International Journal of Academic Research and Development

International Journal of Academic Research and Development

ISSN: 2455-4197
Impact Factor: RJIF 5.22
www.academicsjournal.com
Volume 2; Issue 6; November 2017; Page No. 588-592

Inventory turnover optimization criteria of efficiency (With special reference to FMCG sector in India)
1
Dr. Richa Singhal, 2 Dr. Varsha Tiwari Vyas
1
Assistant Professor, Department of EAFM, S.S. Jain Subodh P.G. (Autonomous) College, Jaipur, Rajasthan, India
2
Lecturer, Department of EAFM, S.S. Jain Subodh P.G. (Autonomous) College, Jaipur, Rajasthan, India

Abstract
Study of the Inventory management is very crucial for all the firms. Unless the working capital is planned, managed and monitored
effectively, company cannot earn profits and increase its turnover, Also, it helps in removing bottlenecks. Although very studies
have been conducted on analyzing the working capital management of Indian companies but very few studies have measured the
inventory management of top FMCG companies of last decade. This study bridges the gap and highlights the current status of
inventory turnover management of selected five FMCG companies in India.
More companies go under because of cash flow issues, rather than declining profitability. Hence traditional prudence always
suggests that a firm should have sufficient cash to cover its immediate liabilities. However there is a growing breed of FMCG
companies that claim otherwise. Unlike most other industries, the turnover of a FMCG company is not limited by its ability to
produce, but its ability to sell. They can generate cash so quickly they actually have a negative working capital. This happens
because customers pay upfront and so rapidly, the business has no problem raising cash (like Nestle, Britannia). In these
companies products are delivered and sold to the customer before the company even pays for them. A negative working capital is a
sign of managerial efficiency in a business with low inventory and accounts receivables (which means it operates on an almost
strictly cash basis). In other situation, it is a sign a company may be facing bankruptcy or serious financial trouble.
The current study has tried to examine the sources used by the companies to finance their working capital requirements and to
analyze and evaluate the Inventory management. The present work therefore is a modest attempt in this direction by undertaking a
study of Inventory management.
With this end an efforts has been made in this article entitled as study of FMCG in respects of performance and its inventory
management. The finding of the study not only throw light on technical weakness in the managerial activities of the companies,
but it may also help scholars and researchers to develop new ideas, techniques and methods in respects of the management of
inventory.

Keywords: inventory management, bottleneck, negative working capital, managerial efficiency

Introduction inventory accumulation in India, are based on time series and

Inventory management is concerned with the acquisition pooling of cross section of time series date pertaining to
storage, handling and use of inventories, so as to ensure the manufacturers’ inventories.
availability of inventory whenever needed, providing Krishnamurty and Sastry’s study in 2014 was perhaps the
sufficient protection for contingencies, maximizing economy most comprehensive study on manufacturers’ inventories.
at minimizing wastage and losses. The efficiency of inventory They used CMI data and the consolidated balance sheet data
management affects the flexibility of the firm. of public limited companies published by RBI, to analyze
Inefficient procedures may result in an unbalanced inventory. each of the major components i.e. raw material, goods-in-
These inefficiencies will have an adverse effect on process and finished goods for 21 industries over the period
profitability of the organization. The more efficient is the 2001-2011. It was a time series study but some inter-industry
inventory management; the less is investment required. cross section analysis had also been done. Accelerator
Excessive investment in inventories increases costs and represented by change in sales, bank finance and short-term
curtails profits. In the way, the effect of inventory control on interest rate were found to be important determinants.
flexibility and on the level of investment required, inventories Utilization of productive capacity and price anticipations had
represents two sides of the same coin. been found to be of some relevance.
Vinod Prakash (2011) was a time series analysis with mostly
Review of Research undefeated data taken from CMI and Annual Survey of
Inventory, in most industries, accounts for largest proportion Industries (ASI) for the period1990-2010. It examined the
of gross working capital. A number of studies, therefore, have influence of structural changes in manufacturing activity on
been conducted to find the determinants of investment in the relative size and composition of inventory in the large
inventories. scale-manufacturing sector in India. Three different models
Econometric studies to analyze the factors that influence for industry groups and for six important individual industries

