An Analysis of Inventory Turnover and Its Impact on Financial Performance in Indian Organized Retail Industry

Article excerpt

The purpose of this research paper is to assess the operational efficiency of the companies in the Indian organized retail industry, expressed in terms of inventory days, and to investigate the impact of the inventory days on the key financial indicators. Panel data was collected from CMIE's Prowess database for the period 2000-2010 for three retailers viz., Pantaloon Retail (India) Ltd., Shopper's Stop Ltd. and Trent Ltd. These are considered as the representatives of the industry due to high market share. Fixed effect model has been used to analyze the panel data. For the data analysis, ANOVA is used to check the significance of differences in the inventory holding period of the case companies. Further, for analyzing financial impact of inventory holding period, regression analysis is used. The results suggest large differences in the inventory positions of companies under study. An inverse relationship is observed between inventory days and the financial performance ratios under consideration which is partially supported by the regression function. Interestingly, significant results could not be obtained for all the companies under study. The findings have policy implications as the measures could be implemented for improving the inventory position and thereby the financial performance by the retailers.

(ProQuest: ... denotes formulae omitted.)

INTRODUCTION

Indian organized retail industry is understood to be a key sector of the economy due to plenty of opportunities in the sector. It is understood that the retailers who follow the legal compliances of the business constitute the organised segment of the retailing business. These mainly include the big corporations who operate through a chain of stores. Unorganised retailing is the conventional form of retailing where the investment in business is very low and many a times without a proper brick and mortar setup. Despite plenty of opportunities available for the organised retailing in India, the industry is still in its premature stage. The Indian organised retail business seems to be a minnow when compared with its counterparts in other emerging economies. The reasons for this are multiple in which the primary one is the lack of job opportunities. Another key reason is the low cost of investment in unorganised sector due to which many shops get opened in the residential premises by simple modification of infrastructure. This unorganised setup (Mom and Pop) is commonly referred to as a 'kirana' store in India. Given the low cost of investment and the low portfolio of products and services, the unorganised sector suffers from lack of deployment of technology and business management skills. Entrepreneurial skills are developed over a period of time with rich experience where the expertise of business management evolving from various B-schools is not put to test due to the lack of paying capacity (Guruswamy et.al., 2005). This is due to strong competition in the retail industry, especially in the grocery retail where kiranas and local markets pose a big threat to the organised set up. The "economics of small-format grocery retailing in India" has been misunderstood by Subhiksha (a store brand in the organised retail segment in India), who got cash strapped (The Financial Express, 2009), and the employees didn't get their salaries for several months.

Despite all these issues there are unlimited opportunities supporting the Indian economy as a front runner in the future, for high growth in the organised retail sector. The Indian organized retail industry has the capability to grow along with the growing wealth of the Indian middle class due to their rising disposable income (CII- AT Kearney, 2006) thereby increasing the demand for lifestyle goods.

The last decade saw a great boom in the organised retail industry in India which is attributed to the changing demographics, international brands foraying in India, infrastructure developments, credit availability, usage of latest technology and a world class shopping experience. These factors have forced the retail organisations to focus on branding the offerings, expanding the retail space and organising this operations and processes. This has resulted in demand for an increased efficiency of the supply chain system and thereby making the relationships in the distribution network more intricate. An efficient supply chain will lead to reducing the costs and optimising the inventory (ASA & Associates, 2008).

A very large part of the Indian retail business is unorganised. This unorganised segment limits the choice for the consumer. Moreover, there are enormous ambiguities when an attempt is made to determine its financial and statistical aspects. This thwarts the application of analytical tools pertaining to the store data. It is difficult to calculate the income tax, turnover, net profit, various financial ratios, year-over-year growth and category-wise margin. Also, the aspect of stock replenishment is handled manually and so is the demand forecasting.

