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Managing The Impact Of The Inventory Level On The Financial Ratios Through Dual Simplex Algorithm In The Coronavirus Crisis

Author

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  • VESA Lidia

    (Doctoral School of Economic Sciences, Faculty of Economic Sciences, University of Oradea, Romania)

Abstract

This paper presents the impact of inventory level on the financial ratios, namely Return on assets and Debt to assets ratio. This study is designed to help managers to establish an efficient inventory level to obtain a high ROA and a low D/A, which indicates that the company is doing well in managing its resources, can attract more investors and can meet financial obligations with its resources. Determining the inventory level that generates a high ROA and a low D/A is possible using the Primal or Dual Simplex Algorithm. Primal Simplex Algorithm has some limits in determining the inventory level, so the Dual is preferable. Using Dual, the company can simulate more production plans until the optimal stock level is obtained. Also, the Dual Algorithm can help managers to identify the initial optimal solution in the shortest time possible and to re-optimize this solution until the ROA and D/A have the expected value. This possibility of re-optimization is important nowadays due to the impact of the coronavirus crisis on the sales: the company can model the production plan whenever the demand is changing and can simulate the production process which generates the best ROA and D/A that can be obtained even if the revenues decrease or the liabilities increase. This paper presents the initial production plan created by the managers, a worst-case scenario (most common in crisis), where the turnover decreases, the ROA is low and D/A is high, and a best-case scenario (the ideal one), where the turnover increases and ROA and D/A have optimal values. Forecasting inventory level, and therefore ROA and D/A has also the advantage that it could avoid a potential conflict of interest between shareholders and managers. Despite these advantages, there are some limits: firstly, using Dual Simplex Algorithm on determining the inventory level that generates a high ROA or a low D/A makes managers simulate several times until the optimal solution is obtained and secondly there are some short them debts that are not considered. The first limit would be removed in further research, by using fuzzy numbers.

Suggested Citation

  • VESA Lidia, 2020. "Managing The Impact Of The Inventory Level On The Financial Ratios Through Dual Simplex Algorithm In The Coronavirus Crisis," Annals of Faculty of Economics, University of Oradea, Faculty of Economics, vol. 1(2), pages 241-256, December.
    • Handle: RePEc:ora:journl:v:1:y:2020:i:2:p:241-256
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    References listed on IDEAS

    as
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    4. Hong Chen & Murray Z. Frank & Owen Q. Wu, 2005. "What Actually Happened to the Inventories of American Companies Between 1981 and 2000?," Management Science, INFORMS, vol. 51(7), pages 1015-1031, July.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    simplex algorithm; return; debt; assets; liabilities; optimal solution;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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