THE EFFECT OF IMPLEMENTING COMPREHENSIVE INVENTORY

MANAGEMENT POLICY ON THE PROFITABILITY OF INDEPENDENT MICRO-

RETAILERS: A QUANTITATIVE EXPLANATORY STUDY

by

Jaime Marulanda

Copyright 2019

A Dissertation Presented in Partial Fulfillment

of the Requirements for the Degree

Doctor of Management of Information Systems and Technology

University of Phoenix




ProQuest Number: 27664858




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 ABSTRACT

Retailers must align operational execution with technology for successful

implementation. With the growing complexity in the retail industry, inventory

management tasks are negatively affected by ineffective processes. Technology is not

enough to produce sustainable efficiencies or prolonged improvements in productivity.

Along with a lack of understanding and difficulty in accessing subject matter experts,

small businesses are at a disadvantage. The specific problem is that for micro-retailers,

there is no automated out-of-the-box tool that is comprehensive and cost-effective that

can guide these organizations in successfully executing inventory-related business

processes.

This quasi-experimental quantitative explanatory research study was an

examination of eight independent micro-retailers to determine if there was a relationship

between comprehensive inventory policy and profitability. An instrument that

determined the level of comprehensiveness of inventory policy (CIP) was used to

operationalize the variable. Stores were then separated into groups where the

experimental group received the treatment that controlled every aspect of inventory while

the control group did not. Data in the form of point of sale databases of each store was

collected and analyzed.

The analysis performed on the data included using Pearson Product Correlation to

determine the level of correlation between CIP and net margin and CIP and gross margin

return on inventory investment (GMROII). A t-test analysis was also performed to

ensure that the results were statistically meaningful. A moderate correlation was detected

between CIP and net margin; however, the results were not statistically significant based

iii
on the t-test results. Nevertheless, a strong, positive, and statistically significant

correlation between CIP and GMROII was established.

iv
 DEDICATION
This is dedicated to my father and life mentor, Ivanov Marulanda. Your insight,

love, encouragement, support, wisdom, and unconditional belief in me gave me light and

direction in the toughest of times. Thank you for always being there, always listening,

and never letting me give up. I would also like to dedicate this to my grandfather,

Octavio Marulanda. Your passion for culture, folklore, and education is an example for

the rest of us Marulandas to follow. Although now in spirit, I hope to make you proud.

v
 ACKNOWLEDGEMENTS

I would like to thank all of those who did not let me give up and supported me

throughout this endeavor. My Mentor, Dr. Matthew Gonzalez, who guided and helped

me move forward. To my committee members Dr. David Shroads and Dr. Robert

Vecchiotti. Thank you for dedicating the time and energy. A special thanks to Michael

Warshower from Buckstore, Inc for his invaluable assistance and the store owners that

participated in the study. Finally, thank you to my family, specifically Ivano Marulanda,

Octavio Marulanda, and Natalia Marulanda, for the continual encouragement and

support. I would not have been able to do this without you.

vi
 TABLE OF CONTENTS

ABSTRACT....................................................................................................................... iii

LIST OF TABLES ............................................................................................................. xi

LIST OF FIGURES ......................................................................................................... xiii

Chapter 1 ............................................................................................................................. 1

Introduction ......................................................................................................................... 1

Statement of the Problem .................................................................................................5

Purpose of the Study ........................................................................................................6

Nature of the Study ..........................................................................................................6

Significance and Contributions ........................................................................................7

Research Questions ..........................................................................................................8

Hypotheses .......................................................................................................................8

Theoretical Framework ....................................................................................................9

Definition of Terms........................................................................................................10

Assumptions...................................................................................................................13

Scope and Limitations....................................................................................................14

Chapter 2 ........................................................................................................................... 15

Literature Review.............................................................................................................. 15

Historical and Theoretical Review.................................................................................15

Inventory Management ..................................................................................................17

vii
 Optimal Order Quantity ............................................................................................ 20

Profitability and Performance ................................................................................... 22

Working Capital, Liquidity, and Financial Management ......................................... 31

Organizational Efficiency ......................................................................................... 33

Inventory Inaccuracies, Out-of-Stock, and On-Shelf Availability ........................... 36

Storage and the Last 100 Yard Problem ................................................................... 47

Auditing and Training ............................................................................................... 51

Demand Error and Forecasting ................................................................................. 53

Supply Chain Management ....................................................................................... 58

Store Operations and Operational Efficiency ................................................................61

Technology ....................................................................................................................65

Data and Point of Sale Technology .......................................................................... 66

Radio Frequency Identification................................................................................. 71

Enterprise Resource Planning and Other Technologies............................................ 75

Business Processes Standardization and Technology ............................................... 76

Technology Adoption in Small Businesses .............................................................. 79

Small Businesses............................................................................................................81

Importance and Significance..................................................................................... 81

Business Sustainability ............................................................................................. 84

Small Businesses Worldwide.................................................................................... 85

viii
 Summary ........................................................................................................................87

Chapter 3 ........................................................................................................................... 89

Methods............................................................................................................................. 89

Research Method and Design Appropriateness .............................................................90

Research Questions ........................................................................................................91

Population ......................................................................................................................91

Sampling Frame .............................................................................................................92

Geographic Location ......................................................................................................92

Informed Consent...........................................................................................................93

Confidentiality ...............................................................................................................93

Instrumentation ..............................................................................................................94

Validity and Reliability ..................................................................................................95

Data Collection ..............................................................................................................95

Data Analysis .................................................................................................................96

Independent and Dependent Variables ..........................................................................97

Chapter 4 ........................................................................................................................... 98

Analysis and Results ......................................................................................................... 98

Research Questions and Hypothesis ..............................................................................98

Data Collection ..............................................................................................................99

Demographics ..............................................................................................................100

ix
 Reliability Testing and Pilot Study ..............................................................................100

Comprehensiveness of Inventory Policy Instrument .............................................. 100

Database and POS Instruments ............................................................................... 103

Data Analysis ...............................................................................................................107

Results ..........................................................................................................................117

Summary ......................................................................................................................125

Chapter 5 ......................................................................................................................... 127

Conclusions and Recommendations ............................................................................... 127

Research Questions and Hypothesis ............................................................................127

Discussion of Findings.................................................................................................128

Limitations ...................................................................................................................131

Recommendations to Leaders and Practitioners ..........................................................131

Recommendations for Future Research .......................................................................133

Summary ......................................................................................................................134

References ....................................................................................................................... 135

Appendix A: Informed Consent ...................................................................................... 154

Appendix B: Non-Disclosure Agreement ....................................................................... 157

Appendix C: Data Access and Use Permission .............................................................. 159

Appendix D: Comprehensiveness of Inventory Policy Questionnaire ........................... 161

x
 LIST OF TABLES

Table 1: Test and Retest Results for CIP Instrument ..................................................... 95

Table 2: Added Test Inventory ....................................................................................... 96

Table 3: Expected Results............................................................................................... 97

Table 4: Results for Test Transaction One per Store ...................................................... 97

Table 5: Results for Test Transaction Two per Store ..................................................... 97

Table 6: Results for Test Transaction Three per Store ................................................... 98

Table 7: Inventory Level ................................................................................................. 98

Table 8: Pilot Test Results per Store............................................................................... 99

Table 9: Pilot Re-Test Results per Store ....................................................................... 100

Table 10: Store CA001 Profit and Loss ........................................................................ 102

Table 11: Store EA001 Profit and Loss ........................................................................ 103

Table 12: Store CB002 Profit and Loss ........................................................................ 104

Table 13: Store EB002 Profit and Loss ........................................................................ 105

Table 14: Store CC003 Profit and Loss ........................................................................ 106

Table 15: Store EC003 Profit and Loss ........................................................................ 107

Table 16: Store CD004 Profit and Loss ........................................................................ 108

Table 17: Store ED004 Profit and Loss ........................................................................ 109

Table 18: Comprehensiveness of Inventory Policy Results ......................................... 109

Table 19: Store CIP and Net Profit ............................................................................... 110

Table 20: Store Net Profit Margin ................................................................................ 111

Table 21: t-Test Net Profit Assuming Equal Variance ................................................. 112

Table 22: Pearson Correlation CIP and Net Margin ..................................................... 112

xi
Table 23: Store CIP and GMROII ................................................................................ 114

Table 24: t-Test GMROII Assuming Equal Variance .................................................. 115

Table 25: Pearson Correlation CIP Versus GMROII ................................................... 117

xii
 LIST OF FIGURES

Figure 1: Model of the Level of Comprehensiveness of Inventory Policy .................... 10

Figure 2: Scatterplot of CIP Versus Margin ................................................................. 113

Figure 3: Scatterplot of CIP Versus GMROII .............................................................. 116

xiii
 Chapter 1

Introduction

The Small Business Administration (2016) indicated that 99.7% of employers are

small organizations. From these small businesses, microbusinesses account for 75.3% of

the private sector, but the employment rate by these types of businesses has dropped by

15% in the last 30 years (Small Business Administration, 2015a). The trend is smaller

small businesses that are not creating as many jobs (Small Business Administration,

2015b). Even with this drop, job creation in the United States is largely attributed to the

small business sector (Small Business Administration 2012a; Small Business

Administration, 2016). Businesses of this size continue to outperform large organizations

by creating 1.4 million new jobs in the first three quarters for 2014 (Small Business

Administration, 2015c). Overall, the small business sector is responsible for 60% to 80%

of the creation of new jobs in the United States while the retail sector accounts for 14%

of employment, and small businesses make up almost 50% of the retail sector (Small

Business Administration, 2016).

These statistics demonstrate the importance of small businesses to the United

States economy, its relation to employment and job creation, and the overall significance

of small retail organizations. Headd (2010) and Batrancea, Morar, Masca, Catalin, and

Bechis (2018) indicated that in economic downturns, small businesses are an important

factor for generating recovery as small organizations have a major role in job creation.

Small business survival, however, remains a challenge. During the initial years, small

business volatility is high and survival rates are low (Small Business Administration,

2012b). As small businesses age, their rates of survival improve. Small businesses with

1
employees have about a 66% chance of survival after two years and about 50% survival

rate after five years (Small Business Administration, 2012b). Survival rates even out

after the first few years given that volatility decreases, and these survival patterns are

consistent across different industries (Small Business Administration, 2012b).

Globally, the importance of small businesses to their respective nations seems to

be similar to the United States. For example, Madishetti and Kibona (2013), Nair and

Chelliaj (2012) and Nyabwanga and Ojera (2012) suggested that the growth and health of

small businesses are a vital part of the economies of developing nations given the

momentum and job growth that these types of businesses provide. In developing nations

such as Colombia, micro-businesses and small and medium enterprises (SMEs) make up

roughly 80% of the workforce (Escobar Cazal & Escobar Reyes, 2015; Pulgarín Legarda

& Zapata Giraldo, 2014). In Latin America, the overall percentage of the workforce

made up by small business employment increased to 88%, and a large percentage of these

organizations will employ family members and promote the economic development of

their local regions (Pulgarín Legarda & Zapata Giraldo, 2014). Such statistics add to the

critical nature of survival of small businesses not just in the United States, but worldwide.

In the small business sector in the United States, accounting and financial

information are not readily available given that small organizations are usually not

required to file information publicly (Small Business Administration, 2016). Globally,

this also seems to be the case. In Colombia, for example, the smaller the business, the

more likely that it will be informal, and these informal companies do not report data or

financial performance to any government agency (Escobar Cazal & Escobar Reyes,

2015). Even with the established importance of small businesses to the economy, the

2
lack of financial and accounting information available makes them difficult to track and

evaluate (Headd, 2003).