Organised segment has done a lot to reduce such shortcomings especially with the usage of the technology. Such players now determine the expected demand, the time to replenish the stock and to purchase the new stock from the supplier, through technoogy supported tools. In short, it helps to optimise the inventory level which, in turn, helps in gaining competitive advantage over the unorganised competitors. Moreover, in case of large retail chain stores it is necessary to handle the inventory and demand aspects with much more seriousness due to a great amount of risk, involved in the form of heavy investments in the property, which could be either purchased or rented. Moreover, correct demand forecasting helps in product availability at the store which in turn results in customer convenience and hence the customer satisfaction (Dasgupta, 2007).

The Indian logistics industry is the backbone of the organised Indian retail sector due to which merchandising, transportation, warehousing and inventory management gets a boost (Gill, 2007). According to a survey based study organised by FICCI and PWC in India there is an evidence of shift in the channel power from the supplier/manufacturer to the retailer. This shift can only be sustained by effective management of retail supply chain operations which leads towards cost savings, specifically by way of channel integration and increased inventory turnovers. Retailers are deploying IT for merchandising and inventory management (Gopal, 2006). Hence, it can be seen that the retailers play a pivotal role for the manufacturers by adding value for the manufacturers' merchandise by providing the offerings to the consumers in the form they need. Nowadays, with the advent of technology the retailers are not only embarking on JIT (Gaur and Kesavan, 2009) to minimize the inventory levels, they are also deploying vertical co-operation strategies through contemporary practices which include "Quick Response (QR), Efficient Consumer Response (ECR), Continuous Replenishment (CR) and Category Management (CM)" (Segetlija, 2009).

REVIEW OF LITERATURE

Inventory management is an important aspect of marketing strategy for a retail organisation and can be considered as an integral part of the place mix of the marketing mix strategy. If inventory is seen from the point of view of 4As (Acceptability, Affordability, Accessibility and Awareness) (The Financial Express, 2004) it can be concluded that inventory fosters 'accessibility' for the consumers. From the sales angle, the inventory under display is a key reason for sales on most occasions (Urban, 1998). Hise et al. (1983) have found, using the linear regression, that inventory played a very significant role in explaining the sales and contribution to income. Wolfe (1968) cited by Urban (1998) had found a strong proportional link between the sales and displayed inventory mainly in case of style items. This was also re-affirmed by Silver and Peterson (1985) cited by Urban (1998), while Levin et.al. (1972) cited by Urban (1998) consider inventory as a motivation for purchase and hence accounts for an increase in sales.

Retailers have to maintain an optimum level of inventory in order to ensure stability of sales which leads towards profitability. It is important to maintain the minimum level of stock on the shelf, else it might lead to stock outs and hence loss of sales. On the other hand, if the stock is excessively piled up then the inventory holding cost goes up and there is an indication of blockage or reduction of the expected cash inflow in the near future. Hence, identifying optimum inventory level is of utmost importance for efficient retail operations. Considering inventory as a key asset for the retailer is therefore important and so are its financial impacts (Laux, 2007).

Retailers are required to carry inventory to deliver what the customers want. Inventory is held by a retailer because of the time lag which occurs in the physical delivery of the goods and also due to the demand uncertainties (Iyer et.al., 2007). Iyer et.al. (2007) have further commented that due to this demand uncertainty, the demand forecasting is imprecise and hence the inventory is held by the retailer when the demand is lesser than the inventory a retailer has two options; either the retailer can reduce the mark-up or have an arrangement with the supplier wherein the supplier takes back the unsold goods. In the former case, the retailer has to bear the loss while in the latter case the supplier bears the loss.

The importance of inventory management in retail comes from the fact that sales growth and inventory growth are positively correlated. This implies that the amount of retail sales in a particular time-period has a strong influence on the inventory holding at the end of that timeperiod. Retailers focus on higher inventory levels due to the philosophy of providing all products under one roof which is done to same customers time and search cost. Customers desire to make several purchases during one single visit instead of making several visists for several purchases Hence, the customers feel like purchasing at one visit instead of several visits and hence are more attracted to the stores with the high variety of stock keeping units on the shelves. This is also supported by the negative correlation between the inventory levels and the gross margin return on inventory (Dedeke and Watson, 2008)

Moreover, the inventory management concept has been elevated in an isolated manner in the operations management literature (Capkun et. al., 2009) mainly pertaining to the manufacturing. But it has now found strong inter-linkages in the retailing industry along with assortments and shelfspace management (Urban, 1998).

