An Econometric Analysis of Inventory Turnover Performance in Retail Services

“Prior research has often relied on metrics such as inventory turnover (Schonberger, 2007; Gaur et al., 2005) and average inventory levels (King and Lenox, 2001) to gauge inventory leanness.”

“Pioneering work on explaining the wide variations in inventory turnover performance, and the link between operational and financial performance in retail operations has recently appeared in Gaur, Fisher, and Raman (2005).”

“In the spirit of Gaur et al. (2005a) , weestimatethefollowing alternative specification to test if our results are induced by our specification of the variables:”

“…average three-month commercial paper interest rate, aggregate sales and production of the firm's two-digit SIC, and the change in firm store counts, if it is a retailer (see Gaur et al. 2005); and specification 3 includes these variables and extends the number of lagged demands and orders to eight.”

“Turning to the factors posited to be related to inventory turnover, we find that GrossMargin is negatively associated with InventoryTurnover, consistent with the strategic association of high margins and low inventory turnover, and vice versa (Nissim and Penman 2001; Gaur et al. 2005).”

“For example, a retailer might prefer to sell a product with a 5% margin over another one with a 10% margin if the former sells much faster than the latter (see Gaur et al. 2005 for a comprehensive empirical analysis of this “earns versus turns” trade-off).”

“For instance, some studies have focused on inventory (e.g., Chen et al., 2005; Gaur et al., 2005), while others have centered on production resources (e.g., Vickery et al., 1993) as determinants of firm performance.”

“Gaur et al. (2005) also find that inventory turnover for retailing firms is positively correlated with capital intensity and sales surprise and, similar to our result, is negatively correlated with gross margins.”

“Indeed, Gaur et al. (2005) show that retailers have lower inventory turnover for higher margin items than for lower margin items.”

“Whereas greater competition is associated with higher inventory levels among new car dealers and supermarkets (Olivares and Cachon 2009, Matsa 2011), the opposite effect is found among factories and retailers (Amihud and Mendelson 1989, Guar et al. 2005).”

“-turns” trade-off, that is, the managerial practice of trading off inventory turns with gross margins (e.g., Gaur et al. 2005).”

“However, Gaur et al. (2005) found that inventory turnover in the retailing so forth.”

“Gaur et al. (2005a) nd that as a retailer s margins decreases and capital intensity increases, it tends to carry less inventory relative to sales (i.e., days of supply).”

“Hall (2005), these are often known to be bad (See Brown and Newey (2002) and the 1996 special issue of the Journal of Business and Economic Statistics quoted therein).”

“Finally, in row 7, we show results of estimation using an alternative definition of gross margins constructed as the ratio of gross profits over sales (Gaur et al. 2005).”

“We use the above process to generate forecasts for our test sample by setting T = 2004 2007.”

“While Gaur et al. (2005) find that average inventory turns in retail firms decreased between 1987 and 2000, indicating higher levels of inventory, Chen et al. (2005c) report an opposite result.”

“Inventory record accuracy is an essential ingredient for efficient and effective supply chain management and store execution (DeHoratius and Raman 2008, Gaur et al. 2005, Heese 2007).”

“Intriguingly, however, empirical validation of this view is limited (Gaur et al., 2005).”

“Finally, another stream of studies has examined performance differences between firms with high and low inventory turnovers (e.g., Alan et al. 2014, Chen et al. 2007, Gaur et al. 2005).”

“Similarly, inventory holding stimulates product demand and improves a firm’s ability to service customers (Cachon et al. 2005), which increases performance (Gaur et al. 2005; Rumyantsev and Netessine 2007).”

“First, Gaur et al. (2005) fit a longitudinal regression model using panel data, whereas we fit a separate regression model for each year t. Fitting cross-sectional regression models allows us to avoid look-ahead bias and ensure that accounting variables are known before they are used to form…”

“However, overly pursuing inventory leanness may harm profitability of retailers, who often face an “earns vs. turns” trade-off (Gaur et al. 2005).”

“…on (a) which factors are the critical determinants of inventory and (b) how various aspects of inventory management impact firm performance.11 Gaur et al. (2005) show that inventory is simultaneously determined with other firm operational outcomes, which suggests that simultaneous equations…”

“( 2005 ) observe that “… the overall trend in inventory turns in the retailing industry is downward sloping during 1987–2000.”

“It is commonly used to measure inventory management performance (Gaur et al., 2004), directly reflecting TABLE 1 Green supply chain performance indicator system.”

“In this section we present a generalization of the model of stochastic peak load pricing described in Dana (1999a).”

“A related trend is the use of panel data (Hausman and Taylor 1981, Hsiao 2014, see Gaur et al. 2005 as an exemplar for POM applications) that enables better control of unobserved firm-specific and time-specific factors while addressing trade-offs between operations variables.”

“Econometric analysis is based on the study of Gaur et al. (2005) for the U.”

“This is important as inventory turns alone may often be increased by compromising on sales as lower inventories can lead to higher stockouts (Gaur et al. 2005).”

“…inter-regional store network may carry more overall inventory across their store networks due to scale considerations (Cachon and Olivares 2010, Gaur et al. 2005, Rajagopalan 2013); thus, they may respond to demand-side shocks by bringing in inventory from outside the affected region (Holmes…”

“In line with this, Gaur et al. (2005) show that the same level of performance can be achieved by varying the combination of capital intensity and inventory—substituting one for the other.”

“Higher inventory turnovers have been shown to be correlated with higher gross margins (Gaur et al., 2005).”