One of the difficulties that arises from the lack of capital that leads to budgetary

constraints of small businesses is the inability to hire experts in areas that can affect

performance. Much research revolves around performance improvements by having

access to experts in the area of management, investment, decision-making, and logistics

(Anichebe & Agu, 2013; Kolias et al., 2011; Madishetti & Kibona, 2013). Among these

areas is the handling of inventory assets to improve efficiency and profitability. Given

that inventory is a major asset in business and accounts for a large percentage of current

and total assets (Anichebe & Agu, 2013; Kolias. Dimelis, & Filios, 2011; Madishetti &

Kibona, 2013; Mittal, Mittal, Singh, & Gupta, 2014), the proper handling of such assets is

critical to the success of a company.

However, most of the research on inventory management involves large

organizations or small organizations that fall outside of the definition of very small

businesses, also known as micro businesses. The Small Business Administration (2016)

defined these organizations as those with fewer than 20 employees and revenues not

exceeding one million dollars. The definition provided by the Small Business

Administration (2016) suggested that most research ignores an overwhelmingly large

segment of the small business population given that micro businesses are rarely studied.

The gap in research creates difficulty determining the level of success that the companies

may have when using technologies or techniques to improve business processes.

Given that inventory is major component of a company (Anichebe & Agu, 2013;

Kolias et al., 2011; Madishetti & Kibona, 2013; Mittal et al., 2014), and this seems to be

3
true regardless of organizational size, the management of the resource is critical to

organizational survival. Retailers must manage levels to maintain a balance between

keeping inventory costs as low as possible while still satisfying demand (Al-Kassab,

Thiesse, & Buckel, 2013; Chambers & Lacey, 2011; Kontus, 2014; Madishetti & Kibona,

2013). Much of the seminal research, such as that conducted by Raman, DeHoratius, and

Ton (2001), suggested that issues in inventory revolve around inaccuracies and that these

inaccuracies are linked to the execution of business processes.

Technologies such as Radio Frequency Identification (RFID) can automate such

business processes and thus provide improvements in inventory management that can

lead to decreased inaccuracies and lower stock-out scenarios (Raj & SajaSekaran, 2013;

Shin & Eksioglu, 2014). However, these types of technologies are only available to

larger organizations with large financial budgets. Other techniques such as advanced

forecasting models presented by Bala (2012) or the use of genetic algorithms and neural

networks presented by Rebert, Sexton, and Hignite (2014) show positive results;

however, these techniques are either too complex or too costly to implement in the micro

business sector.

Alternate solutions that are readily available and that can be deployed in small

businesses must be developed and studied to help such organizations obtain similar

results as those achieved by larger businesses with access to advanced technologies and

techniques. Such solutions may include using comprehensive and standardized inventory

management practices that consider all aspects that influence inventory in a retail store

and that can be tied to technologies that smaller retailers have access to, such as point of

sale systems.

4
 Statement of the Problem

Retail out-of-stock scenarios and inventory inaccuracies, resulting from poor

inventory management practices, continue to negatively affect profits and these are not

being addressed directly (Adusei & Awunyo-Vitor, 2014; Ehrenthal, Honhon, &

Woensel, 2014; Merserau, 2013). The long-term effect includes problems with

profitability and an inability to survive (Mersereau, 2013). Technology alone does not

seem to be enough to solve the inventory management issue. Adusei and Awunyo-Vitor

(2014), Corsten and Gruen (2003), and Raman et al. (2001) all found that even with

advances in technology and automation implementation, inventory inaccuracies and out-

of-stock scenarios continue to be a significant issue for retailers.

The general problem is that operational execution is inadequate in retailers and

such execution is vital to any technological implementation or automation (Raman et al.,

2001). This ineffective employment of inventory management tasks or business

processes seem to be negatively affected by the growing complexity of handling

inventory (Bruccoleri, Canella, La Porta, 2014; Corsten & Gruen, 2003; Raman et al.,

2001) and a lack of understanding of basic management practices and strategies (Corsten

& Gruen, 2003; Raman et al., 2001). Furthermore, technology alone is not enough to

produce sustainable efficiency and increased performance (Mathaba, Adigun, Oladosu, &

Oki, 2017).

Chuang and Oliva (2015) suggested that even when automation technologies,

including RFID, reach affordability levels for full implementation, the complexity of

retail operations involving people, processes, and technology will make success difficult.

The specific problem is that for micro-retailers, there is no out-of-the-box,

5
comprehensive, and cost-effective tool or strategy that can guide small retailers toward

successful execution of inventory-related business processes. Without such tools or

strategies, inefficiencies of capital management, increased inventory, and lost sales

because of insufficient supply are more likely. While many tools such as point of sale

systems can provide some automation, much of the available platforms rely on a

combination of process alignment, capital, and technical knowledge that are outside the

realm of small businesses (Chuang, Oliva, &, Liu, 2016; Chuang 2018).

Purpose of the Study

The purpose of this quasi-experimental quantitative explanatory research study

was to explore the relationship of implementing comprehensive inventory management

policy and a micro-retailer’s profitability. If entrepreneurs, business professionals,

investors, and leaders understand the relationship between the two variables, strategies

may be developed to manage a balance between the cost of managing inventory and the

lost sales created by inventory inaccuracies and other related issues.

Micro-retailers may be able to develop optimized policies accessible to the small

business community. These results may assist entrepreneurs, consultants, and business

leaders in determining the impact of a comprehensive inventory policy and establishing

protocols for improving a store’s performance. Ultimately, improving the performance

of micro-retailers can potentially reduce the mortality rates of these organizations and can

lead to a positive impact on job creation, consequently, improving local economies.

Nature of the Study

The methodology for the study was quantitative using a quasi-experimental

explanatory design. The purpose of explanatory research is to explain why events occur

6
(Leedy and Ormrod, 2013). Since the purpose of this research was to determine if a

comprehensive inventory management policy that considers all aspects of inventory

influences the profitability of micro-retailers, such a design was appropriate.

Furthermore, the explanatory design attempted to answer why such effects may exist.

The population for the study were independent retailers that sell non-

manufactured packaged goods considered micro-businesses under the definition of the

Small Business Administration, using consulting services rendered by Buckstore, Inc

(Buckstore, 2019). The companies that Buckstore consults are businesses that have fewer

than 20 employees and less than one million dollars in yearly revenue (Small Business

Administration, 2016), and such services are exclusively marketed and used by retailers

that fall under the Small Business Administration’s definition (Buckstore, 2019).

Implementing the proposed policy on all stores was unfeasible. Therefore, eight retailers

were selected from the total of 214 active stores that had similar characteristics, including

comparable products, demographics, sales volumes, number of employees, and store

sizes. Four stores served as a control group while the other four served as the

experimental group.

Significance and Contributions

The knowledge gained from this study may be generalized to various sectors

within the small business community to increase the profitability and subsequent

survivability of small businesses. An overall increase in small business survivability has

the potential to affect local economies and employment rates. Leaders in the small

business community may also use the knowledge obtained from this study to assist in

developing comprehensive inventory management policies that can positively affect

7
small organizations. The results of the study may help increase the productivity and

efficiency of micro-retailers while reducing operating costs, both of which can make

these types of companies more profitable and sustainable.

Small and medium enterprises (SMEs) face many challenges when attempting to

invest in technology (Chibelushi & Costello, 2009). These challenges make leaders in

the sector hesitant in investing resources. Furthermore, the prohibitive cost of technology

tends to discourage organizations from pursuing such solutions; therefore, creating and

implementing comprehensive inventory management processes integrated with

inexpensive and readily available point of sale technologies may be a feasible strategy for

small businesses that cannot make large investments in high-end technology that can

automate such processes. The results of the study may influence these leaders in being

more responsive to time and resources in implementing comprehensive processes.

Research Questions

The objective of the research was to determine if a significant relationship exists

between profitability and comprehensive inventory management policies.

RQ1: What is the relationship between comprehensive inventory management

policy and profitability in independent micro-retailers?

Hypotheses

H0: There is no relationship between comprehensive inventory management

policies and the profitability of a micro-retail store.

HA: There is a relationship between comprehensive inventory management

policies and the profitability of a micro-retail store.

8
 Theoretical Framework

Large organizations, such as Wal-Mart, have been able to implement high-end

technologies such as radio frequency identification (RFID) throughout their retail store

management process (Hardgrave, Goyal, & Aloysius, 2011; Shin & Eksioglu, 2014).

Hardgrave et al. (2011) and Raj and RajaSekaran (2013) suggested that the results

concerning reducing out-of-stock scenarios and improving demand forecasting have been

positive, and these companies have been able to improve the inventory management

processes of their organizations by improving the visibility of inventory. Such finding

may indicate that improvements inventory management policies can create competitive

advantages capable of creating leadership within their industry.

Although owners and managers of smaller organizations seem to understand the

importance of inventory management, these organizations struggle with the

implementation of these technologies because of their prohibitive cost and level of

difficulty in implementation. The investment proves to be too great and organizations

allocate their focus, efforts, and resources elsewhere, ignoring the opportunity to develop

competitive advantages that can increase inventory efficiency, improve profitability, and

lead to the development of long-term sustainability. The question that remains

unanswered is if the success of large retailers translates to micro-retailers if such

organizations can replicate the efficiency by improving their management of inventory

and if these efficiencies translate to improved profitability.

Figure 1 represents the framework for the study. The dependent variable was

profitability. The independent variable was the level of comprehensiveness of inventory

management policy. The study attempted to determine if the level of comprehensiveness

9
of inventory management policy and has an effect on profitability. Profitability is the

difference between revenue generated and total costs. Gross margin return on inventory

investment (GMROII) was also be used to extend the understanding of profitability.

Level of comprehensiveness of inventory policy was defined as how exhaustive

and complete a store’s policy is for managing and controlling the different aspects that

can influence inventory accuracy within a store. Such comprehensiveness is established

based on research and results that have helped companies develop best practices in each

area that effects inventory. Comprehensiveness was established by controlling critical

areas including store setup, product setup, product reception, product replenishment, sales

process, employee training, auditing, and stockroom to floor movement.

Figure 1. Model of the level of comprehensiveness of inventory management policy.