Dedeke and Watson (2008) considered sales and interest rates as the main determinants of the inventory but suggested that across various retail segments, these are not ample to determine the inventory. They also highlighted the existing dichotomy between the gross margin and inventory in the extant literature pertaining to retail inventory.

Clearly, the research on inventory has a very wide scope. Huson and Nanda (1995) & Balakrishnan et al. (1996) have worked on the performance of manufacturing firms with respect to the inventory management and its improvement. The researchers who have worked on the inventory management at the firm or industry levels include Rajgopalan and Malhotra (2001) and recently, Chen et.al. (2007). Another set of researchers focused on inventory performance and its relationship with the stock market performance and the operational drivers (Gaur et.al.,2005; Hendricks and Singhal 2005; Roumiantsev and Netessine, 2005). McGahan and Porter (1997) have worked on the wholesale and retail firms and found differences across industries pertaining to the relation between the amount of inventory in hand and the profitability. Stocks also need to be replenished when the competing firms expand and the new ones enter the market. Dedeke and Watson (2008) also found a negative correlation between inventory and purchases. They suggested that retailers should focus on replenishments effectively through efficient use of technology in managing the supply chain. Common replenishment periods (Vishwanathan and Piplani, 2001 cited by Dedeke and Watson, 2008; Kulp 2002) and reductions of lead time (Chopra et.al. 2004) are two methods which aid in increasing the inventory.

Shah and Shin (2006) linked information technology, inventory and financial performance. It was noted that the investment in information technology has a indirect influence on the inventory turnover and hence the financial performance (Melville et al., 2004). This three way linkage is termed as the "process-model" (Shah and Shin, 2006). Hence the usage of information technology makes the inventory optimisation process a convenient one especially with the availability of the current data. Vickery et.al (2003) showed that an increased investment in the information technology would result into higher stock/inventory turnover and hence this leads to reduction in per unit cost of inventory holding.

Shah and Shin (2006) outlined that the link between financial performance and inventory performance is not easily comprehensible as inventory adds to firm's cost and is a part of assets. In case of excess inventory, the inventory carrying cost goes up and hence is an evidence of poor operations in the supply chain management and poor demand forecasting (Singhal, 2005). Appasamy et.al. (2009) studied large apparel retailing firms in India and outlined that the decrease in inventory does result in increasing the return of assets (ROA) but still has negative effect on the performance of the firm. Also, lower inventory requires lesser working capital (Boute et.al.,2006). Madhuvanthi et al (n.d.) also discussed the same issue and suggested that decline in sales results in reduced turnover of the inventory and hence the current assets got blocked, thereby not getting liquefied. Therefore, a high inventory turnover ratio suggests that more liquid money available for further business processes. Retailers of fashion and fad based merchandise have a problem of low inventory turnover and to overcome this problem they usually make an arrangement of sending those merchandise back to the vendors.

Singhal (2005) also said that the material handling cost, carrying cost, insurance and losses (due to perishable nature of a product) form part of inventory related costs. These result in fall in the stock prices.

