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An Econometric Analysis of Inventory Turnover Performance in Retail Services

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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.
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... The most frequently used measure to evaluate inventory efficiency is the inventory turnover ratio (Gaur et al., 2005). The inventory turnover ratio is calculated as the cost of goods sold divided by the average inventory level, and can be used as a comparative measure across firms. ...
... When analysing inventory performance metrics such as inventory turnover or inventory in days, these should be controlled for financial metrics such as gross margin, capital intensity, and sales surprise (Gaur et al., 2005). There seem to be a negative relationship between gross margin and inventory turnover, and a positive relationship between capital intensity and sales growth (Gaur et al., 2005;Kolias et al., 2011). ...
... When analysing inventory performance metrics such as inventory turnover or inventory in days, these should be controlled for financial metrics such as gross margin, capital intensity, and sales surprise (Gaur et al., 2005). There seem to be a negative relationship between gross margin and inventory turnover, and a positive relationship between capital intensity and sales growth (Gaur et al., 2005;Kolias et al., 2011). This implies that firms with better margins on their sales have higher relative inventory levels, while firms with high investment in assets relative to inventory return better inventory performance. ...
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... Given the topicality, complexity and importance, in t is a rich literature dedicated to inventory management in retail (Berman, 2018;Dekimpe, 2019;Evans, 2005;Levy, 2020;Pitari, 2020;Lukic, 2015;Lukic, 2019 a,b;Lukic, 2020 a, b). Some papers have been augmented exclusively by econometric analysis of retail inventories (Adebayo, 2017;Gaur, 2003;Gaur, 2005;Kolias, 2011;Krishnankutty, 2011;Kalan, 2020;Knežević, 2015). All of them serve , in this paper, as a theoretical-methodological and empirical basis for researching the issue of factor analysis and the efficiency of inventory management in food retail in Serbia. ...
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