Definition of Terms

Terms in this study were used in specific ways, which may conflict with the

definition of similar terms outside of the scope and context of the study. Furthermore,

10
some terms were used to place emphasis on aspects of the study that need to be clarified

for conceptual understanding. These terms may be used differently outside of the scope

of the current study and are specifically defined to limit the definition.

x Backroom Effect (BRE): an effect that results from a misalignment between

the reorder size of a product, the amount of shelf space available for said

product, and the inventory policy of a buyer and seller.

x Collaborative strategies: techniques used by organizations to cooperate with

other upstream or downstream partners within their supply chain. Such

techniques focus on strategies that allow these organizations to share data.

x Collaborative technologies: technology and communication systems used

within a supply chain that allows organizations to share information with

upstream and/or downstream supply chain partners.

x Discount retailers: retail stores that sell products under a five-dollar price.

x Downstream organizations: a partner business within the supply chain where

the interaction with said company occurs after a transaction has taken place.

x GMROII: a retail industry standard used to determine performance and

inventory efficiency (Charness, 2002). The value is a combination of sales,

gross margin, and inventory turnover and is calculated by subtracting the cost

of goods sold from the sales revenue and dividing the resulting value by

average inventory

11
x Information exchange: the act of exchanging or sharing information with

upstream or downstream business partners.

x Inventory misplacement: the placement of a product in the wrong shelf or

location by a customer or an employee (Tao, Fan, Lai, & Li, 2016).

x Inventory record inaccuracy: the discrepancy between physical inventory and

the quantity shown in records.

x Inventory shrinkage: permanent loss of a product caused by theft or damage

(Tao et al., 2016).

x Micro-businesses: organizations that have less than 25 employees and have

yearly revenues that do not exceed one million dollars.

x Micro-retailers: retail establishments that have less than 25 employees and

have yearly revenues that do not exceed one million dollars.

x Out-of-stock (OOS) scenarios: situations where a retailer is faced with a

higher demand than the supply available on the shelf.

x Reorder point: the inventory level set where a replenishment activity should

take place.

x Small businesses: organizations with less than 500 employees.

x Stock-outs: a scenario where current demand exceeds inventory on hand.

12
 x Survivability: the ability for a small business to remain open and conduct

business or successfully close the business by being purchased by another

company.

x Supply chain partners: upstream or downstream organizations within a supply

chain.

x Supply chain visibility: the ability to access and view data that is created by

upstream or downstream organizations.

x Upstream organizations: a partner business within the supply chain. The

interaction with said company occurs during the procurement process.

x Very small businesses: organizations that employ fewer than 25 employees

and have yearly revenues that do not exceed one million dollars.

Assumptions

The foundation of research studies is dependent on the assumptions made by the

researcher (Neuman, 2011). The assumptions made for this research study that involved

participants include that all understood the instructions related to adopting the

comprehensive tactics and followed the directions honestly and in a complete manner.

Furthermore, an assumption that all participants were confidential and did not disclose or

discuss any of the implementations with other participants was also made. The

researcher also assumed that all participants were willing participants. The study also

included the assumption that the sample taken from the population was a representative

sample of independent micro-businesses.

13
 Scope and Limitations

The scope of this study was small independent retail establishments with less than

20 employees and revenues that do not exceed one million dollars using the services

rendered by Buckstore, Inc. This study was limited to the effects that comprehensive

inventory management policy has on the profitability of micro-retailers. The study was

also limited by the honesty in the use of the software and the practices and policies

adopted by the retailer. A further limitation of the study is the category of retailer that

was used in the study which included independent small retailers using a specific point of

sale technology.

Furthermore, an additional limitation was the data generated and collected in a

small subset of time where such data did not cover a full calendar year. Given time

constraints, the study was limited to one calendar month. An additional limitation was

the selected population. Only a small subset of the total population of stores that

consisted in eight participants with similar characteristics were used in the study.

14
 Chapter 2

Literature Review

Historical and Theoretical Review

Product availability and out-of-stock (OOS) situations have been fascinating

researchers for decades. In 1962, researchers conducted interviews to determine

consumer satisfaction when faced with out-of-stock situations. Peckman (1963)

interviewed shoppers exiting a supermarket during important shopping days and times

where shoppers had at least one bag of goods purchased. The results indicated that OOS

is not new and that 24% of people interviewed left the store without purchasing all

intended products (Peckham, 1963). When faced with the situation, 42% of those

consumers did not buy an alternate or substitute product and instead left the store without

satisfying the demand (Peckham, 1963), suggesting that the business lost a sales

opportunity.

Schary and Christopher (1979) reached a similar conclusion, adding that when

faced with out-of-stock situations, consumers could go to a different store, postpone the

purchase, seek an alternate or substitute product, or not make a purchase. Regardless of

the behavior, the foundational research concluded that out-of-stock scenarios lead to a

loss of sales. However, the question of why OOS occurs remained. Other studies

indicated that inventory inaccuracies in the records of retailers lead to OOS as systems

fail to trigger the reorder process (Iglehart & Morey 1972).

One of the most referenced studies on the topic of retail inventory is by Raman et

al. (2001). The authors were surprised by the observations where inaccuracies were

common in retail scenarios. Before the study, the assumption in the business

15
environment was that inventory records are relatively accurate and could be used as a

basis for replenishment and forecasting (Raman et al., 2001). This assumption was

contradictory to seminal studies such as Iglehart and Morey (1972), Peckham (1963), and

Schary and Christopher (1979). However, the general thinking that advances in

technology can solve retailing inventory issues can explain the contradiction where

researchers and business leaders may have determined that new technology implemented

in retail were a solution to common problems. In other words, the belief was that

technology products were a prepackaged solution and not a tool that required interaction,

knowledge, and an efficient business process in order to achieve successful results.

The study by Raman et al. (2001) was the first to suggest that, even with

technology, inventory record inaccuracies were a major problem at the retail level and

that such inaccuracies led to losses in profit. The researchers suggested that the primary

contributors to the problem included poor execution in retail operations. One such

problem observed by Raman et al. (2001) was the sales process where products were

misidentified or invalidly scanned by the salesclerk. The movement of product from

reception, temporary storage, or displays also caused issues with inventory, known as

misplaced SKUs (Raman et al., 2001).

Raman et al. (2001) also identified inadequate store design along with a lack of

employee training as a cause for record inaccuracies and inventory management

problems. The researchers reviewed chain stores where the product style and categories,

information systems, and other factors were identical. Therefore, execution at the retail

level was the main difference. Some stores performed better than others (Raman et al.,

2001), thereby indicating that the issues with inventory management had to do with how

16
a store handles inventory and specific execution of store policies than any specific

technology used.

Corsten and Gruen (2003) reached a similar conclusion indicating that

improvements in business processes, operational accuracy, and aligning incentives can

lead to improvement in out-of-stock scenarios and inventory record inaccuracies. To

reach these conclusions, the authors reviewed a compilation of 52 studies that evaluated

OOS scenarios encompassing 71,000 consumers, 16 industries, 661 retail outlets, 32

categories, and multiple research methodologies. The result of the compilation of the

studies suggested that 72% of OOS scenarios are caused by store operations where

retailers make mistakes in replenishment, forecasting, shelf restocking, or other business

process related practices.

Inventory Management

Chambers and Lacey (2011) suggested that the management of inventory is

defined as the balance between the holding cost of inventory, including procurement

costs, and the benefits of ensuring that product is available to support customer service

levels. Inventory management consists of policies that encompass the purchase of

merchandise, the financing of inventory, and the policies to sell said merchandise and

tends to be the most difficult asset to manage in organizations carrying products (Kolias

et al., 2011). Handling these assets is critical given that inventory represents a large

percentage of the current and total assets of a business (Anichebe & Agu, 2013; Kolias et

al., 2011; Madishetti & Kibona, 2013; Mittal et al., 2014). Yet, retailers are facing

increasing complexity in store operations with the need to manage a growing number of

stock keeping units (SKUs) that make decision-making more challenging and

17
multidimensional (Goic, Bosch, & Castro, 2015). Goic et al. (2015), for example,

recounted how supermarkets could offer 20,000 different SKUs, making inventory

management challenging.

Inventory costs include capital costs required to finance the inventory operation,

procurements costs, and costs associated with storage and handling (Chambers & Lacey,

2011). Most small businesses rely on short-term financing; therefore, the efficient

management of working capital is also a vital part of their survival (Madishetti & Kibona,

2013). Given that inventory is a major part of current assets, small businesses need to

invest the minimum amount of funds while having enough inventory to maximize

profitability (Madishetti & Kibona, 2013).

Eneje, Nweze, and Udeh (2012) and Johnson (2014) suggested that managing

inventory can be costly, and profitability depended greatly on how organizations handle

inventory. In the United States, one-third of the logistics costs is credited to the cost of

carrying product while about two-thirds is credited to the cost of shipping (Eneje, et al.,

2012). Therefore, if organizations are attempting to lower the cost of logistics, focusing

on these two factors would provide the needed results (Johnson, 2014). Eneje et al.

(2012) suggested that current market conditions make it difficult to raise prices

suggesting that, to improve profitability, organizations must lower material costs or save

by being more efficient in their operations. The researchers pointed out that to do so,

companies must learn to adopt effective inventory management strategies and policies

using a holistic operating model. By doing so, a business can increase inventory

productivity while enhancing sales margins and lowering operating costs (Eneje et al.,

2012).

18
 The objective of controlling inventory is to maximize the net benefits while

keeping costs associated with inventory as low as possible (Al-Kassab et al., 2013;

Chambers & Lacey, 2011; Kontus, 2014). However, this is not always straightforward

and direct given diverging goals and objectives (Anichebe & Agu, 2013; Kolias et al.,

2011). For example, functional units within an organization also have conflicting

objectives with inventory as one department strives to minimize inventory levels to

remain lean and efficient while another department requires the minimization of the

probability of out-of-stock scenarios (Anichebe & Agu, 2013; Kolias, et al., 2011).

Therefore, an optimization of resources is required to achieve a balance between the cost

of overstocking and the loss of revenue caused by understocking (Gaur & Bhattcharya,

2011; Kolias et al., 2011; Mittal et al., 2014), implying that the objective of an

organization managing inventory is to obtain the least amount of inventory while

satisfying customer demand (Anichebe & Agu, 2013; Kontus, 2014).

When an organization carries too much inventory, financial stress is placed on

said business (Gaur & Bhattcharya, 2011). However, too little inventory, or excess

demand, can result in lost sales (Al-Kassab et al., 2013; Agrawal & Smith, 2013; Gaur &

Bhattcharya, 2011). Holding inventory reduces the probability of stock-outs and lost

sales scenarios but increases associated costs (Kontus, 2014; Sahari, Tinggi, & Kadri,

2012). By properly controlling inventory levels, organizations can improve profitability,

lower costs, and reduce risk (Kontus, 2014).

Based on the findings by Anichebe and Agu (2013), three types of inventory

management systems exist including fixed-order quantity systems, fix-order interval

systems, and ABC inventory analysis-based systems. The researchers stated that fixed-

19
order inventory systems are commonly referred to as a (Q,R) system and involve ordering

a Q number of units when a given product reaches an R reorder point. A fixed-order

interval system reviews inventory levels periodically and reorders product to bring the

inventory levels to the desired point (Anichebe & Agu, 2013). Furthermore, Anichebe

and Agu (2013) indicated that in ABC inventory analysis, a business will try to minimize

the amount of time and effort in controlling inventory by performing an analysis to

determine high rotating product, classified as category A, that typically represent from 70

– 80 percent of sales but only consist of about 10 – 20 percent of inventory.

The unpredictability of consumers and the inability of retailers to precisely predict

demand forces retailers to keep inventory (Shin, Ennis, & Spurlin, 2015). Shin and

Eksioglu. (2014) pointed out that not having enough inventory to cover demand can have

negative consequences not only for the retailer but also for the entire supply chain. Too

much inventory, however, is also a problem as a significant percentage of assets for a

retailer are made up of inventory and product will also make up a large percentage of the

financial investments (Anichebe & Agu, 2013; Kolias et al., 2011; Madishetti & Kibona,

2013; Mittal et al., 2014). When demand exceeds availability or supply, shortage costs

will result, which include opportunity costs, loss of customer goodwill, and late charges,

among others (Lwiki, Ojera, Mugenda, & Whachira, 2013; Shin et al., 2015), which

negatively spreads through the supply chain (Shin et al., 2015).

