THE IMPACT OF INVENTORY MANAGEMENT ON FINANCIAL PERFORMANCE. (original) (raw)

THE IMPACT OF INVENTORY MANAGEMENT ON FINANCIAL PERFORMANCE.

BY
PRASANNA LAKMAL KAVIRATHNA

A Business Management Research Project submitted in partial fulfilment of the requirements for the award of Master of Business Administration (MBA), Faculty of Business and Law, University of Northampton, United Kingdom.

Abstract

This research was conducted to determine the impacts of inventory management on the financial performance of XYZ Packaging (Cambodia) Co., Ltd and to identify strategies that can be implemented to overcome challenges in inventory management impact on financial performance. The research was designed using a quantitative approach that used correlation and regression to analyse the data. The target population was 55 employees comprised of management and staff of XYZ Packaging (Cambodia) Co., Ltd who work in the accounting, procurement, production, and inventory management departments. The primary data was collected from the close-ended questionnaire distributed to the respondents and collected data coded and recorded into the SPSS programme for analysis. The analysis was conducted using SPSS’s Pearson Correlation, and the outcomes indicate a moderately positive relationship between material control and financial achievement with a Pearson Correlation “R” value of 0.603 (60.30%). Additionally, the “p” value is 0.000 , which is lower than 0.01 , indicating a 99 percent significant association between inventory management and financial performance. The financial performance of inventory management is impacted by 36.4 percent, as indicated by the R square value of 0.364 . This study recommended that XYZ Packaging (Cambodia) Co., Ltd should practice techniques such as the economic order quantity (EOQ) model to order raw materials and reduce spaces for storage, reduce holding costs such as labour, insurance, damages, and spoils. Moreover, the study recommended using a computer-based inventory management system to reduce the risk of mistakes and the potential for fraud. Further, Management should continuously conduct training for employees to help them improve their inventory management skills.

ACKNOWLEDGEMENTS

This study was completed with the help and direction of many different people. My special thanks to my lecturer, Professor Indralal De Silva, and my academic supervisor, Ms. Kushal Sumanasekara, for persistent and insightful evaluations, guidance, support in developing this research into a meaningful form, and encouraging feedback to research succeed. Further, my appreciation also extends to my wife, parents, and colleagues for their unfailing help, support, and tolerance.

The XYZ Packaging (Cambodia) Co., Ltd and its employees deserve my special thanks for their ongoing assistance in helping me gather the data for this study. Further, the authors of the books, journals, and online sources that I used for this research deserve my gratitude as well.

TABLE OF CONTENTS

THE IMPACT OF INVENTORY MANAGEMENT ON FINANCIAL PERFORMANCE. … i
ABSTRACT … i
ACKNOWLEDGEMENTS … ii
TABLE OF CONTENTS … iii
LIST OF TABLE … v
LIST OF FIGURES … vi
LIST OF APPENDICES … vii
CHAPTER 1 … 1
1.1 Introduction … 1
1.2 Background of the research … 4
1.3 Research problem … 4
1.4 Research objectives … 6
1.5 Research questions … 6
1.6 Significance of the Research … 6
CHAPTER 2 … 7
LITERATURE REVIEW … 7
2.1 Introduction … 7
2.2 Financial Performance … 7
2.2.1 Return on assets … 8
2.2.2 Inventory turnover … 9
2.2.3 Net Profit … 9
2.3 Inventory Management … 10
2.3.1 Inventory Management Approaches … 11
2.3.2 Economic Order Quantity (EOQ) … 11
2.3.3 Inventory/Stock Holding Cost … 12
2.3.4 Inventory Days … 12
2.3.5 Just In Time (JIT) Inventory Management … 13
CHAPTER 3 … 15

RESEARCH METHODOLOGY … 15
3.1 Introduction … 15
3.2 Conceptual Framework … 15
3.3 Research Philosophy … 17
3.4 Research Approach … 17
3.5 Research Design … 18
3.6 Population … 18
3.7 Sampling … 18
3.8 Data Collection Method … 19
3.9 Data Analysis … 19
CHAPTER 4 … 20
DATA ANALYSIS … 20
4.1 Introduction … 20
4.2 Reliability analysis … 20
4.3 Sample Description … 21
4.3.1 Demographic Data Analysis … 21
4.4 Comparison of Means. … 24
4.5 Correlation analysis and Hypothesis testing … 28
4.6 Regression Analysis … 30
4.7 Summary … 31
CHAPTER 5 … 32
CONCLUSION AND RECOMMENDATIONS … 32
5.1 Introduction … 32
5.2 Conclusion … 32
5.3 Recommendations … 33
5.4 Limitations … 34
5.5 Future Research … 34
Reference list … 35
Appendices … 41

LIST OF TABLE

Table 1-Financial statistics of XYZ Packaging FY 2020/2021 … 5
Table 2-Horizontal analysis by comparing FY 2020 figures with FY 2021 … 5
Table 3- Commonly used financial performance measurement technique. … 7
Table 4-Operational Plan … 17
Table 5-Population and Sample … 19
Table 6-Reliability Analysis … 20
Table 7-Cronbach’s Alpha Results Representation … 20
Table 8-Gender Analysis … 21
Table 9-Age Analysis … 22
Table 10-Level of Education Analysis … 23
Table 11-Years of Experience Analysis … 24
Table 12-Comparison of Means (Gender) Summary … 25
Table 13-Comparison of Means (Gender) Report … 25
Table 14-Comparison of Means (Age) Summary … 25
Table 15-Comparison of Means (Age) Report … 26
Table 16-Comparison of Means (Education) Summary … 26
Table 17-Comparison of Means (Education) Report … 27
Table 18-Comparison of Means (Experience) Summary … 27
Table 19-Comparison of Means (Experience) Report … 28
Table 20-Pearson correlation coefficient value ® … 29
Table 21-Pearson Correlation of Inventory Management and Financial Performance … 29
Table 22-Model Summary of Inventory Management … 30
Table 23-ANOVA Test of Inventory Management … 30
Table 24-Coefficients of Inventory Management … 31
Table 25-Summary of Analysis Data … 31

