 (Inventory Conversion Period)it


Where,
0, 1, 2 and 3 are regression parameters which stand for the coefficients of the independent
variables.
The subscript i denotes number of observations and the subscript t denotes the number of
years i.e. 5 years.
5.2 DESCRIPTIVE ANALYSIS
Firm size

Current ratio

Gross operating
profit

25
25
25
0
0
0
Mean
8.99464
1.08760
.64288
Std. Deviation
1.021254
.238227
.212730
Range
2.730
.730
.742
Minimum
7.764
.730
.372
Maximum
10.494
1.460
1.114
Source: compiled from the information of annual reports run on SPSS
N

Valid
Missing

Inventory
conversion
period
25
0
97.21720
45.406316
168.840
35.150
203.990

TABLE 3: DESCRIPTIVE STATISTICS OF VARIABLES (2011-2015)


The following observations can be made from Table 3 which was prepared on the basis of five
years data from 2011-2015 for five selected companies.
1. The Gross operating profit of the companies ranges between 0.372 and 1.114 with mean of
0.64288 and standard deviation of 0.212.
2. Inventory conversion period ranges between 35.15 and 203.99 days with an average of
97.2172 and standard deviation of 45.406 signifying very high variability across the companies.
3. The Current ratio ranges between 0.730 and 1.460 with an average of 1.08760 and standard
deviation of 0.238227.

4. The average size of firms recorded the logarithm of sales at 8.99464 with a minimum of 7.764
and maximum of 10.494 and a standard deviation of 1.021

5.3 CORRELATION BETWEEN VARIABLES: We use Karl Pearsons correlation coefficient


to find the extent of relationship between all the four parameters.
H0: There is no significant correlation between a pair of parameters
H1: There is a significant correlation between a pair of parameters
Gross

Firm size

Firm

Current

operating

size

ratio

profit

Inventory conversion period

-.268

.455*

.552**

0.195

0.022

0.004

25

25

25

-0.659

.312*

0.000

0.129

25

25

25

-0.659

-.427*

Pearson
Correlation 1
Sig.

(2-

Current

tailed)
N
Pearson

ratio

Correlation -0.268
Sig.

25

(2-

0.195

Gross

tailed)
N
Pearson

operating

*
Correlation .455

profit

Sig.

Inventory

tailed)
N
Pearson

conversio
n period

25

(2-

0.022

0.000

25

25

25

25

**
Correlation .552

.312

-.427*

Sig.

0.129

0.033

tailed)

(2 0.004

0.033

25

25

25

25

*. Correlation is significant at the 0.05 level (2-tailed).


**. Correlation is significant at the 0.01 level (2-tailed).

From the analysis of the above table the following observations can be made:
1. The correlation between Inventory conversion period and Gross operating profit is -0.427. It
shows that decrease in Inventory conversion period results in increase in Gross operating profit
and vice versa. This is as per the expected relationship.
2. The correlation between Inventory conversion period and Current ratio is 0.312; indicating
that decrease in ICP results in decrease in Current ratio and vice versa. This is as per the
expected relationship.
3. The correlation between Inventory conversion period and firm size is 0.552, which indicates
that decrease in Inventory conversion period results in decrease in firm size and vice versa. This
is an unexpected relationship. It shows the ineffectiveness of managers to increase sales level
because of decrease in Inventory conversion period
5.4 MULTIPLE REGRESSION ANALYSIS
For doing this, we use Multiple Regression to show the influence of the three parameters on
gross operating profit.
Adjusted
Model
1

R Square

R Std. Error of the

Square

Estimate

.938a
0.880
0.863
0.078679
Predictors: (Constant), inventory conversion period, current ratio, firm size.
TABLE 5: MULTIPLE REGRESSION ANALYSIS
This shows that about 93.8% of the variation in gross operating profit is explaining by the four
parameters together
Model

Unstandardized

Standardized

Coefficients

Coefficients

Sig.