Optimal Order Quantity

Businesses have been using several models for decades to determine an efficient

way of calculating how many units of a product to maintain in stock and how many units

to order periodically. Chambers & Lacey (2011) indicated that the most popular is

20
Economic Order Quantity (EOQ). EOQ is a model in inventory management that

determines the optimal order size level that a company should be reordering when a

product is depleted or requires replenishment (Chambers & Lacey, 2011). This model

determines order size while accounting for the total cost associated with inventory and

replenishment processes (Chambers & Lacey, 2011).

Chambers and Lacey (2011) suggested that EOQ is a tradeoff between the cost of

procurement and the costs associated with holding inventory. The researchers stated that

although a larger quantity would reduce the number of times that a product is reordered,

and therefore, would reduce the costs of reordering, these would increase the costs

associated with holding inventory, such as storage overhead. The contrary would also be

true (Chambers & Lacey, 2011). The researchers mentioned that small reorders would

decrease holding and storage costs but would increase procurement costs as the frequency

would increase. The authors implied that for the EOQ model to work, variables such as

demand, stock depletion, and timespan between order and delivery must be constant.

Furthermore, in the calculation of EOQ, discounts for volume purchases are not allowed

(Chambers & Lacey, 2011).

In a study by Kontus (2014), the author sought to find a relationship between

inventory levels and profitability. Kontus (2014) suggested using Economic Order

Quantity (EOQ) on each product that is representative in terms of sales. This may

indicate that performing a Pareto Analysis and applying EOQ on products classified as

category A may be optimal. Another technique that can be used along with EOQ is

reorder point (ROP) and safety stock (Kontus, 2014). However, EOQ, ROP, and safety

stock all require constant demand (Chambers & Lacey, 2011; Kontus, 2014).

21
 Having too high of a buffer leads to added costs and tied resources (Lwiki et al.,

2013; Shin et al., 2015). This scenario has led organizations to use inventory

management strategies, such as Just in Time (JIT) inventory, to improve the effective use

of resources such as capital and inventory (Sahari et al., 2012). Sahiri et al. (2012)

described the idea behind JIT inventory as systems that decreases lead-time and inventory

levels through the implementation of a collaborative relationship between a buyer and a

seller where information is shared between the parties in an effort to increase visibility so

that the supplier can provide needed inventory when the buyer reaches certain minimum

levels. Sahiri et al. (2012) and Shin et al. (2015) suggested that the implementation of an

inventory management system that is automated and can provide information via the

optimal levels of inventory can lead to improved levels of profitability for an

organization.

Profitability and Performance

An indicator often used by retailers for managing inventory utilization is turnover

ratio, and the indicator is an efficient metric for calculating business operations (Grubor,

Milicevic, & Mijic, 2013). Choudhary and Tripathi (2012) developed a study to assess

the operational efficiency of retail concerning inventory days. They also attempted to

review the impact that the inventory days had on other key business metrics such as

return on assets and return on capital, among others. The authors used ANOVA to

determine the significance in holding times and used regression analysis to determine the

financial impact of the period using the financial parameters as independent variables.

The results of the study were mixed. Only some retailers showed a negative link

between inventory days and financial performance. Ultimately, Choudhary and Tripathi

22
(2012) concluded that each retailer plans inventory based on their customer demand and

projected needs. Therefore, forecasting plays a crucial role, and the difference between

the forecast and actual sales can result in inventory issues. To solve the issue, retailers

should adopt proper forecasting techniques.

Although the conclusion of the authors regarding the importance of forecasting is

consistent with current literature, these methods tend to rely on calculated demand.

Meaning, current inventory levels in a store satisfy demand by being either higher or

equal to customer demand. If a retailer were unable to capture proper demand because of

out-of-stock scenarios, then regardless of the quality of forecasting techniques, such a

forecast would most likely produce invalid results.

Nyabwanga and Ojera (2012) investigated a possible relationship between the

inventory management practices of small-scale enterprises in Kenya and their respective

business performance. The conceptual framework of the study focused on inventory

levels, budgeting practices, and shelf-space management influencing the growth of sales,

the growth of market share, and quality of service. The authors used a cross-sectional

survey research design and targeted a population of 230 small-scale enterprises in Kenya

of which 70 were selected using stratified random sampling consisting of 49 trading

companies and 21 manufacturers. The researchers divided the survey instrument into

three sections that included demographics, inventory management practices, and business

performance.

Nyabwanga and Ojera (2012) then used multiple regression analysis to determine

the relationship between inventory management practices and business performance. The

results of the study demonstrated that small-scale enterprises do not generally use

23
quantitative techniques to determine minimum or maximum inventory levels.

Furthermore, these organizations were not effective in determining appropriate reorder

levels. Finally, the authors used multiple regression analysis to conclude that inventory

management practices have a positive relationship on business performance.

Sahari et al. (2012) reviewed the relationship between inventory management and

capital intensity and firm performance hypothesizing that a positive relationship exists

between firm performance and inventory management and capital intensity. The

researchers calculated inventory management by using Inventory Days (ID), which is the

average number of days for stock to rotate while return on assets (ROA) was used to

measure firm performance. To test the hypothesis, the researchers used Spearman

correlation coefficient and found a significant negative relationship between ROA and

ID, suggesting that a firm would improve performance by having higher inventory

rotation. The results also showed that a negative correlation exists between inventory

days and capital investment, indicating that organizations with a greater degree of capital

intensity tend to rotate inventory more effectively.

Eneje et al. (2012) attempted to determine the effect of efficient inventory

management on the profitability of brewery companies. The researchers reviewed

aspects of inventory management through procurements, material reception, holding and

ordering costs, and the management of currency exchange rates to achieve profitability.

To do so, the researchers used a population of nine large brewery companies and selected

a sample size of two using judgment sampling. Eneje et al. (2012) also used Pearson

method of correlation to determine a relationship between inventory management and

profitability and found a strong and statistically significant association.

24
 However, the study’s design presented a few weak points including the use of a

small sample size. To achieve a 95% confidence level and a confidence interval of five

using a population of nine organizations, the sample size should have been nine

organizations (Creative Research Systems, 2016). Therefore, the outcomes of the study

may not be sufficiently representative of the population. Furthermore, the results from

manufacturing may not apply to the retail sector as industry’s complexity in inventory

management is higher given the number of products managed by said organizations.

However, the findings are consistent with other studies including Panigraphi (2013) and

Sahari et al. (2012).

A business’s viability depends greatly on the effective management of inventory

(Panugraphi, 2013). The researcher suggested that when the asset is mismanaged, funds

are unnecessarily tied up in product that will reduce the organization’s liquidity, thus

affecting profitability. Proper inventory management can help organizations reduce

inventory levels, which will assist long-term overall firm performance (Panigraphi,

2013). Holding inventory will generate costs; therefore, the amount of inventory held

should be the least amount as possible while still being able to the maintain customer-

service levels required to meet demand (Panigraphi, 2013).

Panigraphi’s (2013) study objective were to examine the relationship between

inventory conversion and the profitability of an organization. To do this, the author used

data from the top five Indian cement companies during 2001 – 2010 hypothesizing that

an improved management of inventory would also improve liquidity and profitability and

that a negative relationship exists between profitability and the inventory conversion

period of a firm. The author used Karl Pearson’s coefficient of correlation to find a

25
possible association between sales and inventory, applying regression and correlation

coefficient t-test. The findings indicated a negative relationship between inventory

conversion and a firm’s profitability; when the inventory conversion period increases,

profitability will decrease.

The findings by Panigraphi (2013) are contradictory to the results of retail-based

studies such as Choudhary and Tripathi (2012) and Kontus (2014) where there is no

significant relationship between inventory management and profitability. This may have

something to do with the complexity and volume of products in a retail environment. In

this example, and other manufacturing examples, only one product was managed. In the

case of Panigraphi (2013), the single product was cement. Therefore, the management of

inventory is constrained to one product and seems easier to control. In retail settings, the

volume of product is greater; therefore, it may require greater emphasis on the process

and policies that manage aspects such as product movement, reception, sales, storage, and

replenishment.

Although the study sought to find a relationship between inventory management

practices and business performance, only a small subset of inventory management

practices was reviewed. Practices in other areas of inventory management such as cycle

counting, replenishment practices, product reception, product labeling, and sales practices

were not determined. Furthermore, none of the businesses surveyed were retailers.

Therefore, it is difficult to conclude that similar results would be observed in a retail

environment.

Lwiki et al. (2013) conducted a similar study. The researchers tried to determine

the impact of inventory management practices on the financial performance of Kenyan

26
sugar manufacturers. The purpose of the study was to investigate a possible relationship

between inventory management practices and financial performance in Kenyan sugar

manufacturing firms. The researchers used a descriptive research design in which a

survey instrument was used to collect primary data from all eight sugar-manufacturing

firms in Kenya covering a period from 2002 to 2007. Lwiki et al. (2013) collected

secondary data from publications from the Kenya Sugar Board and the Year Book of

Sugar Statistics. Descriptive statistics were used to analyze the data and the coefficient

of correlation was used to determine the relationship between inventory management and

financial performance. The results of the study suggested that return on sales (ROS) has

a strong positive correlation with strategic partnerships while return on equity (ROE) has

a strong correlation with both lean inventory systems and strategic alliances.

Although the findings do show correlations, inventory management practices

were based on survey data. Only a few firms were adopting technologies such as

electronic data interchange and electronic point of sale systems, which allow strategic

partnerships to exchange collaborative information. Therefore, most of the data used in

the research study is based on subjective opinions instead of measurable or observable

primary data. For example, one of the parameters used included the operation of just in

time (JIT) purchasing systems and material requirements planning (MRP), both of which

require the exchange of information to function properly (Sahiri et al., 2012).

Furthermore, the size of the population is too small to draw meaningful or generalizable

conclusions.

Madishetti & Kibona (2013) attempted to measure to the impact of inventory

management on profitability using small and medium enterprises in Tanzania. The

27
particular purpose of the conducted study was to demonstrate the econometric impact of

inventory conversion periods on gross profit by using a sample size of 26 small and

medium businesses in Tanzania. To do so, the authors used data retrieved from financial

statements from 2006 to 2011 setting the independent variable as inventory conversion

period (ICP) and the dependent variable as gross operating profit (GOP). Madishetti and

Kibona (2013) use Pearson’s Coefficient of correlation to establish a relationship

between inventory conversion period and gross operating profit, obtaining a result of -

0.464 that indicates that a decrease in ICP results in an increase in GOP and a decline in

GOP results in an increase in ICP. These results are in line with other previous studies

such as Eneje et al. (2012) and Mittal et al. (2014).

Mittal et al. (2014) conducted a study on the impact of inventory management and

profitability. The authors’ objective was to study the management of inventory and the

effect that such management had on profitability for the fertilizer industry in India. To do

so, the researchers used ten companies selected using stratified random sampling

techniques and used data ranging from 2002 to 2011 acquired from financial statements.

Pearson’s correlation analysis was then implemented to determine a relationship, if any,

between profitability and inventory turn ratio. The results of the study demonstrated a

strong relationship between the variables where inventory turn ratio and gross margin are

negatively related with a coefficient of correlation of -0.247. As gross margin increased,

inventory turn ratio fell and vice versa.

