An Econometric Analysis of Inventory Turnover Performance in Retail Services

Abstract

Inventory turnover varies widely across retailers and over time. This variation undermines the usefulness of inventory turnover in performance analysis, benchmarking, and working capital management. We develop an empirical model using financial data for 311 publicly listed retail firms for the years 1987--2000 to investigate the correlation of inventory turnover with gross margin, capital intensity, and sales surprise (the ratio of actual sales to expected sales for the year). The model explains 66.7% of the within-firm variation and 97.2% of the total variation (across and within firms) in inventory turnover. It yields an alternative metric of inventory productivity, adjusted inventory turnover, which empirically adjusts inventory turnover for changes in gross margin, capital intensity, and sales surprise, and can be applied in performance analysis and managerial decision making. We also compute time trends in inventory turnover and adjusted inventory turnover, and find that both have declined in retailing during the 1987--2000 period.benchmarking, inventory turnover, retail operations, performance measures

Information Technology Implementation and Operational Efficiency

“…In this study, we use logIT (log of inventory turnover) as a dependent variable that is developed in Gaur et al (2005) in which a log-linear relationship is suggested between variables. We use the same variables from Gaur et al (2005)-logGM (log of gross margin), logCI (log of capital intensity), and logSS (log of sales surprise)-and add some more independent variables.…”

“…We use the same variables from Gaur et al (2005)-logGM (log of gross margin), logCI (log of capital intensity), and logSS (log of sales surprise)-and add some more independent variables. We add a dummy variable Rank that attains the value of 1 if a firm is in the Information Week 500 rankings and gets 0 otherwise.…”

“…If we let CGS it denote cost of goods sold of firm i in year t, Inv it denote average inventory, GFA it denote gross fixed assets, S it denote net sales and Emp it donote the number of employees, then our variables are computed as follows: The explanation of gross margin, capital intensity and sales surprise is detailed in Gaur et al (2005). The number of observations, mean, standard deviation, minimum value, and maximum value of each independent variable in our model are described in Table 3.…”

“…It is common to use inventory turnover as an operational performance measure (Dehning et al, 2007;Demeter, 2003;Gaur et al, 2005;Vastag and Whybark, 2005). In particular, to develop the model in this paper, we refer to Gaur et al (2005) examining the correlation of inventory turnover with gross margin, capital intensity, and sales surprise.…”

“…In particular, to develop the model in this paper, we refer to Gaur et al (2005) examining the correlation of inventory turnover with gross margin, capital intensity, and sales surprise. Several papers empirically study what affects inventory turnover: Zhu et al (2002) has found a significant relation between e-commerce capability and inventory turnover; and Demeter (2003) has observed that the existence of a manufacturing strategy does not affect inventory turnover.…”