Retailer are expected to optimise their inventory levels which would further help in strategic planning with channel members and would hence cater towards increase in demand. This does not mean that retailers are always expected to increase their inventory turnover. But they must to improve their operational efficiencies which could be done by various innovative techniques like category management, where a particular product category comes under the scrutiny for inventory turnover. A high inventory turnover is not always possible. For this the retailers require greater amount of stock to be stored in inventory with a motivation to increase sales. However, this overstocking could be due to stocking of substitutable SKUs. The stocks are procured from the suppliers who may also be supplying to the competing retailers. Consumers always have a choice to choose from a number of retailers and they may choose any competitor for purchasing the products. This may have a negative effect on the financial performance because of the increased inventory cost. Therefore, the inventory turnover needs to be optimised. (Ganesan et.al., 2009) Hence, it becomes very important to study the financial impact of inventory turnover in a retail organisation. The key inventory related ratios for retail inventory management are inventory to net assets, inventory to sales ratio and stock turnover ratio (Chen et.al., 2005). The first ratio emphasises on the contribution of inventory to the total assets. Cronin and Skinner (1984) examined the effect of inventory turnover on return on assets for retail firms (Evans, 2005). The second ratio emphasises on the inventory required to achieve sales. The third ratio emphasises on the number of times the inventory is replenished. It evaluates the effectiveness of the retailers, in making use of their investment in stock/inventory (Levy et. al., 2007). From the point-of-view of the analysts, inventory turnover ratios hold greater importance in performance analyses for the retailers than for the manufacturers. Further, they rank selling period (or inventory days) as the most important, sales/inventory as moderately important and cost of goods sold to inventory, is ranked as the lowest among these three (Matsumoto et. al.,1995).

According to Cachon and Fisher (2000) there is a periodical review of the stock. It begins with the "retailer orders, the supplier orders, inventory shipments" being "received and released, consumer demand", and finally the "inventory holding and backorder costs". Hard line retailers count their inventories once a year while soft line retailers do it twice a year (PCG Solutions, 2008). If inventory counting is done all together it is beneficial in adjusting the inventory schedules. For example, if the store shrinkage is higher the inventory can be procured earlier in advance. This is helpful in maintaining stocks on the shelf(PCG Solutions, 2008). In the last decade, the advent of technology has highlighted the importance of key concepts of modern organized retail. These concepts are related to inventory management and have resulted in increased inventory turns upon implementation. The higher the inventory turns, the better it is for the retailer. These concepts include quick response, efficient consumer response, vendor managed inventory (Lai and Cheng, 2009) enterprise resource planning, just-in-time, value stream mapping and economic order quantity. Quick response refers to a form of co-operation between the manufacturer and retailer for inventory management where the retailer shares the data through (Point of Sale) POS and Electronic Data Interchange (EDI) while the manufacturer initiates the automatic replenishment of the stock to match the inventory targets (Lai and Cheng, 2009). Efficient consumer response calls for an integration between the members of the value chain thereby matching the supply and demand sides using information technologies like EDI as an enabler. The enabling technology helps in bringing efficiency in replenishment, administration and operating standards on the supply side and product introduction, store assortment and promotion on the demand side. The demand side works towards the efficiency in category management (Overbeck, 2009). Enterprise resource planning (ERP) is a concept which is materialized due to the use of information technology as a backbone. The ERP system provides a strategic and integrated view of the whole value chain thereby helping in strategy development. The various modules of ERP are deployed at various locations to foster the efficiency of the value chain. Just-in- Time (JIT) works towards bringing timeliness in supply, production and distribution and is borrowed from the Japanese manufacturing style widely embraced by Toyota (Davy et.al., 1992). This timeliness helps in increasing the inventory turns on the retail shelves. Value stream mapping (VSM) is a technique used for improving the organization's operational performance by using information and material flow. The key idea is to visualize the current and future state in the value chain (Jain et. al., 2006). The concept of Economic Order Quantity (EOQ) focuses on optimization of inventory carrying cost and the cost of ordering the stock from the supplier. Any mistake in forecasting can pile up inventories thereby adding to the cost therefore EOQ can be applied to minimize such costs.

METHODOLOGY

The objective of this study is to assess the operational efficiency of the companies in Indian organized retail industry expressed in terms of inventory days and to investigate the impact of the inventory days on the key financial indicators viz., return on assets (ROA), return on capital employed (ROCE) and value addition margin (VAM).

To address the objectives, panel data was collected from CMIE's Prowess database for the period 2000-2010. The study period was carefully chosen to make the research representative of an entire decade so that learnings could be offered. The number of companies in organised retail segment displayed on the database, as on financial year ending 2010, was over 40. Out of these, three retailers contributed more than 75% market share (on the basis of turnover). These retailers are Pantaloon Retail (India) Ltd., Shopper's Stop Ltd. and Trent Ltd. These are considered as the representatives of the industry due to high market share. Also, due to lack of availability of data for the time frame this decision was taken. Fixed effect model has been used to analyze the panel data.