In another study, Kontus (2014) took a sample of Croatian companies randomly

selecting 130 organizations mixed between small, medium, and large sizes. For the

study, the author used return on assets (ROA) to measure profitability and the ratio of

28
inventory to current assets as an inventory level measurement. Although the researcher

sought to establish an association between inventory levels and profitability using several

statistical methods, no significant association was found; however, the results from the

research study suggested a trade-off between inventory level and profitability.

Profitability based on inventory levels seem to have more to do with overall

organizational policy than just values of inventory and measures of profitability as policy

and procedures may not be consistent and may have an effect on sales. If the wrong

product assortment is ordered, kept at a high level, stored incorrectly, or has high levels

of system discrepancies, the ROA figures would decrease as the product itself would

generate fewer sales or produce invalid numbers (Kontus, 2014). The implication is that

inventory management policy should be consistent throughout all studied organizations to

ensure that these variables are controlled. The issue with Kontus (2014) and other similar

studies on the topic of inventory management and profitability is that they do not seem to

take into account consistency throughout the organizations that are evaluated. Policy

itself, therefore, may be more necessary and critical than profitability numbers.

Shin et al. (2015) attempted to determine if the management of low levels of

inventory resulted in improved financial performance. To do so, the authors used the

Compustat database to retrieve balance sheet and income statements for a sample size of

1,289 U.S. manufacturing companies and divided the samples between small, medium,

and large businesses. The authors used profit margin to calculate profitability and

inventory-to-sales ratio to calculate inventory management efficiency. The results of the

study indicated that smaller companies had the highest effect of inventory turn ratio on

profit margin, but all three size categories demonstrated an effect. Lower levels of

29
inventory displayed an increase in profitability (Shin et al., 2015). The researchers

suggested that the relationship is stronger for smaller firms and can be explained by the

improvement opportunity that smaller companies may have in comparison to larger

businesses. While larger firms may already have implemented advanced technological

inventory management solutions, smaller firms may have greater improvement

opportunity (Shin et al., 2015).

Sitienei and Memba (2015) used data obtained from three companies that are

listed on the Nairobi Securities Exchange (NSE) and applied multiple regression using

ordinary least squares (OLS) to examine a relationship between inventory management

and profitability of a company. The researchers used inventory conversion, inventory

turnover, the cost of storage, firm size, return on assets, and gross profit margin as

variables. The results of the study suggested that inventory turnover has an insignificant

negative relationship with return on assets and gross profit margin. By analyzing firms

with low margins that require high volumes to be profitable, Sitienei and Memba (2015)

explained the insignificant negative relationship between return on assets and gross profit

margin. The researchers also established a significant negative relationship between

inventory conversion period and return on assets and gross profit margin. This suggests

that inventory held for shorter periods and, hence, a shorter conversion period, leads to

improved cash flow for replenishment, and consequently leads to increased sales and

improved profitability (Sitienei & Memba, 2015).

The results from Sitienei and Memba (2015) are consistent with the results founds

in Panigrahi (2013) where lower inventory conversion periods led to improved

profitability and higher inventory conversion periods led to lower profitability. Even

30
though studies in the context of retail should obtain similar results given that the idea that

shorter inventory conversion period free up capital investment for inventory

replenishment, studies in the realm of retail do not seem to find a significant relationship,

as is the case in manufacturing or industries with low volume of distinct products. This

may be due to the complexity in retail inventory and may suggest that to obtain similar

results, other variables seen in retail settings should be accounted for and standardized, so

that the effect on the retail environment is controlled.

Working Capital, Liquidity, and Financial Management

The purpose of efficient working capital is to obtain a balance between liquidity

and profitability through normal business operations and is the difference between

current assets and current liabilities defined as net assets (Aminu, 2012). By

understanding how working capital affects business operations, an organization can

increase performance while reducing risk. The effective and efficient management of

inventory can allow an organization to maximize profits through the balance of managing

capital investment and rotating inventory (Aminu, 2012).

Economic downturns are normal business operating environments for retailers

(Moussawi-Haider & Jaber, 2013). As such, retailers need to learn how to navigate

through those cyclical events by finding innovative ways to manage cash reductions

(Moussawi-Haider & Jaber, 2013). Moussawi-Haider and Jaber (2013) detailed that

although much has been written about inventory control and cash management, not much

literature is available on how a retailer’s cash management decisions influence inventory

control decisions. The authors suggested that these activities, cash management and

inventory control, are closely related. As such, decisions about both should be made at

31
the same time (Moussawi-Haider & Jaber, 2013). Given the imperfect data scenarios,

financial constraints should be taken into account when making inventory decisions

(Moussawi-Haider & Jaber, 2013).

Krishnankutty (2011) stated that although inventory management is not

necessarily an exact measure of a company’s performance, it could be an effective way to

determine the direction of the organization, regardless of firm size. The researcher

suggested that in any given industry, inventory is a central component in working capital.

The management of such a resource ensures that production and sales flow effectively so

that overinvestment or underinvestment does not occur. Inventory productivity can be

calculated using several variables which include capital intensity, inventory turnover, and

gross margin; therefore, organizations need to understand the variables to manage

inventory effectively (Krishnankutty, 2011). The higher rate of turnover achieved by a

retailer the higher the profit that the retailer can generate. Gross Margin Return on

Investment (GMROI) is an inventory productivity measure used by retailers to analyze

the rate of return per investment in inventory and can also be used as an efficiency metric

(Krishnankutty, 2011).

Krishnankutty (2011) used financial data from the Center for Monitoring India

Economy (CMIE) that included three companies ranging from 1999 to 2009 and used the

panel least square method to establish that inventory turnover, gross margin, capital

intensity, and firm size had a positive and significant impact on GMROI. However, the

sample size for the study was too small to draw and generalize conclusions.

Moussawi-Haider and Jaber (2013) used a realistic event where cash management

was incorporated into reordering decisions such as order lot size and under a scenario

32
where payment for the order is delayed. The scenario also considered the maximum

amount of cash available for the transaction and loan amounts at the time of the event.

The authors reached the conclusion that optimal order quantity and maximum cash

should decrease when the return on cash increases. Furthermore, the most favorable

scenario for a retailer is when the credit period offered by the supplier exceeds the

product’s cycle time (Moussawi-Haider & Jaber, 2013).

The results of the study by Moussawi-Haidar and Jaber (2013) seem to suggest

that decisions in inventory policy should take into consideration aspects often assumed or

ignored in the literature, such as cash management. This is especially important given

that smaller businesses have tighter financial budgets for inventory reordering decisions

where available cash is a constraint of lot sizes (Moussawi-Haider & Jader, 2013). The

authors suggested that being able to account for both inventory needs and cash

management can provide smaller businesses with a better reordering model. However, to

use such a model in a practical environment, frameworks may need to be incorporated

into information technology systems readily available to small retailers such as point of

sale systems.

Organizational Efficiency

Eroglu and Hofer (2011) use Empirical Leanness Indicator (ELI) to measure

inventory management and found a positive relationship between a firm’s inventory

management and financial performance. The authors concluded that organizations that

are leaner than the industry average would perform better financially; however, this

relationship is concave instead of linear. The results also suggested that a firm can be too

lean, and this will have an adverse effect given that stock-out scenarios would be caused

33
by carrying too little inventory and high rotations can also cause added shipping and

ordering expenses. Therefore, situations can arise where profitability is negatively

affected by both carry too much or too little inventory (Eroglu & Hofter, 2011). The

authors also discovered that performance based on leanness differs between industries as

inventory strategy can have different effects depending on the type of business and type

of inventory carried. The limited evidence obtained in prior studies where industries are

not separated is explained by the effects of business type.

In another study, Kolias et al. (2011) used data samples from 2000-2005 obtained

from balance sheets and financial statements of 556 Greek retail companies and used

econometric analysis to find that inventory turnover ratio negatively correlates with gross

margin. The implication is that retail organizations compromise gross margin for higher

inventory rotation to achieve a better return on inventory investment. Kolias et al. (2011)

also found a positive correlation between inventory turnover ratio and capital intensity.

In the supermarket industry, the correlation was found to be higher, suggesting that the

sector would benefit from using technology to achieve higher turnover rates achieved by

lowering inventory levels with lower capital investments. This, however, seems difficult

to achieve because technology itself would not necessarily provide correct information.

As seen in multiple studies, many information technology systems implemented in the

industry contain misaligned information or invalid information (Chen, Jan, Tsai, Ku, &

Huang, 2012; Gruen & Corsten, 2007; Raman et al., 2001). The authors also suggested

that a lot of variability among results exists because of the differences among industries,

consistent with other studies such as Eroglu and Hofer (2011).

34
 Some studies have addressed the effectiveness of an organization in managing

their inventory. An example of such a study is Anichebe and Agu (2013) who sought to

determine the effect that inventory management has on organizational effectiveness. The

authors used a survey instrument to interview employees from three manufacturing

companies in Nigeria and used secondary data obtained from journals and other sources

from 248 companies to determine a correlation using Pearson’s correlational coefficient

and linear regression. The researchers established a strong relationship between

inventory management and organizational effectiveness and determined that inventory

management has an effect on organizational productivity.

One weakness of the study, however, is that some of the data used included

answers to subjective survey questions that may not necessarily align with data elements

from the same organization. For example, the authors asked employees if they agreed

that inventory management promotes income growth for an organization. The

researchers then correlated the results of the provided answers with secondary data

obtained from books, journals, and the internet. Although a correlation was established,

the subjectivity of the value of the solutions may produce distorted or misguided results

that may or may not be representative. Furthermore, the sample companies used for the

primary source of data were only three organizations, which is a relatively small sample

size to determine a relationship or cause and effect.

A research study conducted by Grubor et al. (2013) included financial data from

35 medium and large retailers in the Republic of Serbia obtained from the Serbian

Business Registry agency. The researchers indicated that retailers account for 60% of the

population of medium and large businesses in said country. In analyzing the study to

35
determine the effect of gross margin and capital intensity on inventory turnover, the

authors concluded that inventory turnover and gross margin are positively correlated.

Grubor et al. (2013) suggested that this may be caused by the use of different metrics,

where other studies reviewed gross margin return on inventory (GMROI). Although the

results of the study did show the stated correlation, the study does contain some

weaknesses. For example, the sample size may be a concern regarding supporting the

hypothesis given that only 35 companies were used from a large population; therefore,

the results may not be generalizable.

Inventory Inaccuracies, Out-of-Stock, and On-Shelf Availability

Consumer responses to stock-outs have been well documented. In a research

study conducted by Peckham (1963), researchers found that consumers who did not find

what they were looking for left the store without purchasing approximately 42% of the

time. When faced with out-of-stock situations, consumers will either buy a substitute or

alternate product, postpone the purchase, visit another store, or not execute a purchase

(Schary & Christopher, 1979). Peckham (1963) suggested that OOS scenarios, in fact,

damage the store’s image and negatively affect sales, specifically when multiple stock-

outs are experienced.

Even with the implementation of information technology, a high percentage of

retailers have inventory record inaccuracies within their retail systems (Chen et al., 2012;

Raman et al., 2001). Raman et al. (2001) indicated that inventory inaccuracies where

about 35% of the target inventory physical count and established that a retailer had as

much as 65% inaccuracy between physical inventory and recorded inventory. Gruen and

Corsten (2007) also found the inaccuracy numbers to be as high as 65%. Based on their

36
study, replenishment decisions and forecasting errors account for roughly 47% of out-of-

stock scenarios while shelving policies account for another 25%.