LIST OF FIGURES

Figure 1-Global Containers & Packaging Market Value 2017-2021 … 2
Figure 2-Global Containers & Packaging Market Volume 2017-2021 … 2
Figure 3-Global Containers & Packaging Market Category Segmentation, 2021 … 3
Figure 4-Global Containers & Packaging Market Geography Segmentation, 2021 … 3
Figure 5-Raw Materials Inventory Aging. … 5
Figure 6-ROA Equation … 8
Figure 7-Conceptual Framework … 15
Figure 8-Gender Analysis … 21
Figure 9-Age Analysis … 22
Figure 10-Level of Education Analysis … 23
Figure 11-Years of Experience Analysis. … 24

LIST OF APPENDICES

Appendix A: Ethics Approval Form … 41
Appendix B: Participant Information Sheet … 45
Appendix C: Consent Form for Project Participants. … 46
Appendix D: Supervision Record Form. … 47
Appendix E: Questionnaire … 48

CHAPTER 1

1.1 Introduction

The monetary achievement of the company is very vital to stay competitive in the market and achieve the goals and objectives of the organisation. The primary documents that indicate financial performance are the financial statements of the organisation (Bertoneche and Knight, 2001). Material management effectively contributes to determining the profitability of the organisation. Inventory management refers to ordering, storing, using, and issuing unprocessed materials, proceeding materials, and final products.

The organisation which is grounded for this report is referred to as XYZ Packaging (Cambodia) co., Ltd due to confidentiality measures of disclosing sensitive information about the organisation. The organisation was established in Cambodia in early 2014 to provide all kinds of carton boxes, and corrugated sheets for customers’ packaging needs. The organisation is specialised in producing cartons and corrugated boxes and the key objective of the organisation is to provide high-quality products that meet customers’ expectations. The company’s main customers are Adidas, Pepsi, Quantum Apparel, Minebea, Park Handbag, Khmer Beverage, Cambrew…etc.

The packaging industry is a very dynamic industry that has higher competitiveness. Packaging is an important element for all trading goods such as foods, beverages, apparel, agriculture items, and pharmaceutical items, including all consumer products. Packaging is used to protect and store products while transportation and storage in different circumstances. The significance of packaging is increasing day by day in the developing market due to various reasons (Chen et al., 2017).

In 2021, the global packing market value grew by 4.2%4.2 \% reaching a value of US $ 1,091 billion while the volume grew by 3.5%3.5 \% reaching 371.3 million tons. The largest segment of the market is Paper accounting for 57%57 \% of the market and geographically, Asia is the largest market segment accounting for 38.3%38.3 \% which XYZ Packaging falls on (MarketLine, 2021).

In 2026, the market value of the packaging industry is expected to be the US $1,349.3 billion, an increase of 23.7%23.7 \% from 2021.

Global Containers & Packaging Market Value 2017-2021

Source: MarketLine
Figure 1-Global Containers & Packaging Market Value 2017-2021

Global Containers & Packaging Market Volume 2017-2021

Source: MarketLine
Figure 2-Global Containers & Packaging Market Volume 2017-2021

Global Containers & Packaging Market Category Segmentation, 2021

Source: MarketLine
Figure 3-Global Containers & Packaging Market Category Segmentation, 2021

Global Containers & Packaging Market Geography Segmentation, 2021

Source: MarketLine
Figure 4-Global Containers & Packaging Market Geography Segmentation, 2021

Chapter 1 of the research is focused on demonstrating the study’s background, research problem, research objective, questions of the research, and significance of the research.

1.2 Background of the research

The effectiveness of Inventories on the financial achievements of any manufacturing organisation around the world is very significant. If the company is holding a large quantity of inventory, a significant amount of money needs to be dedicated to inventory indicates the importance of managing inventory effectively and efficiently. Inventory consists of unprocessed materials, proceeding materials, materials used in processes, and processed materials, and accounts for many expenses such as price, space, manpower to accept, check the quality, clear up, retrieve, segregate, re-arrange, dispatch, deterioration, damages, obsolescence, and theft (Muller, 2011). The negligence of inventory management will result in a decrease in the profitability of the organisation.

The inventory management of manufacturing companies is different from others, since the value creation process comprised in production may involve different indications for inventory management (Steinker and Hoberg, 2013). According to Gołaś, (2020) managing inventory is very important for manufacturing companies, unprocessed materials, and proceeding materials are to ensure the production cycle, reduce the risk involved in the uncertainty of delivery right quantity at right time, economies of scale, and finished goods to ensure the continuous sales. Failure to do result in reduces profit, damage to the organisational reputation, and competitive position in the market.

A large quantity of inventory utilises physical space, increasing the possibility of damage, spoil, loss, and influence to create cash flow problems (Lwiki et al., 2013). According to Abubakar et al., (2019), an important function of inventory management is to maintain comprehensive information about receiving and leaving items from the warehouse. Moreover, inventory management increases the accuracy of inventory orders, well organise the warehouse, saves money and time, and enhances the efficiency and productivity of existing and new customer orders. Further, inventory turnover is one of the criteria used to measure inventory management, according to Abubakar.

The inventory turnover percentage is indicated how many times inventory was sold during the given period or how quickly the company sold the inventory. To determine this ratio, the average inventory is divided by the cost of goods sold. A higher number is indicating a higher performance of the company. A lower rate indicates the working capital stuck in inventory items (Periasamy, 2010).

1.3 Research problem

The latest financial statements of XYZ Packaging company demonstrate that the company is having a financial loss. If the company makes financial losses continuously may force the company into bankruptcy.

Following are some of the financial statistics of XYZ Packaging.

Table 1-Financial statistics of XYZ Packaging FY 2020/2021
Following are horizontal analysis by comparing FY 2020 figures with FY 2021

Table 2-Horizontal analysis by comparing FY 2020 figures with FY 2021

RAW MATERIALS INVENTORY AGING

Figure 5-Raw Materials Inventory Aging

The GP margin is derived by calculating direct material, direct labour, and factory overheads. The above statistics indicate that the impact of direct labour and factory overheads are positive while the direct material has a negative impact. Managing inventory is very important as inventory contributes to the largest portion of the current asset of manufacturing organisations (Etale and Sawyerr, 2020). Moreover, inventory management is significant to the financial performance of the organisation due to the various types of

costs involved. Failure to manage inventory negatively affects productivity, profitability, and effectiveness.