For the data analysis, ANOVA is used to check the significance of differences in the inventory holding period of the case companies. Further, for analyzing financial impact of inventory holding period, regression analysis is used taking the financial parameters as independent variables and inventory days as dependent variable. Following are the proposed models for the study:

... (1)

... (2)

... (3)

Considering the inflation and varying output across companies, the credibility of inventory ratios overrides the simple application of absolute values of inventory. Based on the work of Rajagopalan and Malhotra (2001) and Chen et al. (2005), the retailer's inventory position is measured through inventory days i.e., number of days for which inventory is held.

To measure financial performance, return on assets (ROA), return on capital employed (ROCE) and value added margin (VAM) have been used. Return on assets (ROA) is perceived as a useful measure of profit margin (Matsumoto, et.al., 1995). It measures profitability on the whole such that it indicates both the profit margin and the organizational efficiency required to utilise its assets (Post, 1991 cited by Griffin and Mahon, 1997). Return on capital employed is used to measure the efficiency with which a firm has utilised its capital employed to generate the revenues of a firm. This ratio also determines what the firm can pay to its shareholders (Mote and Saha, 2006). In the present competitive environment the traditional earning measures are not adequate to be considered as a standard of business performance. Value measures are gaining acceptability worldwide as an enhanced financial performance tool. The interest in shareholder value is gaining impetus due to numerous developments (Rappaport, 1997) such as:

* Traditional accounting measures namely earnings per share (EPS) and return on inventory (ROI) are not well connected with increase in the market value of a company. This is getting widely acclaimed.

* Publication of returns generated for shareholders, together with the other performance indicators like ROI, EPS and price-earnings ratio etc. in the business press.

VAM (value added as a percentage of sales) is considered as a measure of financial performance for this reason. Use of other ratios viz., marketto- book ratio (Chen et al., 2005), earnings per share (Huson and Nanda, 1995) etc. is evident in other research works but due to unavailability of data and time constraint we restrict to the three ratios mentioned above. Following definitions of the above parameters have been used for the purpose of present study:

Return on Assets (ROA) = Operating Profit (PBIT)/Total Assets

Return on Capital employed (ROCE) = Operating Profit (PBIT) / Average Capital Employed

Value Added Margin = Value Addition/Sales

The capital employed includes tangible net worth (exclusive of revaluation reserve) and long term borrowings (i.e., total assets less current liabilities) and value addition is calculated as a sum of profit after tax (PAT), employee compensation, interest paid and depreciation (Mote and Saha, 2006).

It is believed, normally, that companies with low inventory days demonstrate good financial results and are better managed. Boute et al. (2006) have cited few reasons for this. Firstly, low inventory will result into removal of non-value adding activities, thus, reducing cost and thereby increasing financial returns. Secondly, less working capital is required for lower levels of inventory resulting in higher free cash flow. Lastly, low inventory levels are considered right in the spirit of Just in time (JIT) and lean manufacturing. Wal Mart in association with P & G (Procter and Gamble) deployed the inventory management technique, which allows P & G to use the ePOS (Electronic Point of Sale) data, thereby allowing the vendor to decide the quantity, shipping plan and timing of replenishment of the merchandise. This phenomenon is popularly known as vendor managed inventory and helps aligning the supply and demand. This also helped WalMart, in reducing its decision making towards issues on ordering and purchasing (Pande, 2005). Huson and Nanda (1995) showed that if JIT is adopted it is followed by an increase in the inventory turnover ratio for a retailing organisation.

However, the repercussions of very low inventory are also stringent such as risk of stock outs, delays in delivery, potential loss of sales & increase in payments for emergency buying (Boute et al., 2006). Previous argument is stronger; therefore we assume a negative relationship between inventory days and financial performance measures, which means that a company with low inventory days will demonstrate better financial performance.