Inventory inaccuracies are caused by several factors including theft, product

damage, product misplacement, and transaction errors at checkout (Gruen & Corsten,

2007; Raman et al., 2001; Wang, Fang, Chen, & Li, 2016). Raman et al. (2001) were

able to conclude that information technology was not the problem. They did so by

comparing stores with identical IT infrastructure and demonstrating that the drivers for

inaccuracy were based mostly on business processes and their execution. Inventory

inaccuracies, however, need to be corrected to improve out-of-stock scenarios given that

inventory levels are a primary parameter used for replenishment decisions (Hardgrave et

al., 2011). Hardgrave et al. (2011) suggested that inaccuracies lead to distorted demand,

and misplacement of product causes replenishment errors.

Aastrup and Kotzab (2009) examined the challenges faced by independent

retailers in reference to out-of-stock scenarios. The authors used a quantitative and

qualitative design to examine store policies and the influence that such practices may

have on stock-outs. The researchers used a third-party auditor to conduct physical audits

in 42 stores, visiting each store throughout a three-week period, to obtain the quantitative

data. The auditors took 19,054 observations during said period. When the stores faced

OOS scenarios, managers were asked about the situation and the researchers obtained

917 observations regarding its causes (Aastrup & Kotzab, 2009). Additionally, Aastrup

and Kotzab (2009) interviewed 17 store managers from the independent retail stores.

The results of the study suggested that independent retailers had almost twice the

level of OOS than their chain counterparts. The researchers found that the root causes for

37
OOS scenarios included problems within the store operations and external factors outside

of the control of the store. These findings are consistent with findings by Gruen and

Corsten (2007) and Raman et al. (2001). Aastrup and Kotzab (2009) also found that

internal factors such as store replenishment issues, which occurs when the product is

misplaced in the store and the product itself is unavailable at the shelf, and store ordering

issues, which occurs when the product was ordered too late or not enough quantity was

ordered to cover demand, accounted for almost 99 percent of the stock-out scenarios.

The challenges faced by independent retailers mainly revolve around policy and

procedures for managing store replenishment (Aastrup & Kotzab, 2009, Gruen &

Corsten, 2007; Raman et al., 2001). Furthermore, smaller stores face larger challenges

concerning out-of-stock scenarios (Aastrup & Kotzab, 2009). The researchers concluded

that part of the reason for the increased challenges faced by independent retailers is that

replenishment activities for small independent retailers rely mainly on one person that

uses experience to gauge future demand and current inventory levels whereas larger

chains rely on data and forecasting. Additionally, smaller stores face more challenges in

attracting and retaining qualified personnel (Aastrup & Kotzab, 2009). The results of

these studies seem to suggest that even simple technological tools like point of sale

systems require adequately aligned processes with well-trained staff to produce

meaningful and positive results.

In a current study, Mersereau (2013) considered a periodic review system that

contained inaccurate inventory information and lost sales that are not observable by the

inventory manager. The inventory manager uses an inventory number (quantity) that is

based on sales and replenishment observations which are replicated in the study using a

38
random variable obtained from a probability distribution (Mersereau, 2013). The author

suggested that the current model for the study differs from other models in that the model

allows inventory records to be inaccurate. The researcher considered three policies

where the first uses an inventory manager that ignores inaccuracy and possible errors in

the process. A second policy accounts for inventory inaccuracy but does not account for

errors in the process. The third policy accounts for errors in the process and uncertainty

in the inventory values. The author then compared these policies to an optimal forward-

looking inventory policy that uses A-POMDP, which is an artificial intelligence approach

employed in previous studies.

Although the results of the simulation and analysis for Mersereau’s (2013) study

showed that the A-POMDP policy yielded lower costs and lower replenishment levels,

such costs differences are small. This is especially true when an inventory manager seeks

high customer service levels (Mersereau, 2013). The results of the study suggested that

inventory policies that account for inventory record inaccuracy and errors in the process

might be adequate for use in practical environments as the cost differences are not

significant enough to warrant the implementation of complex computations.

Most of the past research seems to evaluate out-of-stock scenarios from the

goods-dominant (GD) perspective. Such scenario illustrated a direct loss of revenue to

the retailer and the manufacturer or distributor from a missed sales opportunity caused by

an out-of-stock scenario. Ehrenthal, Gruen, and Hofstetter (2014) take a different

approach to out-of-stock situations by applying a marketing concept known as service-

dominant (SD) logic from Vargo and Lusch (2004) that addressed value creation from a

service standpoint. Esper, Ellinger, Stank, Flint, and Moon (2010) and Yazdanparast,

39
Manuj, and Swartz (2010) initially expanded on the topic by addressing the creation of

value throughout the supply chain by the collaborative efforts of each participant from an

SD logic perspective. The concept of SD logic expands the GD perspective because each

party will receive a service as part of the interaction (transaction), thus creating value

throughout the supply chain (Ehrenthal et al., 2014).

From a logistics standpoint, SD logic would suggest that value is lost by all

participant of a supply chain when faced with an out-of-stick scenario, including the end-

user (Ehrenthal et al., 2014). For value to be created, the integration of all resources

throughout the supply chain must be integrated, and value is lost when the objective of

the end-user is not met (Ehrenthal et al., 2014). Furthermore, Ehrenthal et al. (2014)

concluded that such scenarios would increase costs to all direct and indirect participant of

the transaction:

x Retailer: A sales opportunity is missed, thus affecting revenues in a direct

manner. Additionally, the retailer’s image may suffer because of the

dissatisfaction of the shopper. Costs can also be incurred given scenarios

where staff is looking for product, demand figures are distorted by incorrect

data, and forecasting figures use inaccurate demand data.

x Manufacturer / distributor: With the sales opportunity being missed,

manufacturers and distributors will also miss possible revenue generation.

Given the distorted demand data received from the retailer, forecasting and

planning generated by the manufacturer will also be distorted. Marketing

efforts can also be affected by the distortion.

40
 x Shopper: If the shopper does not find the item being sought out, the shopper

must invest time and additional resources in locating the necessary item at

another location.

A large percentage of the research conducted on the topic of inventory

management assumes that inventory records are accurate; however, the reality is that, in

practice, inventory record inaccuracy is a standard issue (Gruen & Corsten, 2007;

Mersereau, 2013; Raman et al., 2001). Policies that consider inaccuracy are critical given

the current situation in industry and because of technologies, such as radio frequency

identification, that are a promise in the mitigation of record inaccuracy (Mersereau,

2013).

Kok and Shang (2014) and Rekik (2011) define inventory record inaccuracy as

the numerical difference between the amount of inventory physically held and the

number indicated in records. Inaccuracies occur due to shrinkage, misplacement,

damages or spoilage, or errors in process and these can lead to errors in the process or

replenishment, which decrease service levels and generate a higher cost in inventory

(Gruen & Corsten, 2007; Kok & Shang, 2014; Raman et al., 2001; Wang et al. 2016).

Inventory shrinkage can be caused by several factors including theft, spoilage, or

damages to product and the cause is the reduction of physical inventory (Gruen &

Corsten, 2007; Kok & Shang, 2014; Raman et al., 2001; Wang et al., 2016). Therefore,

the inventory record will be a higher number than physical inventory (Kok & Shang,

2014; Wang et al., 2016).

Transaction errors can be caused by miscounting items or incorrectly identifying

products (Kok & Shang, 2014; Wang et al., 2016). In retail, cashiers incorrectly

41
processing a sale can also cause such errors (Raman et al., 2001). Based on these

observations, one can establish a scenario where product A and product B are similar but

are not the same product; therefore, a cashier may scan one product and increase the

quantity to two. This would incorrectly reduce the inventory record by two while

maintaining the inventory record the same for the other product, thus producing

discrepancies. Kok and Shang (2014) and Raman et al. (2001) indicated that inventory

misplacement refers to product that is physically available but cannot be found. The

effect is that inventory levels are temporarily reduced until the product is found (Kok &

Shang, 2014). This can produce errors such as incomplete cycle counts, which then lead

to incorrect editions of inventory records that will ultimately produce replenishment

errors (Kok & Shang, 2014).

Based on the results obtained from the aforementioned studies, replenishment

activities seem to be highly dependent on inventory records. Inaccuracies in such records

can cause errors in inventory such as oversupply (Hardgrave, Aloysius, & Goyal, 2013).

Hardgrave et al. (2013) also defined these inaccuracies as the discrepancy between

physical and recorded inventory levels. Given the statistics in inaccuracies, the

implication is that most of the replenishment decisions are based on inaccurate

information (Hardgrave et al., 2013).

There seems to be two types of inaccuracies in inventory. Based on the

definitions established by Raman et al. (2001), the first is overstated perpetual inventory,

which is when the retail systems or records indicate that there are more quantities than

physically available. This scenario causes OOS, as product will not be reordered (Raman

et al., 2001). The second understated perpetual inventory occurs when the system or

42
records indicate that there is less inventory than physically available. This situation

causes overstock and can result in increased holding costs, lower margins, lower

inventory turnover, and errors in a store’s business process (Raman et al., 2001).

Other factors can cause overstated and understated perpetual inventory. Such

cases include manual updates to inventory records, stolen product, damaged product,

improperly handled returns, incorrect quantities in shipments, and cashier error in the

sales process (Hardgrave el al., 2013). In Hardgrave et al. (2013), the researchers

discussed the difficulty in determining what role or impact technology plays within the

context of retail. The authors suggested that the main reason that the impact is difficult to

assess is that the retail environment is complex and has other factors that play a role.

Such factors include budgetary concerns, human intervention, and circumstantial

concerns, among others (Hardgrave et al., 2013).

Given the cost of implementing technologies such as RFID, Hardgrave et al.

(2013) used case level tagging for their study. The tagging tracked in-store movements

of boxes of product (Hardgrave et al., 2013). The authors implemented three read points

in the store’s business process that include the receiving door (merchandise reception

area) to capture product shipments to the store. Additionally, a backroom to sales floor

door read point was implemented to capture product moving from back storage to retail

space. Finally, a read point was also established to capture empty cartons returning from

the retail floor to the disposal area.

This study differed from a previous study conducted by Hardgrave et al. (2011) in

that the coverage of RFID involved product categories. In the previous research study,

the researchers tagged five categories and compared the tagged categories to a control

43
group made up of untagged categories, including 1,268 products, and determined that the

RFID tagged categories conclusively improved inventory inaccuracy by as much as 36%.

The objective of the study by Hardgrave et al. (2011) was to seek how RFID affected

stock-outs in differing categories in a retail store. The study was limited to a few

categories and required manual verification to obtain discrepancy numbers.

The idea of the later study by Hardgrave et al. (2013) was to use RFID auto-adjust

to edit inventory quantities based on the movement of product through the store, thus

reducing the human element that may introduce error. For example, if the level of

perpetual inventory in the point of sale system indicates a value of two, however, a scan

read for a case containing 24 units of the product is detected, then the perpetual inventory

value was automatically updated (Hardgrave et al., 2013). In the study by Hardgrave et

al. (2013), a scenario where auto-adjust is not generated occurs when a particular product

shows an inventory level of 13 and a box scan in the reception area for a value of 12 is

registered, but no other movement exists. This would suggest that the product came into

the store, but is still in the backroom, indicating that a single item is on the shelf

(Hardgrave et al., 2013). The researchers, in this case, implied the system would provide

instruction for restocking the shelf but would not trigger an adjustment to the inventory

level in the system.