Std.
1

Error
0.233
0.023

Beta

(Constant)
Firm size

B
-0.507
0.188

Current ratio

-0.128

-0.004

0.902

-2.175
8.287

0.041
0

0.085

-0.143

-1.495

0.150

0.001

-0.880

-7.977

Inventory
conversion
period
Dependent Variable: Gross operating profit
TABLE 6: MULTIPLE REGRESSION ANALYSIS
From the above table, the multiple regression equation can be written as
Gross operating profit = -0.507 + 0.188(firm size) - 0.128(current ratio) - 0.004(inventory
conversion period)
From the above equation, we conclude that gross operating profit is positively related to firm size
and negatively related to inventory conversion period and current ratio.
We look at the significance values corresponding to each of the three parameters. We observe
that the significance value corresponding to firm size and inventory conversion period are less
than 0.05 whereas for current ratio, it is greater than 0.05.
This shows that firm size and inventory conversion period have a significant influence on gross
operating profit whereas current ratio does not have a significant influence on gross operating
profit.
5.5 ANALYSIS OF VARIANCE (ANOVA)
When one way ANOVA is used to find whether there is any significant difference between these
5 companies, the first hypothesis can be considered as:
H0: There is no significant difference between the 5 companies with respect to the 4 parameters.
H1: There is a significant difference between the 5 companies with respect to the 4 parameters.
Sum
Squares

of

Mean
d.f.

Square

Sig.

Firm size

Between

Current ratio

Groups
Within Groups
Total
Between

Groups
Within Groups
Total
Gross operating profit Between

Inventory

Groups
Within Groups
Total
conversion Between

period

Groups
Within Groups
Total
TABLE 7: ANOVA TABLE

24.069

6.017

.963
25.031

20
24

.048

2.654

.663

.550
3.204

20
24

.028

1.009

.252

.077
1.086

20
24

.004

46301.121

11575.280

3180.485
49481.606

20
24

159.024

125.026

.000

24.107

.000

65.769

.000

72.789

.000

Since the significance value is 0.000< 0.05 for all the four parameters, we reject H0 and
conclude that there is a significant difference between the five companies with respect to all the
four parameters.

6.0 RESULTS AND CONCLUSIONS


Inventory conversion period has a negative relationship with gross operating profit and current
ratio which is in accordance with the previous research findings. These findings show that as
inventory conversion period of a firm increases its profitability decreases and vice versa. With
the help of regression analysis we can conclude that the four selected variables i.e. current ratio,
firm size and inventory conversion period contribute to 93.8% variation in gross operating profit
and that gross operating profit is positively related to firm size. Significance value of firm size
and inventory conversion period shows that they have a significant influence on gross operating
profit whereas current ratio does not have a significant influence on gross operating profit. Lastly

ANOVA test shows that there is a significant difference between the five companies with respect
to all the four parameters.
7.0 LIMITATIONS
There are mainly three major limitations of the study:
1. The study is based on only five FMCG companies and taking more companies in the sample
may change the result slightly.
2. All the data collected is secondary and is collected from www.moneycontrol.com and
companies official websites, so the results completely depend upon the accuracy of these
data.
3. Analysis has been done on last five years data of companies i.e. 2011-2015.

8.0 REFERENCES
Ashok Kumar Panigrahi (2013), Relationship between inventory management and profitability:
an empirical analysis of Indian cement Asia Pacific Journal of Marketing & Management
Review Companies, vol.2 (7).
EphremWoldu (2011), Impact of working capital management on profitability of small and
medium scale enterprises (SMEs) in Addis Ababa Addis Ababa university school of business
and public administration.
RallabandiSrinivasu (2014), Fast moving consumer goods retail market, growth prospect,
market overview and food inflation in Indian market an overview IJIRSET, vol. 3, issue 1.

ShwetaRai (2012), Inventory flow management process: - FMCG (beverages) sector IJRST,
Vol. No. 1, Issue No. V.
SrinivasMadishetti and DeogratiasKibona (2013), Impact of inventory management on the
profitability of SMEs in Tanzania vol. no. 4, issue no. 02.
VipuleshShardeo (2015), Impact of Inventory Management on the Financial Performance of the
firmIOSR Journal of business and managementVolume 17, Issue 4.Ver. VI, pp 01-12.