PROPOSED HYPOTHESIS FOR THE STUDY

This section proposes the hypotheses which are tested:

H1: The inventory holding period differs significantly within and between the companies under study

H2: Inventory days influence 'ROA' negatively

H3: Inventory days influence 'ROCE' negatively

H4: Inventory days influence 'VAM' negatively

FINDINGS AND ANALYSIS

This section discusses the inventory holding patterns of the case companies and the impact of different inventory levels on financial performance.

Table 1 presents an overview of inventory days (ID) of the companies under study. Large differences in the inventory status of the retailers under study can be observed. The average of inventory days is 42.22 at one end and 98.84 on the other extreme. It is evident that the average of inventory days is highest in case of Pantaloons Retail (India) Ltd. followed by Trent Ltd. and Shopper's Stop Ltd. Trent Ltd. has shown highest dispersion as both standard deviation and range are highest in this case.

On a closer observation of the key performance parameters, it is evident that the average ID is lowest in case of Shopper's Stop Ltd., but the retailers is not able to cash that in terms of superior financial performance; which is against our assumption. It is evident from table 2 that ROA and VAM for Shopper's Stop Ltd, are the lowest while ROCE is just average. In fact, Pantaloons Retail has been able to achieve highest average ROA and ROCE despite having highest ID. Trent Limited has outperformed in terms of VAM with an average of 36.61%. However, the company has registered a declining trend throughout the period under study.

In order to compare the ID values within and between the case companies ANOVA has been performed. The p-value represents significant difference in the inventory holding pattern. This supports our first hypothesis. Various possible reasons can be cited for difference in inventory holdings viz., the variety of product, degree of customisation, merchandise planning, product life cycle length etc.

To explain the dynamics further a thorough analysis of the inventory management practices adopted at these companies is given below.

Shopper's Stop Ltd. (SSIL) is a retailer who sells fashion oriented merchandise and the merchandise planning is done twice a year on seasonal basis. The real problem is the difference between the forecasting and actual sales. The inventory is based on forecasting. Since the company mostly sells the contemporary fashion based merchandise, it recognises the stock which is more than 12 months old as incongruent to their image of contemporary fashion. The planning mismatch results in excess inventory which results in higher markdowns and lower margins. The retailer is not confident that the aforementioned tactics of inventory reduction are fruitful or not. Sometimes the selling price may go below the cost price in certain cases. Twice a year at the end of the seasons, SSIL conducts sale as a part of inventory washout process, whereby reducing the level of inventory drastically but simultaneously not increasing the profit margins.

The retailer has a strong focus towards its IT and supply chain operations. They have deployed James D. Armstrong (JDA)'s Warehouse Management System (WMS) and Merchandise Management System to facilitate the logistics department, which operates on a 24x7 basis. It also helps in synchronisation of inventories, especially in sourcing them. The purchase patterns of the customers is monitored and the loyalty card scheme named the 'First Citizen' helps in displaying vibrancy of the changing wants and demands of the customers. The orientation is also towards reducing the operational costs. Gross margin return on investment (GMROI) is one of the indicators of operational efficiency based on cost.

The arrangement of the merchandise from the vendors is three-fold - bought out, consignment and concessionaires. Bought out merchandise are those in which SSIL owns the title to the merchandise and it also includes its private label brands. Consignment based merchandise is of a different orientation where the vendor bears the risk of inventory that gets piled due to lower sales. The Vendor then takes back the merchandise and makes the payment only after sales. SSIL's only risk in this case is pertaining to the damage or loss of the merchandise. Concessionaires are vendors that get spaces allocated within the store, use the billing system of the store and a percentage of their sales is retained by the SSIL as a part of the deal, with a fixed minimum.

The percentage of turnover of Consignment based merchandise as part of the total sales was around 7% for the fiscal year ending 2008-09 and 2009-10. For the concession based merchandise (including own goods) the percentage was little over 91% for both the years. Hence it is seen that concessions and own goods form a major part of the sales and hence require greater inventory movement (Shopper's Stop Limited, 2004).

