Question

Pick n buy is a company that supplies fresh fish to two supermarkets,kamature and zonda super market.During 2018, the two supermarkets had large stocks of unsold fish at the end as shown in the table.

	kamature	zonda
Stock of fish at the beginning of the year	$175	$165
Cost of fish sold during the year	$105	$112
Stock of fish at the end of the year	$130	$120

Required

1. Describe the significance of inventory turnover in the formulation of strategy
2. Pick n buy is considering dropping the outlet which has a less favorable inventory turnover. On the basis of the inventory turnover of each supermarket, advise which supermarket should be dropped.

Answer 1

1. SIGNIFICANCE OF INVENTORY TURNOVER  

Inventory turnover is an indicator for how well an organization manages costs associated with it's sales. Higher inventory turnover means company is going on well and it's selling quickly and also a considerable demand for the products. The inventory turnover ratio also known as stock turnover ratio is considered as one of the key element for evaluating the efficiency of company in hadling the production and selling of it's products. Inventory ratio may vary significantly among industries. Thus as said, a higher inventory represents , fastest moving products and low inventory represents slow moving products. Users of such tools have to make sure on various factors that effect inventory turnover ratio before making any interpretations or decisions. FIFO,LIFO & JIT inventory methods can be sited as the example effecting factors of inventory turnover.

Thus inventory turnover plays a significant role in formulating a strategy to the company. Since it's figures indicates efficiency and inefficiency of organizations in handling it's products, the strategy should be formulated based on such results. Higher ratio indicates efficient management and fastest moving commodities, on the other hand lower ratio indicates the poor inventory management and slow moving products.

2 . DECISION REGARDING THE CASE STUDY OF PICK N BUY COMPANY

Inventory turnover ratio = cost of goods sold / average inventory

KAMATURE CO. ZONDA CO.

Cost of goods sold	$ 105	$ 112
Average inventory	$ 152.5	$ 142.5
Inventory turnover ratio	0.689 times	0.786 times

working notes

Average inventory of kamature = [ opening stock + closing stock ] / 2

= [$175+$130] / 2

= $152.5

zonda = [ $165+$120 ] / 2

= $ 142.5

inventory turnover of KAMATURE = 105 / 152.5

= 0.689 TIMES

Inventory turnover of ZONDA = 112 / 142.5

= 0.786 TIMES

• INTERPRETATION

Based on the above it is clear that both the super markets are having a poor management system for handling products, which caused slow moving of fish. A idle ratio for retail business is 2 to 4. In the above case it is less than 0 , which means inefficient management and slow moving of fish. It may resulted in loss to pick n buy company.

From the above both super markets turnover is lower than the idle turnover, which means inefficiency and weaker sales and declining demand. so either pick n buy can drop both the otlets or otherwise can opt for zonda whose inventory turnover is slightly better than the other one.