Linking inventory management and financial performance of manufacturing industry companies

Abstract

Purpose- Investments in inventories have a significant role in manufacturing companies’ operating cycles. The rapid conversion of inventories into sales and eventually the creation of profits lead to financial performance. In the study, we examine the effect of various types of inventories held by the manufacturing companies on profitability. Methodology- We use the real sector statistics published by the Central Bank of the Republic of Turkey. In this context, we analyse the data set of 86 sub-sectors for the period from 2009 to 2021 by using the fixed effects panel data model. While gross, operating and net profit margins are dependent variables in order to examine the effect of inventory management in various levels, types of inventories relative to sales are used as independent variables in the models. Other than inventories, fixed assets turnover and manufacturing industry growth rates are included as control variables in the models. Findings- We find that there is not a statistically significant relationship between operating profit margin and inventories other than raw materials. However, finished goods and merhandise inventories are negatively related to net profit margin. None of the inventory types are statistically related to gross profit margin. We obtain a negative relationship between profitability ratios and manufacturing industry growth rate as a control variable. Conclusion- We conclude that the rapid conversion of finished goods and merchandise inventories into sales contributes to net profits of the manufacturing industry companies. However, holding periods of raw materials and work-in-process inventories do not have significant relationships with net profitability. Furthermore, we result that inventories are related to profit margin not at the level of gross or operating profit, rather at the level of net profitability. Accordingly, manufacturing companies should be more cautious about the holding periods of finished goods and merchandise inventories rather than of raw materials and work-in-process inventories. Findings indicate that profit margins of manufacturing companies decrease –probably due to competition– during economic upturns. Keywords: inventory management, manufacturing industry, profitability, working capital JEL Codes: G30, G32