This Inventory Turnover Memo assignment shall involve comparing the inventory turnover of two of the biggest beverage manufacturing companies, PepsiCo and The Coca-Cola Company. The total value of inventory is the total cost of inventory multiplied by the total value of the items. On the other hand, inventory turnover is the ratio that measures how efficiently the inventory is managed (Wan et al., 2020). This ratio is obtained by dividing the cost of goods sold (COGS) by the total average inventory, which indicates how many times the inventory has been turned over a given period.
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Inventory Turnover Ratio
In the case of inventory turnover ratio for PepsiCo was 9.3201 in the year 2019. This means that PepsiCo tuned its inventory over 9.3201 times annually which reduced to 8.4679 times by 2020. The reduction in the inventory turnover indicated slower sales and thus inefficient management of inventory for the company. It is, however, important to note that the average inventory for Pepsi Co increased from US$ 3,233 million in 2019 to US$ 3755 million in 2020 (Johnston, 2020).
Therefore, the reduction in the inventory turnover can be attributed to the fact that the inventory held by the company increased between the two years. The company needs to streamline inventory management to ensure efficient utilization of resources, including the warehousing cost.
The inventory turnover ratio too decreased from 4.53 times in 2019 to 4.04 times per year for the case of The Coca-Cola Company. It is important to note that the figures were almost half of those obtained from Pepsi co. This indicates that Coca-Cola has a less efficient way of managing inventory than PepsiCo. Additionally, Coca-Cola’s inventory management had reduced between 2019 and 2020.
One of the causes of a high inventory turnover is the increased value of inventory health, as indicated by an increased average value of inventory from US$ 3,225 to US$ 3,323 million (Murphy, 2020). This may have an insignificant toll on the overall efficiency of the company.
Cost of Goods Sold
The cost of goods sold is reported in the income statement and indicates the cost of the commodities over a given period. The average value of inventory is the mean value of the inventory over a given period (Wan et al., 2020). This is obtained by adding the total inventory value over the past two years then dividing it by two. The Inventory turnover Average days in inventory is the day sales indicate the average number of days it takes to turn over inventory.
Like the inventory turnover ratio, the Inventory turnover average days in the case of PepsiCo increased. This increase was from 39 days in 2019 to 43 days in 2020. Therefore, there was a reduction in inventory liquidity as it took more days to covert inventory, including work in progress to finished produce. This indicates its inefficiency because it took longer to convert inventory into profit, releasing the cash tied into the inventory.
Like the inventory turnover ratio, the Inventory turnover average days in the case of The Coca-Cola Company increased. This increase was from 81 days in 2019 to 90 days in 2020. Therefore, there was a reduction in inventory liquidity as it took more days to covert inventory, including work in progress to finished produce. This could be caused by holding a higher total value of inventory between the two years (Wan et al., 2020). However, it indicates its inefficiency because it took longer to convert inventory into profit, releasing the cash tied into the inventory.
References
- Johnston, H. (2020). UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [Ebook]. PepsiCo, Inc.
- Murphy, J. (2020). UNITED STATES SECURITIES AND EXCHANGE COMMISSION [Ebook]. The Coca-Cola Company. Retrieved 7 December 2021.
- Wan, X., Britto, R., & Zhou, Z. (2020). In search of the negative relationship between product variety and inventory turnover. International Journal of Production Economics, 222, 107503.