“Firms’ investment in items such as R&D and COGS are often considered by researchers in a multiplicative manner when measuring firm performance, for example, Gaur et al. (2005) and L (cid:1) evesque et al. (2012), who explore the theoretically appropriate use of a log-linear model.”

“Gaur et al. (2005) show that inventory turnover negatively correlates with gross margin and positively correlates with capital intensity and sales surprise in the retail industry.”

“Depending on the retail segment, typical retail gross margins range from 25% to 50% (Gaur et al. 2005, Table 2).”

“2”

“Gaur et al. (2005) use financial data for retail firms to investigate the correlation of inventory turnover with gross margin, capital intensity and sales surprise in a longitudinal study.”

“We also controlled for capital intensity, which has been shown to be associated with firm performance [84].”

“…(Chikan, 1996), incentives for efficient inventory management (Baldenius and Reichelstein, 2005), parameters that impact on inventory policy (Borgonovo, 2008), efficacy of inventory (Barker and Santos, 2010), and determinants of inventory turnover (Gaur et al., 2005; Kolias et al., 2011).”

“Gross margin is frequently studied in operations management (e.g., Gaur et al. 2005, Kesavan et al. 2010) and entrepreneurship (e.g., Jarillo 1989, Wiklund 1999), but has not been investigated in growth phase new ventures.”

“Lieberman et al. (1999) explored the drivers of inventory levels in the automotive parts industry in the United States and Canada and identified significant technological and managerial factors.”

“Additionally, and based on previous literature (Rumyantsev and Netessine, 2007; Gaur et al., 2005; Lieberman et al., 1999), we also include the following control variables: firm size, gross margin, lead time, sales growth, financial structure and sales uncertainty.”

“…to uncertain demand, firms develop forecasts (Fisher and Raman 1996), keep safety stocks and inventories (Graves 1988, Graves and Willems 2000, Gaur et al. 2005), use financial instruments (Gaur and Seshadri 2005), and both produce (Graves 1988, Fine and Freund 1990, Jordan and Graves 1995,…”

“The empirical evidence of this inverse relationship between inventory turns and gross margin has been well documented in prior research (Gaur et al. 2005).”

“[18] suggested the use of a new empirical measure—adjusted inventory turnover—for performance comparison across years or across firms, by controlling some variables affecting inventory turnover ratios of companies.”

“After computing all the variables, we omit from our data set those firms that have less than five consecutive years of data available for any sub-period during 1985-2003; there are too few observations for these firms to conduct time-series analysis.”

“This logic is well developed from an analytical perspective in Roumiantsev and Netessine (2007a) and Gaur et al. (2005).”

“We note that with annual data, Gaur et al. (2005) also use Holt’s linear exponential smoothing to generate forecasts.”

“Such complications in selecting variables to represent operational performance have been experienced in previous studies using a similar approach [10,31,42,58].”

“Field data can also be obtained indirectly from third parties that collect industry data (e.g., Compustat, WardsAuto; see Gaur et al. 2005 and Moreno 170 and Terwiesch 2015) or collected independently by the researchers, for example, web-crawling transaction information from a market platform (Li…”

“…that the performance of inventory management, such as inventory turnover, can have a substantial impact on firms’ stock returns; correspondingly, Gaur et al. (2005) investigate inventory turnover and assert that gross margin, capital intensity, and sales surprise can largely explain the…”

“Following the model specifications in previous studies (Rajagopalan and Malhotra, 2001; Chen et al., 2005,2007; Gaur et al., 2005; Rumyantsev and Netessine, 2007; Han et al., 2008; Ak and Patatoukas, 2016; Casalin et al., 2017) and considering data availability at the industry level, we include two primary explanatory…”

“Gaur et al. (2005) report gross margins across retail segments with the highest margin in the jewelry segment and the lowest in food stores (Table 2, p. 184).”

“Unfortunately, since a firm’s sales forecast is not publicly reported, an appropriate forecast proxy must be used (Gaur et al., 2005).”

“Other factors that also may have an impact on inventory levels include: gross margin, capital intensity and sales surprises (Gaur et al., 2005); interest rates, inflation and purchasing managers’ optimism (Chen et al.”

“Consistent with prior literature (Gaur et al. 2005a,b, Gaur and Kesavan 2009, Rumyantsev and Netessine 2007, Kesavan et al. 2010), we find that sales growth, gross margin, lead time, and assets are positively related to inventory investment.”

“Following the definitions of operational variables in Gaur et al. (2005), we set capital intensity ( CI ), gross margin ( GM ), and sales surprise ( SS ) as control variables.”

“At the firm-level, measures of inventory efficiency have been used in a number of studies on either a quarterly or annual basis (Gaur, Fisher, and Raman 1999, 2005; Rumyantsev and Netessine 2007a; Rajagopalan 2012; Isaksson and Seifert 2013).”

“This is rather surprising since a large proportion of trade credit defaults occurs among wholesalers and retailers (Bardos and Stili 2007), who hold large levels of inventory (Gaur et al. 2005), and usually have the ability to decide on their inventory level target.”

“The findings of Gordon et al. (2009), based on 112 U.S. firms, provide a strong evidence on the positive relationship between ERM and firm performance, which is contingent upon an appropriate match between ERM system and five relevant influencing factors (environmental uncertainty, industry competition, firm size, fir…”

“They include absolute measures such as average inventory levels and maximum inventory levels (King and Lenox 2011) standardised measures such as inventory turnover (Gaur, Fisher, and Raman 2005; Schonberger 2007), days of supply (Koumounakos 2008) and inventory to sales ratios (Swamidass 2007).”