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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. ( only for reference)

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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

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

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

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

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

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

-.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 0.01 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

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.

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.

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