Although the study by Hardgrave et al. (2013) did consider factors of product

identification in the movement of cases and flagged situations where the misplacement of

product will cause record inaccuracies, the cost of implementing such a system would be

unrealistic for independent micro-retailers. Furthermore, a comprehensive inventory

management plan that covers the scenarios where inaccuracies are generated may

44
produce similar results using resources that the retailer already possesses (Chuang et al.,

2016; Chuang, 2018). The RFID auto-adjust seems to be an expensive solution to

manage an inefficient business process of handling inventory movement within a store.

A clearly defined comprehensive business process supported by an adequately priced

business system that aligns with said business process along with higher levels of

employee training may be able to obtain improved results at a substantially lower cost.

This is important considering that the cost of implementing high-end systems such as

RFID is prohibitive for micro-retailers.

With a high degree of probability, when customers are faced with a stock-out

situation, they may elect a substitute product (Tan & Karabati, 2013). Therefore, not

considering the inventory levels of substitute products may result in a decreased demand

performance (Tan & Karabati, 2013). Using a computational study, Tan & Karabati

showed that performance of a store’s inventory can be improved by taking into account

the level of inventory of substitute products.

The issue with the study is that smaller retailers may not have adequate space for

handling substitute products or increased options per category and may need to rely on

optimized business processes. Furthermore, in practice, implementing these sophisticated

computational methods may be difficult in micro-retailers with commercial point of sale

systems that have limited customizability. It may not be possible to automate the

algorithms or methods, thus relying on manual intervention to run the technologies

presented in the studies mentioned above.

Another factor that can affect demand and, consequently, leads to out-of-stock

scenarios is ticket-switching (Zhou & Piramuthu, 2015). Zhou and Piramuthu (2015)

45
attempted to study the effect that ticket switching has on inventory management. The

authors focused on a specific type of shrinkage in inventory caused by the practice, which

occurs when consumers swap the tag of an expensive item with that of a similar cheaper

item in order to pay less for the transaction. The authors indicated that the consequences

of ticket switching include data inaccuracies for multiple SKU’s and such consequences

negatively impact the retailer as retailers are using the invalid data for reordering

decisions. The demand for several products would be inaccurate as the cheaper version

would have a higher demand and thus would produce a higher reorder point while the

more expensive item would have a lower demand and would cause an OOS scenario. If

the products being affected were perishable item, this would cause unnecessary spoilage

due to excess inventory (Zhou & Piramuthu, 2015).

Newer sales channels also seem to have an effect on calculating demand. For

example, the popularity of e-commerce as a secondary sales channel for businesses has

led to revenue management of multiple processes based on the channel (Schneider &

Klabjan, 2013). Large businesses such as Best Buy and Home Depot provide mixed

techniques such as online purchasing with in-store pickup. Furthermore, small

businesses add additional channels by selling though multiple marketplaces such as

Amazon and EBay (Schneider and Klabjan, 2013). The authors use a model where a

single SKU is used for multiple channels and a condition for periodic review from a

supplier exists.

Every time an order takes place, a cost is incurred. The product is sold multi-

channel at differing price points and demand is stochastic and independent (Schneider

and Klabjan, 2013). The researchers indicated that organizations incur cost penalties

46
when said businesses cannot satisfy demand. For example, Ebay (2019) and Amazon

(2019) have strict policies regarding sales cancelations caused by stores not having

enough inventory. Subsequent cancellations can result in account suspensions.

Schneider and Klabjan (2013) simplify the model where only two channels are used but

presented a realistic scenario seen in retail to show that strict conditions have to be

imposed on the penalty incurred by stock-outs for the basic inventory policy to be

optimal.

Out-of-stock scenarios where demand is not met seems to incur greater costs than

what Scheider and Klabjan (2013) suggested given that eBay and Amazon’s policies rank

sellers by their order fulfillment rate (Amazon, 2019; eBay, 2019). This would imply

that since smaller businesses are engaging in e-commerce activities through these

marketplaces, there is an even greater need for inventory management policy that

controls out-of-stock scenarios when demand on multiple channels is not known.

Storage and the Last 100 Yard Problem

Eroglu, Williams, & Waller. (2011) described the “last 100 yards” as the space

that has the highest impact on the efficiency of a supply chain. The authors stated that

out-of-stock scenarios tend to occur when inventory is held in a backroom and in the

shelves of a store, where the distance between this is commonly referred to as “the last

100 yards.” Aastrup and Kotzab (2009) observed that this area is where the accuracy of

inventory deteriorates the most. Although this should enable improved services levels

and avoid stock-outs, inefficient replenishment processes within the organization cause

the contrary to take place (Aastrup & Kotzab, 2009; Eroglu et al., 2011; Ehrenthal &

Stolzle, 2013).

47
 Ton and Raman (2010) concluded that while higher inventory levels and added

product variability leads to higher sales, such increases can also create phantom products

that can decrease overall sales. This is directly attributed to inefficient replenishment

processes from the stockroom to the shelf (Ton & Raman, 2010). Eroglu et al. (2011)

described the average retailer as holding backroom inventory and displaying merchandise

on the shelves where the process begins with shelf replenishment and then proceeds with

a movement of excess inventory to the backroom. The authors indicated retailers need

workers to monitor product on a consistent basis and move product when required;

however, these processes tend to be inefficient and lead to errors.

Backroom Effect (BRE) results from a misalignment between the reorder point of

a product, the amount of space allocated to the product, and the case pack size of the

product and is caused by diverging inventory policies between a supplier and a retailer

(Eroglu et al., 2013). When retailers ignore BRE, costs and reorder points increase. The

authors detailed that since retail space is valuable and limited, retailers hold inventory in

retail shelves and the backroom, allowing space in the retail section for greater product

assortment and variety (Eroglu et al., 2013). Since retail space is limited, the amount of

product being received may not fit entirely on the shelves; therefore, the overflow of

product is stored in the backroom. However, this strategy has the disadvantage of adding

complexity to the operation while increasing costs (Eroglu et al., 2013).

Inventory then must be managed in two separate locations, and product must be

consistently moved from the backroom to the retail space to ensure product availability

(Eroglu et al., 2013). Based on the study published by Eroglu et al. (2013), the quantity

of inventory that a retailer stores in the backroom is then a function of the shelf space

48
available and allocated to said product and the reorder quantity and reorder point. This is

not always ideal because suppliers will generally set the minimum order quantity and this

is traditionally based on the case quantity while retailers set the reorder point (Eroglu,

Williams, & Waller, 2013). The results from the numerical analysis performed by the

researchers suggested that when retailers ignore the backroom effect, inventory decisions

are negatively affected.

Research suggested that product availability is a critical component for customer

service levels and retail revenue streams, yet product availability on the shelves of

retailers remains a consistent issue (Papakiriakopoulos, 2012). Part of the problem seems

to involve a lack of detection strategy, product availability originating from upstream

partners and the high cost of monitoring shelf levels at daily intervals. The researcher

suggested that the temporary effect of a product being unavailable to the consumer seems

to be product substitution; however, the long-term effect is that the consumer will look

for alternative places to shop. Papakiriakopoulos (2012) concluded that it is possible to

detect low product availability using rule-based mechanisms; however, these are

inefficient when looking at daily levels and have adoption issues as managers seem

reluctant to adopt monitoring systems that may also detect inefficiencies in their

operations.

Eroglu et al. (2011) suggested that retailers should not depend on heuristics or

case pack quantities for shelf allocation quantities and instead, consumer demand should

drive allocation since such demand drives out-of-stock scenarios. In previous research by

Waller, Williams, Tangari, and Burton (2010), the researchers found that case pack

quantities had a positive relationship with market share, which can be attributed to higher

49
quantities and the reduction of the replenishment process that also reduces stock-outs.

Zelst, Donselaar, Woensel, Broekmeulen and Fransoo (2009) also suggested that

increasing quantities in their case by using higher case quantities promotes the efficiency

of inventory management and movement. Although larger quantities would reduce the

likelihood of stock-outs, the retailer would incur higher holding costs (Zelst et al., 2009).

The replenishment process within the last 100 yards is mostly unreliable (Raman

et. al., 2001; Waller et al., 2008). This is caused by product misplacement, insufficient

employees to perform these tasks, or a poorly designed business process (Gruen &

Corsten, 2007; Raman et al., 2001; Waller et al, 2008, 2010). Hardgrave et al. (2011)

were able to obtain improvements in inventory inaccuracies and out-of-stock scenarios by

tagging products using RFID tags at case pack level using categories where inaccuracies

are common. The implications are that case level tagging provides tracking information

between the storage room and the shelves, reducing or eliminating misplacement of cases

and improving visibility of the said cases (Hardgrave et al., 2011).

The improvement in visibility between backroom and store-front functions then

lead to reduced out-of-stock scenarios at the shelf level and reduces inventory

inaccuracies overall (Hardgrave et al., 2011, 2013). Since tracking would be done at a

case level, the overall investment in RFID tags was significantly lower making it more

feasible for implementation (Hardgrave et al., 2013). This experiment, however, was

conducted using large retailers that already had an RFID infrastructure in place. Chen et

al. (2012) also achieved improved results in inaccuracies by implementing an optimized

RFID method called UnTrusted Reader Protocol (UTRP) to achieve continuous

monitoring of inventory levels. The complexity of this process and technology, however,

50
would be impractical and outside of the scope and budget of micro-retailers.

Furthermore, it would require pos technology that is RFID-ready.

Auditing and Training

Retailers often use an auditing strategy called cycle counting to reduce the impact

of inaccurate inventory records where policies usually include the use of ABC

classification to determine which products to review (Kok & Shang, 2014). Such

processes seem to be deemed as labor intensive and expensive. Furthermore, there are no

clear guidelines toward how to conduct such cycle counts or how to develop policies for

cycle counting (Kok & Shang, 2014).

Kok & Shang (2014) considered a periodic review, multiple stage supply chain

that included inventory with discrepancies between physical and recorded numbers. Each

stage in the supply chain, meaning, each downstream supply chain partner, corrects

discrepancies by conducting cycle counts (Kok & Shang, 2014). The researchers

indicated that errors at each stage accumulated and the organization does not observe the

error until the count is performed. Results obtained from the study suggested that

downstream auditing is more effective than upstream counterparts, unless upstream

partners have higher error rates or lower costs in the periodic review process. If lead

times are small, holding inventory costs are high, or the number of partners in the supply

chain are large, the number of cycle counts should be higher (Kok & Shang, 2014).

The improvement of on-shelf availability requires that retailers have better trained

staff (Chuang et al., 2016). An additional alternative is to hire third-party companies that

specialize in auditing to make corrections. Nevertheless, this would seem like a strategy

that is beyond the means of a micro-retailer. Furthermore, Chuang et al. (2016) indicated

51
that these types of strategies are not trivial. In their research study, Chuang et al. (2016)

addressed the questions of hiring external companies to conduct shelf audits and

attempted to explore the operational and financial feasibility of such an operation.

In their field experiment, the researchers used data from transactional sources to

identify possible OSA scenarios and send auditors to correct the issue. SKUs were split

into two groups where one received intervention while the other, the control group, did

not. After a 12-week period, the researchers found that SKUs in the treatment group had

more accurate inventory readings and higher OSA. After a transition period the auditing

efforts also reduced, thus suggesting that the strategy is sustainable. The strategy was

also cost-effective, indicating that after some training, it may be possible for store

employees to be tasked with continuing the efforts. The results of Chuang et al. (2016) is

proof that a well planned and executed auditing strategy that improves operational

efficiency is economically feasible.