588
International Journal of Academic Research and Development

had been tried. Output/sales, capacity utilization, short-term Adesh Sharma (2002) applied accelerator model with financial
rate of interest, money supply, foreign exchange availability, variables to determine the factors influencing investment in
price index, size and time trend were taken as explanatory inventories in pesticides industry in India. Data had been
variable. The simple accelerator model with output gave better taken form the Stock Exchange Official Directory, Mumbai
results for industrial groups, whereas the ratio model seemed for the period 1990-2001 in respect of 18 firms in this
to perform better in the analysis of individual industry. The industry. The coefficients of the accelerator and financial
flexible accelerator models were found to be inferior. The variables were found to be significant and positive. The
impact of price index was found to be generally insignificant, coefficient of inventory of inventory stock was significant and
while the impact of foreign exchange and money supply was negative.
absent. The rate of interest showed a perverse impact. Time
trend appeared to be important than the size of establishment. Objectives of the Study
The role of availability of funds was completely ignored in  To study the inventory position of the FMCG companies
this study. by taking various measurements.
George (2008) was cross section analysis of balance sheet data  To compare and analyze various components of working
of 52 public limited companies for the period 2001-05. capital management such as Accounts receivables,
Accelerator, internal and external finance variables were accounts payables, inventory position, credit management,
considered in the equations for raw materials including goods- etc
in-process and total inventories. However, equations for  To study the impact of inventory on working capital
finished goods inventories considered only output variable. management of various companies.
Accelerator and external finance variables were found to be
important. Limitations of the Study
Seamy and Rao (2006) [16] of the flow of funds of public 1. The study duration is limited to 10 years.
limited companies had an equation for aggregate inventory 2. The findings of the study are based on the information
investment. RBI data for the period 1990-2005 had been used. retrieved by the annual reports of the companies and there
The explanatory variables considered were accelerator, flow reliability depends upon audit.
of bank borrowings, an index of man-days lost, capacity by 3. The study is limited to the analysis of inventory turnover
the call rate. Accelerator, bank finance and fixed investment ratio of the companies.
were found to be significant. 4. The study has picked up only five companies in the FMCG
R.N. Agarwal (2005) estimated total inventory investment sector.
equation for individual firms in automobile manufacturing
industry, which was divided into two sectors─ car-sector and Scope of the Study
non car-sector. His study was based on the data for1995-2004. The scope of the study is identified after and during the study
Official Directory of Mumbai Stock Exchange had been the is conducted. The main scope of the study is to check the
basic source of data. Analysis of two sector revealed that sales effective utilization of working Capital in FMCG sector. The
and stock-sales ratio were important explanatory variables. study analyzed the liquidity position and working capital
Cost of capital and trend were important in only car sector management threw inventory turnover ratio of a limited
while fixed investment and flows of external funds were sample consisting of only five companies i.e. Nestle, HUL,
significant in non-car sector. Existing stock of inventories was Britannia, ITC and Dabur. The study of working capital is
statistically significant in both the sector but contrary to based on only one tool i.e. Ratio Analysis. Further the study is
expectations, it possessed negative coefficient. Several other based on last 10 years Annual Reports of the five companies
variables as dividends, capacity utilization and liquidity ratio taken into consideration. As only FMCG sector was studied so
were found to be of no importance in explaining inventory the findings could only be generalized to this sector’s firms.
investment behavior.
N.C. Gupta (2003) [6] examined the determinants of total Sampling Element
inventory investment in aluminum and non-ferrous semi firms Five individual FMCG companies have been analyzed. The
in private sector. The data had been taken from Stock five companies are:-
Exchange, Official Directory, Mumbai for 9 years1990-93 to  Hindustan Unilever Ltd.
1996-2002. variables considered were current sales change,  ITC (Indian Tobacco Company)
one-lagged sales change, inventory stock at the beginning,  Nestlé India
gross fixed investment during the year, flow of net debt  Britannia
(external finance) and profits net of dividends and taxes but  Dabur India
gross of depreciation provision (retained earnings or internal
finance). The equation also provided for firm dummies and Analysis and Discussion
year dummies. Analysis was based on pooling of time series Inventory Turnover Ratio
of cross section data. Demand factor and external finance Inventory turnover ratio or Stock turnover ratio indicates the
turned out to be significant determinants in aluminum. Both velocity with which stock of finished goods is sold i.e.
retained earnings and external finance were important replaced. Generally it is expressed as number of times the
determinants in case of non-ferrous semis. Competition for average stocks has been “turned over” or rotate of during the
investment funds between fixed and inventory investment was year. High turnover suggests efficient inventory control, sound
suggested both in aluminum and non-ferrous semis. sales policies, trading in quality goods, reputation in the