1.4 Research objectives

The research objective is to examine the factors relating the inventory management in the packaging industry.

1. To determine the impacts of inventory management on the financial performance of XYZ Packaging (Cambodia) Co., Ltd.?
2. To identify strategies that can be implemented to overcome challenges in inventory management impact on financial performance.

1.5 Research questions

1. What are the impacts of inventory management on the financial performance of XYZ Packaging (Cambodia) Co., Ltd.?
2. What are the strategies that can be implemented to overcome challenges in inventory management impact on financial performance?

1.6 Significance of the Research

The significance of this study is to determine the impact of inventory management on the financial performance of XYZ Packaging (Cambodia) Co., Ltd and implement the strategies to overcome such challenges to improve organisational performance. Moreover, the information that is presented in this research will benefit the management of XYZ Packaging to maintain adequate inventory management to ensure customer orders while increasing the financial performance of the organisation.

This research will provide a good insight into the significance of managing the inventory of manufacturing organisations, especially in the packaging industry. The findings of this research provide literature that is significant for academics, institutes, and managers to improve decision-making processes. Moreover, this report is important for competitors of XYZ Packaging Company to manage their inventory effectively to improve the financial performance.

Further, this research is significant for future researchers to study the influence of inventory management on financial performance and investors to decide on their investments.

CHAPTER 2

LITERATURE REVIEW

2.1 Introduction

This chapter highlights the important concepts and theoretical framework of inventory management and financial performance published by various authors. Many authors and researchers have published different types of literature on the topic of managing inventory and financial performance.

This chapter presents the literature review of inventory management on financial achievements. The literature gathered from recent journal publications is the foundation for this review. Within this chapter, the researcher has reviewed literature about definitions of inventory management and financial performance, inventory management approaches, financial performance measurements, and a critical review of the literature.

2.2 Financial Performance

The monetary achievement of the company is measured using a periodical financial statement such as the statement of income, statement of financial position, and statement of cash flow. Financial ratios are used to analyse the performance of the company. The liquidity ratios, profitability ratios, growth ratios, solvency ratios, activity ratios, and assessment ratios are called financial ratios (Putri et al., 2020).

The financial performance of the company can be measured by using two methods. The market-based method and the accounting-based method (Barauskaite and Streimikiene, 2021). The main measuring topics are listed in the table below according to Barauskaite and Streimikiene

Source: Barauskaite and Streimikiene, (2021)
Table 3-Commonly used financial performance measurement technique.
The financial achievement of an organisation is significant to ensure the survival of the business and enables to measure and assess the quality of the performance. But, many issues in popular methods are not been addressed, caused not effectively accomplish the purposes (Rosa, 2021).

Meutia et al., (2019) study show that eco-efficiency of environmental achievement has a large and favourable effect on the achievement of financial of 80 firms listed on the stock exchange in Indonesia. Kusumah and Fabianto (2018) researched twenty-seven listed businesses on the Indonesia stock exchange the effect of implementing ISO 9000 on financial performance resulted that no significant impact. However, the labour force reduction has a positive result on financial performance based on a case study of Playtime manufacturer (Wadesango et al., 2018). According to Capkun et al., (2009) analysis indicates that Inventory performance and financial performance have a significant relationship in US-based production companies from 1980 to 2005. But the level of strength differs in the types of inventory, finished goods showed the strongest correlation, and work in progress has a strong and unprocessed material had the highest correlation with all financial performance.

According to Steinker et al., (2016) study of 142 manufacturing companies in the United States from 1995 to 2007 shows that approximately 70%70 \% of financially distressed companies are reducing inventories. Reduction of the inventory will help to lower the cost of the inventory storage facility and finance stuck in the unprocessed material, work in progress, and finished goods.

2.2.1 Return on assets

One of the useful analytical indicators to evaluate a company’s financial performance is the return on assets (Filatov, 2019). The efficiency of an organization’s asset usage is measured by its return on assets (ROA). (Hidayat et al., 2021; Miencha et al, 2016; Saputra and Wardoyo, 2019). When examining the financial strength of the company, studies mainly focus on capital structure and financial proportions for instance return on assets (Pointer and Khoi, 2019). Fluctuating in inventory levels affects return on assets means decreasing inventory levels results improve return on assets and vice-versa (Ahmed, 2016). The formula below can be used to determine ROA.

Return on Assets = Net Income Total Assets x100%=\frac{\text { Net Income }}{\text { Total Assets }} x 100 \%

Figure 6-ROA Equation

ROA measures the ability to generate profit from assets. The higher the ROA of a company shows the level of profit that the company can reach by getting a better position. The low

ROA indicates the assets of the company are unemployed and the investment in the inventory is too high (Hidayat et al., 2021)

Nasution’s (2020) goal was to figure out how inventory turnover affects profitability. Nasution analysed 18 establishments registered on Stock Exchange in Indonesia from 2015 to 2017 and the results show that inventory turnover does not have a positive influence on Return on Assets.

2.2.2 Inventory turnover

The different factors have affected the performance of inventory management. The literature papers about inventory performance generally show inventory turnover ratio as a measurement of inventory management. The inventory turnover calculation is made by dividing the cost of goods sold by the average inventory during a specified time period, and it shows how frequently the company sold or replaced its inventory during that period. (Hançerlioğulları et al., 2016).

According to Kwak (2019) inventory turnover is used as a performance measure of manufacturing companies and is very critical because inventory turnover can show how quickly the company’s products leave the company. Inventory turnover is higher, which means there is less money tight up on slow-moving items. Moreover, inventory turnover measuring objectives are available in the financial statement of the company. Further, Kwak’s analysis of 421 manufacturing establishments in Korea from 2010 to 2018 shows that Gross margin is inversely proportional to inventory turnover and cost of debt and is positively associated with capital intensity.

Lee et al, (2015) researched to observe the effect of an organisation’s innovation performance on the turnover performance on inventory by collecting data from all nonservice United States public organisations from 1976 to 2005. The study shows the positive effect of an organisation’s innovation performance on the inventory turnover performance. Further, Lee demonstrates that the companies in more innovative industries have better performance in inventory management.

