MANAGERIAL ACCOUNTS FOR MANAGERS

ARTICLE SUMMARY ON

The effect of inventory management on firm performance

Author: Dimitrios P. Koumanakos Source: International Journal of

Productivity & Performance Management

Submitted to: Mrs. SRI JANANI Submitted by: G. REENA JULIE 10212 Section C

Volume: Vol. 67, No. 5, 2008

ARTICLE SUMMARY:
The article is all about how tradeoff between ordering costs and holding costs characterizes the transactions approach to inventory represented by EOQ and models of inventory. How much inventory a firm should keep is extensively studied in operations management but there is a contradictory that inventory is both an asset as well as a liability. Deloof documents suggest that managers can create value for their shareholders by reducing the number of inventory days to reasonable minimum days. Bout et al provided additional evidence, saying that, companies with very high inventory ratios have more possibilities to be bad financial performers and Chen et al states that firms with abnormally high inventories have abnormally poor stock returns; firms with abnormally low inventories have ordinary stock returns while firms with slightly lower than average inventories perform best over time. Shah and Shin examined that reducing inventories has a direct relationship with financial performance using longitudinal data. Whereas, in the Greek context, Voulgaris et al found that the efficiency of inventory management policy on the basis of financial ratio analysis is a dominant factor in the performance of the Greek firms. A simple cross-section linear regression model estimated by three representative industries is used to sort out the independent effects of inventories management. In most of the sectors, it has been proved that the relationship between profitability and inventory management is negative and statistically significant at least at 10 per cent level of significance. For describing a relationship between profitability and inventory turnover a different parametric model or nonparametric model regression should be used only when the null hypothesis is rejected. In a nutshell, the author concludes that, the purpose of this study was about the investigation of existence of a possible linear relationship between inventory holdings and accounting based measures of performance for a recent group of Greek manufacturing firms belonging to the food, textiles and chemicals sectors, where it clearly states that in the analysis of three industries only two have turned with a positive strong linear in an occasional period and it

is also important to ensure that the report made should be from economical aspects and not as an unrepresented accounting phenomenon.