589
International Journal of Academic Research and Development

market, better competitive capacity and so on. Low turnover

suggests the possibility of stock comprising of obsolete items,
slow moving products, poor selling policy, over investment in
stock etc.

Inventory Turnover Ratio=Cost of goods sold / Average

inventory at cost Inventory turnover ratio of individual
companies

Table 1: Inventory Turnover Ratio of ITC (Rs in Crores)

Fig 2
Year Cost Of Goods Sold Inventory Ratio
2014-15 15060.00 5638.00 2.67 Inventory turnover ratio of HUL has higher values than that of
2013-14 12906.00 5269.00 2.45 ITC. In Table 2, the value of this ratio starts from 6.25 in the
2012-13 12133.00 4549.00 2.67 year 2005-2006 and then decreases in the next two years. In
2011-12 10772.00 4600.00 2.34
year 2008-2009, the ratio again shows an increase to 7.27. In
the next four years, the ratio was more or less the same and
2010-11 9548.00 4051.00 2.36
then it declines in year 2013-2014. In the year 2014-2015, the
2009-10 8211.00 3354.00 2.45 ratio again increased to 7.04 which indicates that the company
2008-09 6475.00 2636.00 2.46 is maintaining high Inventory ratio which is the symbol of
2007-08 4889.00 2003.00 2.44 inventory control efficiency of management.
2006-07 4135.00 1534.00 2.70
2005-06 3742.00 1252.00 2.99 Table 3: Inventory Turnover Ratio of Nestle (Rs in Crores)
Grand Average 2.55 Year Cost Of Goods Sold Inventory Ratio
2014-15 5939.00 734.00 8.09
2013-14 5006.00 576.00 8.69
2012-13 4095.00 499.00 8.21
2011-12 3460.00 435.00 7.95
2010-11 2808.00 401.00 7.00
2009-10 2274.00 276.00 8.24
2008-09 1955.00 253.00 7.73
2007-08 1777.00 217.00 8.19
2006-07 1710.00 219.00 7.81
2005-06 1538.00 219.00 7.02
Grand Average 7.89
Fig 1

Table 1 shows the value of inventory turnover ratio. On seeing

the values of the 10 years, it can be said that the company has
been very consistent in keeping the level of the ratio. The
value varies between 2.36 and 2.99. It also indicates that the
company is efficiently converting its inventory into sales and
doesn’t believe in huge over stocking.

Table 2: Inventory Turnover Ratio of HUL (Rs in Crores)

Year Cost Of Goods Sold Inventory Ratio
Fig 3
2014-15 17718.00 2517.00 7.04
2013-14 16096.00 2811.00 5.73 Table: 3 throws light on the inventory turnover ratio of Nestle.
2012-13 14975.00 2180.00 6.87 It can be seen that the ratio is quite high as compared to the
2011-12 17583.00 2529.00 6.95 ratio of other companies taken in the study. It starts with the
2010-11 11832.00 1954.00 6.06 value of 7.02 in the year 2005-2006 and then keeps on
2009-10 10455.00 1548.00 6.75 increasing in the next two years till 2007-2008. In declines in
2008-09 9617.00 1322.00 7.27 the year 2008-2009 and then kept on increasing and then
decreasing in the next three years. In years 2013-2014 and
2007-08 8490.00 1470.00 5.78
2014-2015, the ratio increased to 8.69 and 8.09 respectively.
2006-07 8162.00 1393.00 5.86
The higher values of inventory turnover ratio indicate that the
2005-06 7999.00 1279.00 6.25 company is having efficient inventory control and better
Grand Average 6.46 competitive capacity.