2.2.3 Net Profit

The net profit is calculated after deducting all the expenses such as administration expenses, selling expenses, finance expenses, taxation, preference dividends, and so on from the sales (Nariswari and Nugraha, 2020).

Profitability is a key area that measures the analysis of the financial performance of the company. The previous studies show different results on the profitability of manufacturing companies. Richter and Schrader (2017) investigated 1,115 companies from European

counties that issuing shares to employees significantly increases the performance of the business. Simultaneously, Kim and Patel (2017) found analysing 12,648 European companies no significant impact on profitability issuing shares to employees.

Karki (2020) studied the financial statements of Uniliver Nepal in Kathmandu to examine the influence of managing stock on profit and revealed a positive impact on profitability. Further, Karki recommended implementing efficient and effective inventory practices, using suitable advanced technologies, and increasing employee capabilities and knowledge by providing training about proper and efficient inventory management.

2.3 Inventory Management

When it comes to the literature on inventory management in the carton box manufacturing industry or packing box manufacturing industry, specified literature is not available. Therefore, the author explored inventory management literature in manufacturing companies.

Inventory management can be described as meeting customer requirements while keeping inventory holding costs at a reasonable level to generate profit for the company.

According to Karim et al., (2018); Singh and Singh (2018) effective inventory management includes maintaining an adequate inventory of raw materials in case of short supply, forecasting accurate rate, ensuring uninterrupted production by providing continuous raw materials, effectively maintaining carrying cost, ensure to maintain adequate finished goods to meet customer orders, lower investment in inventory, effectively maintain optimum level, protecting the inventory from obsolescence, deterioration, damage, unauthorised use or fraud. Moreover, according to Gołaś, (2020) managing unprocessed materials, proceeding materials, and final products are very important for manufacturing companies, the unprocessed material, and proceeding materials are important for the production cycle and to reduce the risk involved in the uncertainty of delivery right quantity at right time, economies of scale, and to ensure the continuous sales finished goods are very important. Failure to adopt results in damage to the organisational reputation, competitive position in the market, and profits. Further, failure to implement inventory management affects the financial performance of the company by creating stock losses due to theft and fraud activities.

Most of the time inventory management is not easy the demand is very difficult to predict or forecast. Wang and Mersereau (2017) demonstrate that demand is changing over time and correct primary demand is never completely known by the manager of inventory. Further, providing two real-world examples and explained that demand forecasting is very difficult to handle even the managers considered historical demand data and current demand with the seasonal variances.

According to Prachař et al., (2014), the Kanban technique is one of the best approaches to managing inventory effectively and efficiently by reducing and optimising the inventory without maintaining a large inventory. Kanban helps to control production, materials, and information flow including what to make, where to make, how to make, and for whom to make. Further, the Kanban system principle encourages making when there is a market for a specific product, which means working according to customer requirements.

According to the study and logical analysis was done by Shin et al., (2015), the results show that optimising inventory level and profitability performance have an inverse relationship. Examining 976 manufacturing companies in the United Kingdom from 2006 to 2015 resulted that reducing excessively high inventory or growing excessively low inventory positively associated with the organisation’s performance (Afrifa et al., 2020). Further, the manufacturing companies with a more concentrated customer base maintain a fewer inventory without having excess inventory reducing the risk of inventory write off and reversals (Ak and Patatoukas, 2016).

2.3.1 Inventory Management Approaches

Investment in managing inventory is estimated to be 10%10 \% to 18%18 \% of net revenue. This percentage can be higher in the industries such as healthcare. The primary goal of managing inventory is maximizing the quality of service than minimizing the cost of inventory such as holding and ordering. Shortage and substitute costs are more significant compared to inventory holding and ordering costs. Demand satisfaction is the most critical in the manufacturing industry. Shortages in customer demand will result in dissatisfaction among customers and damage the reputation. Economic Order Quantity (EOQ) is a type of inventory management approach in literature (Saedi et al., 2016). Moreover, Re-Order Point (ROP) method, ABC analysis, SDE (Scars, Difficult, and Easy) analysis, and FSN (Fast, Slow, Non-Moving) analysis are can be seen in the literature (Ni’mah and Farida, 2019).

2.3.2 Economic Order Quantity (EOQ)

The profitability of the business is considerably impacted by inventory. Inventory has become more critical for manufacturing companies to stay competitive in the market by meeting customer requirements on time. Maintaining a high inventory level causes increasing the cost of inventory. Due to the uncertainty in the market inventory is a very sensitive area that needs to focus on and reduce cost. The level of re-order, and economical order quantity is very significant for the company. To avoid circumstances involve in inventory Economical Order Quantity calculation technique provides a solution (Budiani et al., 2021).

For the smooth operation of the production, every manufacturing company needs adequate inventory. Emergency purchase of raw materials experiencing some obstacles such as defective goods, unavailability, shortage, not according to the order. Thus manufacturing companies face some constraints. The most cost-effective way to order the right quantity of raw materials is Economic Order Quantity (EOQ) method (Sukmawati et al., 2019).

2.3.3 Inventory/Stock Holding Cost

Inventory/stock holding cost refers to the costs that are involved in storing unsold items. Spaces for storage, labour, insurance, damages, and spoils are considered inventory holding costs. Identifying the cost of retaining inventory in the store is a crucial administrative responsibility. Azzi et al., (2014) study of the inventory carrying cost of ten wellestablished companies in Italy shows that studying the inventory holding cost is important to improve organisational performance.

Companies are holding more inventories due to the fluctuation of demand and difficult to predict the variances. Numerous strategies and systems have been established and implemented to avoid the uncertainty in the manufacturing and demand, to avoid the incurrence of additional inventory holding costs (Torkul et al., 2016).

The inventory holding cost can be incurred in several ways. Some companies produce items for customers, and complete the production but do not deliver on the same day due to delivery arrangements or shipping arrangements, and have to keep them in storage on a temporary basis which leads to a cost of inventory storage. In some instances, the cost of inventory storage is highly involved in industries such as furniture manufacturing or selling, in the showrooms seller keep a variety of products by enabling customers to select (Yang et al., 2021). Industries like biotechnologies require a chain of processing steps, processing in batches, until the packaging steps. The scheduling of various processing steps is very complex and time-consuming. This time gap between each stage increases the deterioration or contamination. Some items need to store under very special facilities or in a refrigerator which increases the cost of holding inventory. For instance, in some treatment for special treatment of blood disorder, blood component needs to extract and process from live blood cells the process should be sterilized and requires special temperature controls and physical separation throughout the process. In this situation, the cost of holding work in progress and finished goods can be significantly high (Bülbül et al., 2004).