Pantaloons Retail (India) Ltd. (PRIL) is a multi-format retailer selling products from apparels to groceries and in formats ranging from discount to lifestyle. PRIL focuses on inventory optimization which improves their working capital. The company also focuses on increasing the inventory turnover through its stronger supplier network. This is helpful for food and grocery segments which are sold in various stores owned by PRIL. PRIL follows the outsourcing strategy for some perishable products.

PRIL operates through its 13 distribution centres which cover an area of 2,60,000 sq. ft. These distribution centres carry merchandise in form of over a hundred thousand SKUs which function in a 24x7 environment. The distribution centres are expandable to manage the excess inventory and can support any expansion plans. The key objective is to reduce the inventory thereby minimising the operational costs. The operational efficiencies are monitored through various ratios of gross margin returns which are based on floor area, labour and inventory. The company had also implemented SAP Advanced Planning Tool for merchandise planning (Pantaloon Retail India Ltd., 2005). These tools help in automatic replenishment of the merchandise. Moreover, PRIL also uses retail enterprise management for sales forecasting which has an indirect effect on inventory management (Vyas and Sharma, 2007).

PRIL focuses on inventory optimization which improves their working capital. The company also focuses on increasing the inventory turnover through its stronger supplier network. This is helpful for food and grocery segments which are sold in various stores owned by PRIL. The store is a one stop shop for many customers. The key objective of the store is to ensure product availability to the customers.

PRIL leverages IT to a great extent and it helps in the func tioning of its large portfolio of formats. They have also planned to deploy data warehousing and data mining techniques as part of their business intelligence planning. This will ease out the difference between the forecasted, planned and actual inventory figures.

Vendor arrangements with PRIL are very much similar to that of SSIL. PRIL has different policy norms for each vendor type. These arrangements are categorised as concessionaires, consignment and shopin- shop. Concessionaires based merchandise is purchased from the suppliers and the revenue is accounted in the company records. These include the key brands by PRIL. This is different from SSIL. Under the consignment based merchandise, the suppliers own the inventory. The vendor takes back the unsold products, which is very similar to that of SSIL. PRIL gets its commission and only this is recorded in the accounting books of the company. Shop-in-shop arrangement has space allocation for the vendor inside the store. Vendor deploys its own staff while the merchandise inventory is monitored by PRIL. PRIL receives a fixed commission subject to a fixed minimum. This commission along with the rental through in-store space allocations, are recorded in the accounting books of PRIL (Pantaloon Retail India Ltd., 2005).

Trent Ltd. is a retail wing from the TATAs. They sell fashion and lifestyle based products They sell many private brands like Westside, Westsport and Richmond. These labels help them in improving their control on the product ranges and ultimately the inventory. They also sell a host of product ranges from international to national brands apart from the private labels. They aspire to meet the changing customer expectations. In fashion and lifestyle products, this has high importance. Customers don't cherish the products which are out of fashion. Hence, if the inventory is piling up and the inventory replenishment doesn't take place quickly then this could be a problem for the retailer. For Trent Ltd, the period between October and January is the period of maximum footfalls and high sales. This is the time of key Indian festivals of many religions. In this period their inventory turnover is very high as compared to other months. The retailer intends to avoid any serious/significant fall in the sales during this period.

Due to this reason, their merchandise range is based on the forecasts and contemporary trends of fashion and lifestyle. Any downslide in the forecasted sales could result into lower inventory turnover and hence a markdown our prices, to sell off the inventory. According to their corporate parent website, they have managed their inventory in a disciplined way despite the economic slowdown, which is quite evident from the lowest average inventory days (Agrawal, 2009). Trent Ltd. deploys a retail management software called 'Retail Pro' which, along with other processes, helps in the automation of the retail inventory. They use SAP to automate the order generation process. This helps in optimising the inventory. The retailers offers a loyalty card named Clubwest which makes the customers loyal to the store. The database is used for sending promotional offers through email, sms etc and hence invites repeat purchases. This leads to faster inventory replenishment and accounts for higher inventory turnover. They also organise around 6 to 8 shopping festival every year for building relationships with the customer.