590
International Journal of Academic Research and Development

Table 4: Inventory Turnover Ratio of Dabur (Rs in Crores) among all the companies taken in the study. Table 5 shows
Year Cost Of Goods Sold Inventory Ratio
that the company has touched the highest value of 14.13 in the
2014-15 2857.00 529.00 5.40 first year of 2005-2006 and the lowest value of 7.79 in the
2013-14 2413.00 461.00 5.23 year 2010-2011. But still the company has maintained very
2012-13 1450.00 298.00 4.87 efficient values which show proficient inventory control,
2011-12 1293.00 262.00 4.94 sound sales policies, trading in quality goods, reputation in the
2010-11 1084.00 201.00 5.39 market and better competitive capacity.
2009-10 822.00 157.00 5.24
2008-09 639.00 116.00 5.51 Comparison of Inventory Turnover Ratio among the
2007-08 616.00 128.00 4.81 Companies and with the Industry’s Average
2006-07 593.00 111.00 5.34
2005-06 624.00 179.00 3.49 Table 6: Inventory Turnover Ratio of 5 companies and the industry
Grand Average 5.02 Average
Industry
Year ITC HUL Nestle Dabur Britannia
Average
2014-15 2.67 7.04 8.09 5.40 11.91 7.02
2013-14 2.45 5.73 8.69 5.23 12.45 6.91
2012-13 2.67 6.87 8.21 4.87 12.09 6.94
2011-12 2.34 6.95 7.95 4.94 11.22 6.68
2010-11 2.36 6.06 7.00 5.39 7.79 5.72
2009-10 2.45 6.75 8.24 5.24 9.63 6.46
2008-09 2.46 7.27 7.73 5.51 8.17 6.23
2007-08 2.44 5.78 8.19 4.81 9.87 6.22
2006-07 2.70 5.86 7.81 5.34 10.46 6.43
Fig 4 2005-06 2.99 6.25 7.02 3.49 14.13 6.78
Grand
2.55 6.46 7.89 5.02 10.77 6.54
Inventory turnover ratio of Dabur for 10 years has been more Average
or less consistent except for the year 2005-2006 in which the
value is the least at 3.49. Table 4 shows that the value of the
ratio lays between 4.81 and 5.51. The value of the ratio
indicates that the company is not piling up too much stock in
hand and also has a good selling policy.

Table 5: Inventory Turnover Ratio of Britannia (Rs in Crores)

Year Cost Of Goods Sold Inventory Ratio
2014-15 4548.00 382.00 11.91
2013-14 3872.00 311.00 12.45
2012-13 3239.00 268.00 12.09
2011-12 2849.00 254.00 11.22
2010-11 2353.00 302.00 7.79
2009-10 2070.00 215.00 9.63
Fig 6
2008-09 1512.00 185.00 8.17
2007-08 1323.00 134.00 9.87
2006-07 1276.00 122.00 10.46
Year 2014-15
2005-06 1159.00 82.00 14.13 Year 2014-15, saw the highest average inventory turnover
Grand Average 10.77 ratio in last 10 years in the FMCG sector. It was 11.91 with
Britannia having the highest value followed by Nestle at 8.09
and HUL at 7.04. Higher the inventory turnover ratio, better it
is considered for FMCG companies because the goods are
cheap and are consumed very fast and on the top they are
perishable also. The company having the least inventory
turnover ratio is ITC with the value of 2.67 which is less than
half of the average ratio of the industry in that year. It shows
that the company is converting its inventory into sales at a
very low pace. Refer table 6.