2.3.4 Inventory Days

The days in inventory and days inventory outstanding refer to Inventory days the analysis of the average time inventory keep in the company before it is sold. It is derived by dividing the cost of average inventory (the cost of opening inventory of the year and the closing

inventory of the year divided by two) by the cost of goods sold and multiplied by the reporting period mostly 365 days (Malm and Sah, 2019).

A study carried out in Saudi Arabia of 21 energy companies to study the effect of days in stock outstanding on financial achievement showed a negative relationship (Aljaaidi and Bagais, 2020).

2.3.5 Just In Time (JIT) Inventory Management

Just in Time (JIT) is one of the management of inventory approaches that emphasises maintaining zero-level inventories while considering holding inventory as waste. The objectives of this system are to meet the daily schedule and keep rotation time short to the greatest extent possible. Failures to meet the daily schedule possibly will consequence in a delay in customer order delivery and work-in-progress inventory. The unexpected machine breakdowns and downtimes are can be a series of impacts on this approach (Khalfallah and Lakhal, 2021).

JIT inventory management approach helps to address series deficiencies in the production by minimizing raw material movements, minimum proceeding materials, and maintaining minimum final products in the inventory (Alcaraz et al., 2016).

In reality, very difficult to achieve an ideal JIT system in manufacturing companies due to the impossible to reach zero quantity in the process. For instance, a manufacturing company implements JIT quasi-pull system (Chiarini, 2016).

Much literature includes evidence to illustrate that a considerable impact of managing stocks on the achievement of financial. Most of the finding shows that higher days in inventory ratio provide an unfavourable consequence on financial performance. Moreover, the majority of the analyses have been done by using the total inventory, not the subsection such as unprocessed materials, proceeding materials, or final products separately. According to Gołaś, (2020a) the researchers generally consider combined inventory when analysing the link between inventory management and financial achievements by failing to consider components of the inventory.

Gołaś (2020) performed a case study to observe the association between stock performance and financial success of food companies in Polish and identified unprocessed materials and processed goods are significantly determined by the number of days in stock for total stock. Moreover, Gołaś’s study found that managing inventory is a principle factor of enhancement in the achievements of finance. Further Gołaś and Bieniasz (2016) analysed the food manufacturers in Poland from 2005 to 2010 to research the effectiveness of managing inventory measures on financial achievements comprising return on sale, return on equity, and return on assets. The results proved that positively correlated with financial achievement.

The goal of managing stock is to avoid the higher holding cost due to too much inventory and avoid production interruption due to the unavailability of inventory. Materials planning, budgeting, and forecasting can expect from an efficient inventory management system. The company should implement good inventory management and reporting systems such as ABC analysis and economic order quantity to optimise the inventory level (Orobia et al., 2020).

The study performed by Ondimu et al., (2018) of manufacturing firms in Kenya on how inventory management affects financial performance shows that the relationship between material transformation period, stock carrying cost, and actual stock per annum with finance performance is a negative relationship. Only the optimal inventory orders showed a positive association with the financial achievements of businesses engaged in manufacturing in Kenya.

A case study examined by Etale and Sawyerr (2020) of GlaxoSmithKline Consumer Nigeria PLC to recognise the link between inventory control and financial success, concluded that All of the independent variables were related to the dependent variables in a positive way. The independent variables were inventory to asset ratio and inflation while the dependent variable was Return on assets. Etale and Sawyerr had collected secondary data from the audited statements of financial of GlaxoSmithKline from 2011 to 2018. The study was descriptive statistics and multiple regression analysis. Further, Etale and Sawyerr mentioned that the inventory to assets proportion is substantial at a 5% level.

The research was conducted to explore the effect of managing inventory practices on the achievement of financial of Larfage Wapco Plc in Nigeria. The secondary data of the annual audit report from 2005 to 2013 of the company had collected to analyse the association between the inventory value carried and the cost of goods sold, and the impact of managing stock on the control policy of profitability. The data was analysed using Regression, Qualitative, and ANOVA and the results showed that the cost of goods sold and the value of stock carried have a substantial relationship. Moreover, the research recommended developing a policy structure to enable speedy implantation of best inventory practices such as EOQ, JIT, and MRP as there is a substantial influence of inventory management on the control policy of profitability (Onikoyi et al., 2017).

According to Althaqafi (2020); Ahmed et al., (2015) study results show that managing Inventory and profitability have a strong relationship with Saudi production companies and suggested that if inventory is handled well, it guarantees more profitability, whereas inadequate inventory management results in poor financial results.

CHAPTER 3

RESEARCH METHODOLOGY

3.1 Introduction

This chapter describes the methodology used to explore the impacts of stock controls on financial performance and to identify strategies to overcome it. The methodology demonstrates the system of methods, techniques, and strategies used to develop the study. Conceptual framework, research philosophy, approach, design, population, sampling, data collection, and analysis areas are included in this chapter.

3.2 Conceptual Framework

Source: Author developed, 2022
Figure 7-Conceptual Framework

The above figure demonstrates the association between managing inventory and financial outcomes. The indicators of inventory management are economic order quantity, inventory holding cost, and days in inventory. The indicators of financial performance are return on assets, inventory turnover, and net profit.

To evaluate the association between inventory management and financial performance, the researcher devised the following hypothesis.

Hypothesis
H01\mathrm{H}_{01} : Inventory management does not have an impact on financial performance.
H11\mathrm{H}_{11} : Inventory management has an impact on financial performance.

Operationalisation of the research variables

Source: Author developed, 2022
Table 4-Operational Plan

3.3 Research Philosophy

Positivism and interpretivism are two types of research philosophies. Positivism refers to a type of or continuation of empiricism that is commonly related to experiments and quantitative study (Ryan, 2018) and represents social surveys, structured questionnaires, and official statistics. Interpretivism is a process for gaining a deep knowledge of sense by focusing on micro details while ignoring presuppositions and scientific assumptions (Irshaidat, 2022). Interpretivism engages in qualitative studies such as unstructured interviews, and observation.

