Proceedings of The 8th International Conference on Applied Research in Management, Business and Economics
Year: 2024
DOI:
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Resilience in Cyclicality: Impact of Inventory Efficiency on Operational Profitability During Economic Cycles
Samuel Yeboah
ABSTRACT:
Optimizing inventory is widely acknowledged as a winning strategy for reducing costs and enhancing profits (Isaksson and Seifert, 2014). The imbalance in inventory can lead to significant financial effects for businesses due to their crucial role in operational activities. According to ReyAres et al. (2021), current assets, including inventory, represent a substantial portion, accounting for 61.7% of total assets in many companies. Moreover, inventory and accounts receivable investments constitute a significant proportion of overall investments for numerous firms (Nwude et al., 2021; Özkaya and Yaşar, 2023). This significance is particularly pronounced in the consumer goods industry, where managing substantial inventory volumes and working capital is paramount. The cyclical and non-cyclical nature of the industry presents unique dynamics that require discernment when analyzing working capital. These firms often deal with considerable inventory levels that create costs and liquidity issues, especially during economic crises. Therefore, understanding these essential economic and crisis-motivated dynamics will inform targeted working capital management, particularly inventory management strategies that optimize operational efficiency. With a sample of public United States consumer goods firms from 2010 to 2022, the paper investigates the impact of inventory days on operating margins in demand-stable and demandsensitive businesses during economic downturns. The results indicate that cyclical firms regularly maintain a required level of Inventory days that prevents stock-out-related risks while guiding against overstocking. A 108-day optimal inventory day boosts operating margins by 3% among cyclical businesses. Maintaining relatively higher optimal inventory levels benefits non-cyclical businesses with predictable demand patterns. Additionally, the results imply that extended Inventory days are profitable in a crisis in the cyclical sector. The distinct impacts in cyclical and non-cyclical sectors underline the importance of considering industry characteristics in inventory management research. This study adds to our understanding of how inventory management strategies can differentially affect industry profitability. The research’s novelty lies in its understanding of inventory dynamics under varying market conditions and crises. It provides empirical evidence on how inventory levels affect operating profit in predictable and fluctuating market conditions. Moreover, it extends the body of knowledge on business resilience during crises, particularly the role of inventory management during events like the Covid19 pandemic. By estimating optimal inventory levels, the study offers a non-linear analytical pathway to understanding the InvD-profitability nexus. Finally, it predicts the optimal inventory levels that boost operating profit at a specific rate.
keywords: Inventory days, cyclical, operating margins, pandemic, non-linear