2013-14
Fig 5 In year 2013-14, the average inventory turnover ratio in the
FMCG sectors comes out to be 6.91 which is lesser than the
Britannia shows the highest value of inventory turnover ratio ratio in year 2014-2015. In this year also, the company having
the highest inventory turnover ratio is Britannia with the value

591
International Journal of Academic Research and Development

of 12.45 which is even more than the average ratio of the 4. Buchan Joseph F, Chapin, Harret. Scientific Inventory
industry. It is followed by Nestle with the value of 8.69 which Management: New Delhi : Credit and Collections “
is again not very bad. Rest of the three companies ITC, Dabur Principles and Practice” New Delhi: McGraw Hill, 2002.
and HUL have values which are less than the industry’s 5. Gopalakrishnan P, Sandilya MS. Inventory Management
average in this year which indicates that the company are Text and Cases, Delhi: The McMillan Company of India
keeping surplus of inventory turnover in hand to meet the day Limited, 2004.
to day requirement and smooth functioning of work. Refer 6. Gupta, Huefner. Working Capital Management
Table 6. efficiency: A study on the Indian Cement industry, The
Management Accountant. 1972; 39(5):63-372.
2012-13 7. Jaros. Journal of Commerce and Management. 2006;
In year 2012-13, the average inventory turnover ratio in the 19:185-190.
FMCG sector comes out to be 6.94 which is reasonably good 8. Jhamb LC. Inventory Management, Everest Publishing
for FMCG companies. In the same year, the company having House, 1998.
the highest inventory turnover ratio is Britannia. The ratio is 9. Jim Mcmenamin. Financial Management –An
12.09. And that shows that the company is converting its introduction. New Delhi: Oxford University Press, 2000.
goods produced into sales many a times during one year. 10. Khoury. liquidity management practices in Canadian
Nestle is the company with the second highest ratio of 8.21, companies, 1999.
followed by HUL with the value of the ratio as 6.87. Dabur 11. Lewis R. An Enquiry into the Informational Needs of
was able to maintain the ratio at a value of 4.87 and the Stockholders and Potential Investors, dissertation,
company with a very low ratio in the year 2009-2010 is ITC. Arisona State University, 1972.
It can be said that ITC was least effective and efficient in 12. Lyle HC. A Critique, The Use of Accounting Data in
converting its inventory into sales. Refer Table 6. Decision-making (ed.) Columbus, Ohio, College of
commerce and Administration, The Ohio State
2005-06 to 2011-12 University, 1967.
If we analyze these seven years, we see that the value of 13. Mohamad, Noriza. Looking Around: Finance for the
industry average of inventory turnover ratio has been Non-Financial Management: Harvard Business Review.
revolving around 6 with the only exception in year 2010-11. 2010; 37.
In all these seven years, Britannia has maintained itself to be a 14. Reilly, Reilly. Construction of working Capital. New
company with the most effective and efficient ways of Delhi: Prentice-Hall of India, 2002.
converting its inventory into sales by maintain the highest 15. Smith. Journal of Management. 2004; 14(8):162-164.
average inventory turnover ratio among all the companies. 16. Seamy, Rao. Working Capital Management-Strategies
Nestle took the second place in keeping the maximum and Techniques, New Delhi: Prentice-Hall of India a
inventory turnover ratio. The companies that have maintained Private Limited, 1975.
reasonably low and below average inventory turnover ratio are
Dabur, HUL and ITC. Throughout the 10 years of time period,
ITC always has a inventory turnover ratio which is least
compared to all the companies. So, it can be said that among
all the FMCG companies, ITC has the most poor inventory
turnover ratio. Refer Table 6.

Conclusion and Suggestion

The company maintained the highest inventory turnover ratio
in Nestle, Britannia & HUL and the lowest in ITC and Dabur.,
it means investment in working capital in Nestle, Britannia
and HUL is lesser than other company. In this way their
working capital requirement regarding inventory is less than
other companies. So this is good symptoms for companies.
The inventory turnover ratio of the ITC and Dabur is less than
Nestle, Britannia and HUL so it can be said that investment in
working capital regarding inventory in these companies is
greater than other companies therefore companies should try
to increase their ratio.

References
1. Arnoldo Hax C. production and Inventory Management,
New Delhi: Oxford University Press, 1984.
2. Archer SH, et al. Business Finance - Theory and
Management. New York: The Macmillan Company,
1972.
3. Ben Mc Clure. Journal of Finance. 2010; 23:115-119.

592