This study is setting out to determine the impacts of inventory management on the financial performance of XYZ Packaging (Cambodia) Co., Ltd. The financial performances are measured by using statistical data from surveys and annual reports. The inventory management outcomes are also measured using fixed facts such as economic order quantity, inventory days, and inventory holding costs. The positivism approach is more appropriate for the study as the research used structured questionnaires and official statistics.

3.4 Research Approach

In research, two types of approaches are used: inductive and deductive. Since there is an absence or limited prior theories or research findings, the inductive method is applied (Elo and Kyngäs, 2008). The analyst’s mind isn’t completely blank at the start of the study with this approach; alternatively, the research question(s), study goal(s), and/or some relevant norms guide the research analysis (Armat et al., 2018). The deductive method is applied when the previous research theories and findings exist (Pacheco-Romero et al., 2021). The researcher starts the analysis by using previously available theory-driven analytical models

or previous research findings, which is obviously an illustration of deduction (Elo and Kyngäs, 2008).

The purpose of this research is to see how inventory management affects the financial performance of XYZ Packaging (Cambodia) Co., Ltd. The theories related to managing inventory and financial achievements have existed. However, the impact of the independent variables on the dependent variables needs to be identified. Therefore, this research follows the deductive approach to analysing the data.

3.5 Research Design

Research designs are types of inquiry that provide detailed instructions for a research project’s processes, and These could be found in techniques such as qualitative, quantitative, and mixed approaches (Creswell and Creswell, 2018). Qualitative study is allowed to perform in-depth research on a diverse range of topics, including own preferences, in basic and simple language (Yin, 2015). The data is collected by observing or interviewing. Quantitative research is the process of acquiring and evaluating numerical data and data is thought to be dependable and repeatable (House, 2018). When hypotheses are statistically analysed and facts are quantitatively demonstrated, fields of research in Business and Management Studies, broadly defined, are seen to advance. (McLoughlin, 2007). Within this study, numerical data will be collected and analysed. Therefore, the research was designed under a quantitative method to analyse data using correlation and regression.

3.6 Population

The population is comprised of management and staff of XYZ Packaging (Cambodia) Co., Ltd who work in the accounting, procurement, production, and inventory management departments. The target population is 55 employees from the above-mentioned department.

3.7 Sampling

The research is used the probability sampling technique to define the sample size and the random sample technique is used. The sample size is 55 as the total number of population is manageable and helps to develop accurate information. The below table demonstrates the sample size from each department selected for the survey.

Source: Author developed, 2022
Table 5-Population and Sample

3.8 Data Collection Method

The study used data from primary and secondary sources. The primary data was collected from the close-ended questionnaire distributed to the management and staff working in the Accounting department, Inventory management department, Production department, and Procurement department. The secondary data was collected through the audited financial statements for the year ended in 2020 and 2021.

3.9 Data Analysis

The data was analysed using a quantitative method. The primary data was obtained from the questionnaire categorised, coded, and entered into SPSS software for analyse. The study finding was depicted in tables, charts, and graphs to simplify description and explanation. The technique used to identify the strength of the variables is a correlation.

CHAPTER 4

DATA ANALYSIS

4.1 Introduction

The chapter includes the analysis and interpretation of data obtained from the respondents through a survey questionnaire to determine the impact of inventory management on the financial performance of XYZ Packaging (Cambodia) Co., Ltd. Using SPSS (Statistical Package for Social Science), the gathered data were analysed. At first, reliability analysis between variables was performed using Cronbach’s Alpha and verified the reliability. Secondly, demographic data was analysed and presented using charts. Further, analysed the impact of demographic data on variables. Finally, correlation and regression analysis was performed and tested the hypothesis.

4.2 Reliability analysis

The Cronbach’s Alpha model in the SPSS tool was used to determine the reliability of the data of variables.

Reliability Statistics

Table 6-Reliability Analysis

Pentapati et al., (2020) provided the following ranges to check the reliability of Cronbach’s Alpha results.

Table 7-Cronbach’s Alpha Results Representation

According to the above table, Cronbach’s Alpha score of 0.7 demonstrates reliable and consistent results. This study shows a 0.727 means considerably high reliable study.

4.3 Sample Description

The survey questionnaires were distributed to 55 management and staff of XYZ Packaging (Cambodia) Co., Ltd who work in the accounting, procurement, production, and inventory management departments. However, all the participants have responded to questionnaires. The demographic factors of the participants included age, gender, years of experience, level of education, and data collected to understand the performance of inventory management of XYZ Packaging (Cambodia) Co., Ltd.

4.3.1 Demographic Data Analysis

Gender Analysis

Figure 8-Gender Analysis

Gender

Table 8-Gender Analysis

The composition of the respondents is 43.6%43.6 \% of male and 56.4%56.4 \% of female.

Age Analysis

Figure 9-Age Analysis

Table 9-Age Analysis
The highest respondents 58.2%58.2 \% are between the age of 25 to 35 in the study, 21.8%21.8 \% from below the 25 years of age category, and 20%20 \% from age between 36 to 45 categories are second and third highest respectively.

Level of Education

Figure 10-Level of Education Analysis

Education

Table 10-Level of Education Analysis
The highest number of respondents 50.9%50.9 \% have a secondary level of education, 40.0%40.0 \% of the respondents have a primary level of education, and the University level education respondents 9.1%9.1 \% have participated in this study.

Years of Experience

Figure 11-Years of Experience Analysis

Table 11-Years of Experience Analysis
The majority of the respondents 34.5%34.5 \% have 1 to 2 years of experience and send highest respondents 32.7 have more than 4 years of experience. Only 5.5%5.5 \% of the respondents have less than 1 year of experience.

4.4 Comparison of Means

In this section, demographic data age, gender, years of experience, and level of education analysed by comparing with dependent variable financial performance and with independent variable inventory management.

Case Processing Summary

Table 12-Comparison of Means (Gender) Summary

Table 13-Comparison of Means (Gender) Report
Comparison means of respondent’s gender analysed with financial performance and inventory management. All the mean figures show positive responses and results are not much vary on gender.

