This presentation discusses the impact of inventory management on the financial performance of firms. It defines inventory and different inventory classifications. Effective inventory management aims to have the right inventory available at the right time and place. The presentation analyzes the inventory management and financial metrics of three steel companies over multiple years. A correlation analysis found that inventory turnover was negatively correlated with profits for one company but positively correlated for the other two, indicating the relationship between effective inventory management and profitability. The presentation recommends ways for the companies to improve inventory management and financial performance.

1. A
PRESENTATION
ON
“IMPACT OF INVENTORY MANAGEMENT ON FINANCIAL
PERFORMANCE OF THE FIRM”
BY
VIPULESH SHARDEO
ADMSN. NO. – 2014MT0349

2.  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 material
 Work-in-process
 Finished goods
 Purpose of inventory control is getting the right inventory
at the right place in the right time with right quantity.

3.  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.

4.  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.

5.  Costs related to inventory:
 Purchase costs.
 Ordering costs.
 Carrying costs.
 Shortage costs,
 Inventory costing methods:
 FIFO
 LIFO
 WAC(Weighted Average Cost)
 WAC = Value of material in stock/ Quantity in stock.
 Standard Price.
 Current Price.

6.  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

7.  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.

8.  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.

9.  Inventory turnover:
 IT = COGS/ Avg. Inventory.
 It measures the inventory management is poor or good.
0
1
2
3
4
5
6
7
8
9
2014 2013 2012 2011 2010
Inventory Turnover Ratio
JSW SAIL TATA

10.  Net profit margin:
 Deduction of excess revenues to the expenses.
-10
-5
0
5
10
15
20
2014 2013 2012 2011 2010
Net Profit Margin(%)
JSW SAIL TATA

11.  Return on Asset:
 It is nothing but return of Investment.
 It measures the profitability of the firm.
0
100
200
300
400
500
600
700
800
900
1000
2014 2013 2012 2011 1010
Return on Assets Including Revaluations
JSW SAIL TATA

12.  Asset turnover ratio:
 Asset turnover = total sales/ Avg. total assets.
 It measures the efficiency of utilization of assets.
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
2014 2013 2012 2011 2010
Asset Turnover Ratio
JSW SAIL TATA

13.  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)
0
2
4
6
8
0 5000 10000
InventoryTurnover
Ratio
Net Profit
Inventory
Ratio
Linear
(Inventory
Ratio)
0
2
4
6
8
-10000 0 10000
InventoryTurnover
Ratio
Net Profit
Inventory
Ratio
Linear
(Inventory
Ratio)
0
5
10
0 500 1000 1500 2000
Inventory
TurnoverRatio
Net Profit
Inventory Ratio
Linear
(Inventory
Ratio)

14.  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.

15.  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.