They also have strong supplier relationship that operates on economies of scale. The suppliers deliver quick replenishment for the basic products to the retailer. Also, the fashion merchandise is replenished within short lead times. The suppliers for this type of merchandise are selected on the basis of high level of design empathy (Agrawal, 2009).

FINANCIAL IMPACT OF THE INVENTORY LEVEL

This section discusses the impact of inventory holdings on the financial performance.

To study the type of relationship between ID and financial performance measures, regression analysis is used. Table 4 presents results of ordinary least square estimations of regression Model 1 ... used to connect ROA with ID: It can be concluded from the results that the beta coefficient is significantly negative (p-value <.05) only in case of Pantaloons Retail (India) Ltd., representing that a high inventory position is consistent with a lower ROA. In other cases, beta coefficients are positive but not significant (p-value >.05). Hence the second hypothesis is supported only in case of Pantaloon Retail (India) Ltd.

Table 5 presents results of ordinary least square estimations of regression model 2 ... used to link ROCE with ID. It can be concluded from the results that the beta coefficient is significantly negative (p-value <.05) only in case of Pantaloons Retail (India) Ltd., representing that a high inventory position is well linked to a lower ROCE. In case of Trent Ltd. the coefficient is negative and not significant (p-value >.05). For SSIL, beta coefficient is positive but not significant (p-value >.05). Hence the third hypothesis is supported only in case of Pantaloon Retail (India) Ltd.

Table 6 presents results of ordinary least square estimations of regression model 3 ... used to link value added margin with ID. It can be concluded from the results that the beta coefficient is again negative but not significant (p-value >.05) only in case of Pantaloons Retail (India) Ltd., which represents an inverse connection between the inventory levels and value added margin. In case of Trent Ltd. the coefficient is significantly positive (p-value <.05), demonstrating that high inventory position would correspond to higher VAM, which is against our hypothesis. For Shopper's Stop Ltd., beta coefficient is positive but not significant (p-value >.05). Hence the fourth hypothesis is not supported at all.

CONCLUSION AND IMPLICATIONS

Various studies from time to time have been published discussing the importance and significance of the inventory management and linkage of inventory with financial performance of the companies. Each company has to focus on achieving optimum inventory levels which would further help in strategic planning with channel members and hence catering towards increase in demand. This does not mean that retailers are always expected to increase their inventory turnover but are supposed to improve their operational efficiencies which could be done by various innovative techniques like category management, JIT and lean manufacturing. The results of the analysis indicate that not all of the proposed hypotheses were supported. Very sizeable differences in the inventory levels of retailers have been observed.

A thorough analysis of the inventory management practices adopted at these companies suggests that each retailer plans its inventory level keeping in view its positioning in minds of its customers and, of course, the sales forecasting. The inventory level is based on forecasting which plays a crucial role. Difference between the forecasting and actual sales poses a real problem in front of the retailers. The planning mismatch results in excess inventory which results in higher markdowns and lower margins and sometimes retailers are bound to sell the excessive inventory below the cost price. Retailers need to adopt, therefore, proper forecasting techniques in order to avoid conditions like excessive inventory and stock outs as both the conditions will result into poor financial performance.

The findings also point out that not all companies showed a significant negative linkage between inventory days and financial performance. The relationship between the two is inconclusive. There are so many other factors apart from inventory, which determine the financial performance of an organisation, like brand image, advertising efforts, etc. Future studies can focus on other determinants of financial performance along with the inventory days.

Our study has certain limitations. Firstly, we use data for period from 2000 to 2010. The financial results during last few years may have influence of economic slowdown which was experienced worldwide during this period. It would be interesting to note in future research, if the results differ after taking such economic swings into account. Present study is based on three large retailers, future research can focus on all the companies in the organised retail sector to see the overall impact of inventory on the financial performance.

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[Author Affiliation]

Himanshu Choudhary

Gaurav Tripathi, Assistant Professor, Institute for International Management and Technology, Gurgaon, Haryana, India. Email: gtripathi@iimtobu. ac.in.

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