Case Processing Summary

Table 14-Comparison of Means (Age) Summary

Report

Table 15-Comparison of Means (Age) Report
The above table represents comparison means of age with variables and age in inventory management is not much different. However, age on financial performance is also the same except age category 25−3525-35 which lower mean of 3.3273 .

Case Processing Summary

Table 16-Comparison of Means (Education) Summary

Table 17-Comparison of Means (Education) Report

The comparison mean derived from the above table also indicates positive preference and level of education on inventory management is much similar. However, on financial performance highest mean is 3.6545 for Primary level education. Secondary and University means are much similar.

Case Processing Summary

Table 18-Comparison of Means (Experience) Summary

Table 19-Comparison of Means (Experience) Report
Comparison mean derived from years of experience with variables shows positive preference while the highest mean is 3.8000 from 2-3 years of experience and the lowest mean is 3.1333 from less than 1 year of experience.

4.5 Correlation analysis and Hypothesis testing

A relationship between two variables is tested via correlation, which also determines the degree of the relationship and computes an index indicating the linear relationship between the two variables (Grech, 2018). According to Ratnasari et al., (2016) Indicators of the Pearson correlation r-value are presented below.

Indicators of Pearson correlation coefficient value ®.

Table 20-Pearson correlation coefficient value ®
H11: Inventory management has an impact on financial performance.

Association between Inventory Management and Financial Performance.
Correlations

∗∗{ }^{* *}. Correlation is significant at the 0.01 level (2-tailed).
Table 21-Pearson Correlation of Inventory Management and Financial Performance
Based on the analysis done using Pearson Correlation of SPSS, the “R” value received as 0.603 and indicates a moderately positive association between inventory management and financial performance. The result of 60.3%60.3 \% shows that inventory performance increased by 60.3%60.3 \% financial performance is also increased by the same percentage (Ahmed et al.,

2015). Moreover, the “p” value is 0.000 which is lower than 0.01 indicating the association between inventory management and financial performance is 99%99 \% significant. According to Mulindabigwi and Mulyungi (2015), inventory management positively impacts financial performance.

4.6 Regression Analysis

Impact of Inventory Management on Financial Performance

a. Predictors: (Constant), InventoryManagement

Table 22-Model Summary of Inventory Management

a. Dependent Variable: FinancePerformance
b. Predictors: (Constant), InventoryManagement

Table 23-ANOVA Test of Inventory Management

Coefficients a{ }^{a}

a. Dependent Variable: FinancePerformance

Table 24-Coefficients of Inventory Management
According to the above analysis data, the R square value of 0.364 represents there is an impact of 36.4%36.4 \% of inventory management on financial performance. Moreover, the P -value indicates that 0.000 means influence is 99%99 \% significant (Mulindabigwi and Mulyungi, 2015).

4.7 Summary

Table 25-Summary of Analysis Data

CHAPTER 5

CONCLUSION AND RECOMMENDATIONS

5.1 Introduction

The chapter discusses the findings from chapter four, and provide the study’s conclusion and recommendations based on the objectives of the study, limitation, and future research of this study.

5.2 Conclusion

The management of inventory must maintain accurate records of the items. It is crucial for minimising costs. Improved inventory management will undoubtedly assist in resolving any inventory-related issues the business may be experiencing and will reduce the need for substantial investments or cash holdings in inventory.

The financial performance and inventory management of XYZ Packaging (Cambodia) co., Ltd were evaluated in this study. In chapter four, according to the research objectives, the data was organised, evaluated, and interpreted.

The research objective was to determine the impacts of inventory management on the financial performance of XYZ Packaging (Cambodia) Co., Ltd. Further, identify strategies that can be implemented to overcome challenges in inventory management impact on the financial performance of XYZ Packaging (Cambodia) Co., Ltd. Inventory management was the independent variable that includes the techniques such as economic order quantity, inventory days, inventory holding costs and general inventory management practices. Financial performance was the dependent variable that indicators are return on assets, inventory turnover, cash flow, and net profit.

The researcher used Pearson Correlation of SPSS to analyse the data and found that financial performance and inventory management are correlated with a correlation R=\mathrm{R}= 0.603 (60.3%) indicating that inventory management positively impacts financial performance in XYZ Packaging (Cambodia) Co., Ltd. This implies that effective inventory management will increase XYZ Packaging’s financial performance and vice versa (Ahmed, 2016). Further, the “p” value is 0.000 , which is lower than 0.01 , and shows that there is a 99 percent statistically significant relationship between inventory management and financial performance (Mulindabigwi and Mulyungi, 2015). Based on the above finding, this study concludes that a moderate and positive association is existing between inventory management and financial performance in XYZ Packaging (Cambodia) Co., Ltd.

Economic Order Quantity (EOQ) model enables XYZ Packaging to estimate the number of quantities that needs to be ordered and when need to be ordered (Sukmawati et al., 2019). Optimal order quantity reduces the stock holding cost of XYZ Packaging.

It is found that thirty-two percent of the inventory is held in the warehouse for more than 90 days and twelve percent of the inventory is held in the warehouse for more than 365 days. The current position of the organisation increases the holding cost of the inventory and the organisation needs to maintain spaces for storage, labour, insurance, and also increase the possibility of damages, and spoils. Azzi et al., (2014) stated that the inventory holding cost is important to improve organisational performance.

A more prudent approach to material management would result in less waste, fraud, and write-offs while also guaranteeing that the materials were available when needed, which would improve XYZ Packaging’s financial performance. Due to the unique characteristics of inventory as an asset, inventory management has evolved significantly to address the growing issues faced by the majority of business organisations. The inventory management position at XYZ Packaging has been revealed that make use of a well-built inventory policy to manage unused inventory without incurring unnecessary costs and to also minimise associated carrying costs (Onikoyi et al., 2017). If the firm’s inventory management policies are effective, increases the profits of the company.

In conclusion, this research discovered that streamlining inventory management can positively increase the financial performance of XYZ Packaging (Cambodia) Co., Ltd.

5.3 Recommendations

The researcher found out that there is no computerised system to monitor inventory at XYZ Packaging (Cambodia) Co., Ltd. Current practice is all the calculations and reporting are done using excel worksheets by the stock controllers. As a result, there may be a significant risk of mistakes and the potential for fraud (Althaqafi, 2020). The researcher would like to recommend implementing a recognised computer-based system to manage the inventory.

