THE IMPACT OF INVENTORY MANAGEMENT ON PROFITABILITY : A quantitative study of the food manufacturing sector in Sri Lanka between 2017 and 2021

Abstract: ivABSTRACTBusinesses must overcome a variety of difficulties as a result of the considerable changersin the global economy. Due to import limitations, excessive inflation, and ongoing foreignexchange troubles in the economy. Sri Lankan industries, particularly food markers, arecurrently experiencing extremely difficult times. For many people in the nation, the foodbusiness is crucial. A nation’s ability to succeed economically and politically depends onthe availability of cheap, nutritious food that is also in good supply. The government isaware that consumers care about the cost and safety of the food they eat. Everyone alsoseems to be becoming more concerned about the origin of their food, how it is raised orcultivated, and whether it is sufficiently nutrient-dense. The food sector is tightly regulatedto ensure everything runs smoothly due to the necessity to supply food safety and value. Inmost sectors, of the company's inventory makes up a sizeable portion of its current assets.It's beneficial for the business process to manage such inventories in order to prevent lossesbrought on by stock shortfalls and surpluses. There were several examples where companieswere collapsed due to mismanagement of their inventories. Thus, this research expected toexamine the impact of inventory management on profitability of listed food manufacturingcompanies in Sri Lanka as this sector operation is highly relied on the inventories.A quantitative research strategy was adopted for this study and financial data was obtainedfrom the published annual reports of 14 listed food manufacturing companies on theColombo Stock Exchange for a period of 5 years from 2016/2017 to 2020/2021 to conductthe analysis. In this regard descriptive, correlation and regression analysis were conductedto analyze the data by using Statistical package for the social science (SPSS) software.Inventory turnover, number of inventory days and gross margin return on inventory havebeen identified as dimensions to measure the independent variable of inventorymanagement. Company profitability has been identified as the dependent variable and itwas measured through return on equity and return on assets. Six hypotheses wereestablished and tested to ascertain how inventory management affects profitability based onthese five variables. Results of the study show that inventory turnover has a significantnegative impact on return on assets and medium negative impact on return on equity. Thestudy also reveals that the number of inventory days and gross margin return on inventoryhas no significant impact on return on assets and return on equity. The study's findings willbe crucial in advising policy makers, operational managers of food manufacturingcompanies for the efficient inventory management which lead to enhance the profitabilityof those companies.