3. BBC’s inventory turnover ratio decreases from 2009-2011.

Calculate ITR and analyze the

efficiency of the company’s inventory management.

According to Fernando (2022), Inventory Turnover Ratio (ITR) is a financial ratio that indicates
the number of times inventory has been turned over (sold and replaced) during a specific period
and evaluates the company’s efficiency in managing its inventory. Therefore, it is calculated as:

Cost of Goods Sold (COGS)

Inventory Turnover Ratio=
Average Value of Inventory

Authors of the case have provided the value of inventories of the three accounting year (2009-
2010-2011) and various other financial information’s necessary. It has also been noted that the
inventory has almost increased by 85 percent in the three years (Kapoor & Goel, 2012). The
calculation of ITR can be calculated as follows:

i. Valuation of inventories
The valuation of inventories has been provided in ‘Exhibit 2’ of the case and the
valuation has been done by the formula below
Inventories=Raw Material + Packing Material + Finished goods
ii. Cost of goods sold (COGS)
As per the financial statements in the case study, neither the cost of goods sold, nor
the opening and closing stock of inventory is mentioned. Therefore the ratio will be
computed by sales during each year.

The calculations of the ratio have been depicted in the table blow.

Particulars 2011 2010 2009

1. Valuation of Inventories
Raw Material 432,071 166,573 149,924
Packing Material 85,915.2 87,976 5,624
Finished Goods 352,160 486,200 167,300
Inventories 870,146 740,749 322,848
2. Cost of Goods Sold
Sales 9,544,409 8,529,838 12,539,108

Inventory Turnover Ratio (ITR) 10.97 11.52 38.84

Analysis of the efficiency of company’s inventory management

The inventory turnover ratio has sharply declined over the period from 38 times in 2009 to 10.97
in 2011; this shows the inefficient management of inventory. The inefficient management in the
inventory was mainly due to the following factors:

a) Excess holding of inventory

BBC Private Limited was producing and warehousing excess amount of ‘stable
bleaching powder’ and majority of the inventory was in the form of raw materials. In
addition according to World of Chemicals (2022), excess inventory in chemical
companies accounts to 5-8 percent of the entire stock because the chemical
manufacturing companies usually tend to purchase more raw materials, do not plan their
production effeciently and due to the change in consumers and technological
requirements. Therefore holding additional inventory lead to a decrease in ITR, and
impacted the working capital of the company.
b) Sticky inventory management
According to Kroes & Manikas (2018); Guenther, Riehl, & Rößler (2014), firms act in
sticky manner during inventory management whereby the firm do not lower the stock of
inventory depending on the demand and wearhouse capicities. In order to maintain or
increase the inventory managers mange the invntory in a sticky manner and even
acppect the aditional holding cost. Thus leading to wastage and damage of inventory
and consequenly leading to the decarease in ITR

Effects of the in-eficent management of the inventory and lower ITR

i. A lower turnover ratio would mean that the company is not being able to sale its
product and the company will have to bear the cost of wearhousing the inventory,
ii. Increase in the operating cycle period,
iii. Wastage due to the product expiry,
iv. Hazardus dangers due to the nature of chemical products
v. Loss of profits and
vi. Adverse effect on the liquidity of the company.
Recommendation

In order for BBC to conduct an efficient management of inventory and increase their ITR, the
company should carry out the following measures:

i. Disposal of excess inventory

The company needs to dispose the excess chemical stock and used equipment of a
company by leveraging their assets through trading (World of Chemicals, 2022).
They need to calculate the required stock for the contract requirements with IR and
rest should either be traded or put into alternative use.
ii. Improvements to decrease inventory stickiness
The firm could consider inventory write-offs as a way to lower stickiness but they
should also implement changes that will improve the accuracy and agility of their
production and inventory management process (Kroes & Manikas, 2018).