The level of re-order and effective order quantity is very significant for a company. Maintaining an optimal inventory level is necessary for an organisation to operate well, however, neither an overstock nor an understock should exist within the company. Based on the responses received for the questionnaire, the researcher found out that the economic order quantity (EOQ) model is not used to make order raw materials. The researcher is recommended to provide training on how to use and practice the economic order quantity model.

This study recommends that management should regularly provide staff with training to help them become more proficient at managing inventories and to help them become familiar with the current inventory management techniques, which, will lower the organization’s costs associated with maintaining inventory.

5.4 Limitations

The study objectives were to determine the impacts of inventory management on the financial performance of XYZ Packaging (Cambodia) Co., Ltd and identify strategies that can be implemented to overcome challenges in inventory management impact on financial performance. The study was limited to a single company in Cambodia, thus its conclusions cannot be applied to other businesses or countries. The findings and conclusions are also grounded on the expertise and knowledge of the participants in their particular fields of employment. Another challenge was the time factor. The study was conducted by giving questionnaires to the respondents and it is time-consuming to answer the questions and collect from respondents.

Moreover, this research did not investigate sub-components of the inventory such as unprocessed items, processing items, and processed items separately due to time constraints. These sub-components of the inventory may have quite varied impacts on the financial performance of XYZ Packaging (Cambodia) Co., Ltd (Steinker and Hoberg, 2013).

5.5 Future Research

Future search can be conducted to determine how different components of the inventory, unprocessed items, processing items, and processed items in separately affect the financial performance of XYZ Packaging (Cambodia) Co., Ltd. Moreover, qualitative research can be conducted to determine how the management of inventory impacts the performance of financial of the company. The paper recommends additional research can be done to determine how the management of inventory affects the procurement function performance in XYZ Packaging (Cambodia) Co., Ltd.

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Appendices
Appendix A: Ethics Approval Form

THE UNIVERSITY OF NORTHAMPTON NORTHAMPTON BUSINESS SCHOOL

MODULE: STRMO59: Business Research In Practice

If you have ticked Yes to questions 8-12, then your project is NOT low risk

SECTION B

Please provide full details of your project below

(if insufficient detail is provided and the precise nature of the study is not clear your supervisor will NOT approve the project and your form will be returned)

State the aims and objectives of this research:

The objectives of this study is to determine the impacts of inventory management on the financial performance of XYZ Packaging (Cambodia) Co., Ltd.

Moreover, identify strategies that can be implemented to overcome challenges in inventory management impact on financial performance.

How will participants be recruited? Who will they be (i.e. number, age, and gender?):

All participants recruited for this research are management and staff of XYZ Packaging (Cambodia) Co., Ltd who work in the accounting, procurement, production, and inventory management departments.

Details of the informed consent process (If required, use the Informed Consent and Participant Information Sheet templates provided and submit with this form):

The sample consent form for project participants attached

Description of the method (please submit your research instrument (survey questionnaire, interview questions that you will be using to collect data with this form if relevant):

The sample of interview questions sheet attached

Where will this research be conducted?

At the XYZ Packaging (Cambodia) Co., Ltd

What steps have been taken or will be taken to ensure appropriate permissions are obtained? (N.B. provide a copy of correspondence i.e. letter, emails granting you permission must be submitted with your ethics submission):

The organisation which grounded for this report is referred to as XYZ Packaging (Cambodia) co., Ltd due to confidentiality measures of disclosing sensitive information about the organisation.

□\square approved in its current form
□\square declined and will need to be revised and resubmitted
The following required revisions are stipulated.

Appendix B: Participant Information Sheet

University of Northampton
Faculty of Business & Law

PARTICIPANT INFORMATION SHEET

Study title

The impact of inventory management on financial performance.
You are invited to take part in a research study. Before you decide whether or not to take part, it is important for you to understand why the research is being done and what it will involve. Please take time to read the following information carefully.

The purpose of the study?

The objective of this study is to determine the impacts of inventory management on the financial performance of XYZ Packaging (Cambodia) Co., Ltd. Moreover, identify strategies that can be implemented to overcome challenges in inventory management impact on financial performance.

All the participants who have been invited for this research are management and staff of XYZ Packaging (Cambodia) Co., Ltd who work in the accounting, procurement, production, and inventory management departments.

It is up to you to decide whether or not to take part. If you decide to take part you will be given this information sheet to keep and be asked to sign a consent form. If you decide to take part you are still free to withdraw at any time and without giving a reason.

If you take part in this research you will be given close-ended questionnaires to answer which will take around 20 minutes to complete.

The data and information collected about the individual will be kept strictly confidential (subject to legal limitations) and will be kept at a specialised data centre at the University of Northampton and may be used for articles or reports as an output of this research project, but your confidentiality and anonymity will be maintained.

Moreover, you may request not to reveal your identity in this project and any output of this research and your identity will be kept anonymous.

If you take part in this study, you are required to fill out the survey questionnaire provided to you and return it to the researcher.

This research is done by me as a student at the University of Northampton and the Faculty of Business and Law.

Appendix C: Consent Form for Project Participants

University of Northampton

University of Northampton
Faculty of Business and Law
CONSENT FORM FOR PROJECT PARTICIPANTS

Title of Project:

Dear Participant:
You will be given a copy of this Consent Form to keep and refer to at any time. Tick the appropriate column for each item if your answer is “yes” or “no”

Thank you
Researcher: Prasanna Lakmal Kavirathna

Appendix D: Supervision Record Form
University of
Northampton

POSTGRADUATE BUSINESS RESEARCH
SUPERVISION RECORD FORM

Appendix E: Questionnaire

Section A: Respondent Profile:

1. Gender?

a. Male [ ]
b. Female [ ]
2. Age?
a. Below 25 years [ ]
b. 25-35 years [ ]
c. 35-45 years []
d. above 45 years [ ]
3. What is your level of education?
a. No formal [ ]
b. Primary [ ]
c. Secondary [ ]
d. University [ ]
4. Year of experience?
a. Less than 1 year [ ]
b. 1-2 years [ ]
c. 2-3 years [ ]
d. Above 4 years [ ]

Section B: Inventory Management

Section C: Financial Performance