Chaung and Oliva (2015) indicated that in-store logistics, or the process of

handling product movement throughout a store, is prone to errors that lead to

misplacements and transaction problems. Therefore, poorly executed store operations

lead in on-shelf availability problems (Chuang, 2018; Zondag & Ferrin, 2014). To

combat this problem, stores use employees to conduct audits and move products from the

backroom to the shelf. However, these also have inherent problems related to the period

of the last audit, the time when these are executed, and the quality of the process

(Chuang, 2018). Additionally, most of the previous studies on the topic of out-of-stock

do not differentiate between out-of-stock at the store level with out-of-stock at the shelf

level. Chuang et al. (2016) note the distinction and elaborate that one requires

52
replenishment from upstream partners while the other involves improving in-store

operations. Most of the previous issue also fails to address OSA in terms of proposing

models to fix the problem.

Consequently, the researchers proposed an analytical approach that uses a store’s

POS system to design an audit policy. In their research design, Chuang (2018) keeps

track of unlikely events by tracking z-signals, or consecutive zero sales in the POS

database. The researcher deems these as a strong indicator of a problem with on-shelf

availability, consistent with other research studies including Chuang, Olivia, and Liu

(2016) and Zondag and Ferrin (2014). The design also included accounting for multiple

sales periods and demand variation. For the study, Chuang (2018) excluded the use of

inventory records because such records are largely inaccurate (Chuang & Oliva, 2015;

DeHoratius & Raman, 2008; Raman et al., 2001).

Demand Error and Forecasting

Forecasting is a primary challenge for retailers and not only causes stock-outs, but

also leads retailers to lost sales and poor customer experience (Beutel & Minner, 2012;

Ehrenthal et al., 2014). Improper management, demand variation, and economies of

scale will lead to inventory stock-outs or carrying too much inventory. Demand is

usually varied, and retailers do not have much control over such variability (Ehrenthal et

al., 2014). Additionally, retailers encounter seasonality and can experience errors in

supply and demand by not accounting for the seasonality. Most retailers do not have a

way of managing the season and may use automated ordering systems that do not have

the ability either (Ehrenthal et al., 2014).

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 Inventory can influence how much a customer purchases, yet most research

considers demand as an external factor and do not consider the impact that inventory can

have on sales (Stavrulaki, 2011). Stavrulaki (2011) concluded that by displaying

products in large quantities, retailers could increase sales and the effect is known as the

demand simulation effect. Furthermore, the level of inventory of a particular product can

also have an impact on the demand for another similar product (Stavrulaki, 2011). The

reason that this figure is critical in retail operations is that demand error is common and

can lead to errors in both product procurement and forecasting and different levels of the

supply chain (Eroglu et al., 2013; Ehrenthal et al., 2014). Thus, an improvement in

profitability depends highly on the ability to manage demand (Baron, Berman, & Perry,

2011).

Stavrulaki (2011) suggested that the best solution for the traditional newsvendor

model is the balance between too much inventory that increases costs and too little

inventory that loses sales opportunities. Concerning the benefits of demand simulation,

retailers would then need to balance the costs of increased inventory leading to increased

revenues differently as the traditional tradeoff may be affected by adding demand

simulation and substitution effects (Stavrulaki, 2011). Furthermore, the inventory levels

of substitute products may lead to lower levels of the original product as the substitute

product itself can satisfy a portion of the demand for the original product (Stavrulaki,

2011).

Stavrulaki (2011) considered a single-period randomly determined inventory

setting for two products where one is a substitute for the other and used the probability

density function and cumulative distribution function to capture demand simulation

54
effect. Results obtained from the numerical analysis implied that ignoring the demand

simulation effects when considering inventory levels of substitute products may produce

information that would suggest that a retailer not keep the product in stock (Stavrulaki,

2011). The results of the study also suggested that higher levels of inventory of a product

could increase its demand while decreasing the demand for a more profitable substitute

product. Therefore, retailers should consider profitability when determining inventory

levels of specific SKUs (Stavrulaki, 2011).

Bala (2012) indicated that systems that manage supply chains and systems that

manage inventory forecasting have evolved and grown in the past decades but have done

so in an independent manner. This would suggest that the combination of both is rare.

During the same period, retailers have evolved from using manual systems to more

sophisticated computerized systems where those that use computerized systems for

forecasting and inventory management have a profitability advantage over those that

continue using manual systems (Bala, 2012). Given the high number of SKUs that

retailers handle, forecasting demand to determine inventory levels for each SKU is a

complex task (Bala, 2012).

Bala (2012) proposed using customer segmentation as an input to demand

forecasting for a data-mining model to improve inventory levels. For the study,

researchers recorded customer demographic information, including gender, income,

number of children, educational attainment, and living location, along with purchase

information and created classes of customers based on SKUs purchased. Feature

selection was then performed where dominant attributed were identified to determine

classification, followed by clustering based on said feature selection (Bala, 2012). The

55
researcher performed demand forecasting after segregating the database on eight SKUs in

a single supermarket setting. Results obtained from the study suggested that the proposed

model improved demand forecasting when compared to other forecasting models. This

increased inventory efficiency while reducing levels and improved the prediction of

consumer behavior in purchasing patterns (Bala, 2012).

However, the model seems to have several weaknesses. For example, consumer

privacy concerns should be a factor when supermarket personnel ask for demographic

information. Given that the model is largely based on the demographic and highly

personal consumer information, the willingness of a consumer to share such information

influences the results. Such willingness may not be obtainable in countries where privacy

concerns are important. Furthermore, the amount of time needed to collect said

information may increase transaction times in retail settings where high volume traffic is

a problem.

Other forecasting techniques, such as forecasting for safety stock instead of exact

inventory levels, are presented in current research. An example of one such model was

presented by Beutel and Minner (2012), where forecasting was used to determine the

level of safety stock and such stock accounts for problems with demand forecasting for

inventory levels. Beutel and Minner (2012) presented a model where data-driven

frameworks were used to set the level of safety stock. The demand for the model

depended on factors such as price and weather. The study included the use of real data

obtained from 64 stores that sell newsvendor-style products where overstock scenarios

cause inherent losses (Beutel & Minner, 2012). In newsvendor-style business models,

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products expire at the end of the day; therefore, demand forecasting is critical in

minimizing losses (Beutel & Minner, 2012).

Observations derived from the results of the study by Beutel and Minner (2012)

suggested that the needed services levels to satisfy demand could be obtained from the

use of the data-driven frameworks presented. However, the result of the increased

service levels also increased inventory levels significantly (Beutel & Minner, 2012).

Although the results of the study established an improvement in calculating safety stock,

these frameworks would need to be incorporated within the technology used by smaller

businesses such as point of sale systems. Additionally, Beutel and Minner (2012) iterated

the importance of sample size of the data and used large organizations with larger

available data sets. This would seem to suggest that smaller businesses would be using

smaller and singular datasets; therefore, results in the safety stock calculations may not

produce similar results.

Other studies use even more technological complexity such as artificial

intelligence. An example is Rebert et al. (2014), who implemented a modified genetic

algorithm and neural network for the prediction of peak times in retail environments.

The ability to predict sales can allow organizations to account for peak times that can

produce better employee scheduling (Rebert et al., 2014). Since, in retail, inventory

decisions are made weeks or months in advance, such information can provide better

insight into the needed inventory to maintain high service levels (Rebert et al., 2014).

The authors used a neural network simulation optimization algorithm (NNSOA) based on

a genetic algorithm to attempt to forecast sales to provide better information for future

decision-making.

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 The results of the study allowed the authors to suggest that NNSOA outperforms

other forecasting techniques (Rebert et al., 2014). Although the study’s results did

suggest the ability to predict future sales accurately, and this can lead to improved

replenishment of inventory, the complexity for small businesses would be too great for

general implementation. In these scenarios, small retailers would require experts to tie

data sources to the techniques.

Supply Chain Management

The purpose of inventory control is to manage the flow of product to meet

customer demand (Chalotra, 2013). Supply chain management consists of managing the

flow of product from raw materials to end consumer, encompassing manufacturers,

distributors, suppliers, wholesalers, retailers, and end consumers while collaborating

among channel partners to form a chain (Chalotra, 2013).

In a study by Chalotra (2013), the researcher used data obtained from a survey

instrument that included 44 small manufacturing firms as the test subjects. The results of

the study indicated that organizations could improve their competitive abilities and

increase market share by improving the control of inventory. The study also shows that

cost reductions can be achieved by improved inventory efficiency. The study does have

limitations that included the subjective nature of the questionnaire to draw conclusions.

While correlation is seen from the data, part of the data is obtained from a series of

subjective questions answered by the managers of the organizations.

Hariga and Al-Ahmari (2013) stated that supply chain partnerships that are based

on the sharing of information such as vendor managed inventory and consignment

inventory have been proven to be successful in improving the efficiency of supply chains.

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The basis of such partnerships is the collaboration in sharing demand and inventory

information (Hariga & Al-Ahmari, 2013). The researchers suggested that the objective

behind vendor-managed partnerships is to allow the supplier to make decisions regarding

order size and frequency. The advantage for the vendor is the improved visibility of

customer demand obtained by the supply chain partner’s data. Given this new set of

responsibilities, the cost structure for ordering will shift from the customer to the supplier

(Hariga & Al-Ahmari, 2013). However, the use of these types of techniques and

technologies seem to be outside the realm of possibilities for very small organizations

and very small retailers. Yet, collaborative and cooperative strategies are proven

techniques to increase efficiency, reduce costs, and improve an organization’s

competitiveness (Dukes, Gal-Or, & Geylani, 2011).

In their research study, Hariga and Al-Ahmari (2013) integrated retail space

allocation using vendor managed inventory. The researchers acknowledged the

independent nature of each party and provided the retailer with setting inventory policy,

which included decisions on order size, shelf space, and reorder points. The authors

assumed negligent costs between the continuous product movement from backroom to

retail space and assumed said movement to be continuous in order to maintain available

shelf inventory. The results of the study suggested that all supply chain partners obtained

improvements in efficiency and positive results when suppliers are offered unlimited

shelf space for product placement so that the ordered quantity is displayed on the shelf

instead of temporarily being stored in the backroom. When said shelf space is limited,

the value for the supplier decreases (Hariga & Al-Ahmari, 2013). This would seem to

pose a problem for smaller retailers as shelf space would be more limited.

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 Lau (2012) mentioned that responsiveness must be sacrificed to obtain an increase

in efficiency, and the opposite is true. The researcher further indicates that to reduce

costs in a downstream supply chain, a centralized approach consisting in fewer locations

with less inventory would be needed. This would subsequently reduce responsiveness by

increasing lead times (Lau, 2012). The author suggested that to increase responsiveness,

a more expensive decentralized approach would be required where more facilities are

used, and more inventory is held. In the retail industry, responsiveness is paramount to

ensure proper customer service levels, and the distribution channel used affects a

retailer’s competitiveness directly in both costs and in the ability of said retailer in being

able to service customers (Lau, 2012). Technology is available that can assist retailers

with handling scheduling, forecasting, and routing; however, these sophisticated

technologies and techniques are often outside the realm of small businesses (Lau, 2012).

The importance of supply chain management from the perspective of retailers is

increasing given the evolution of demand (Randall, Gibson, Defee, & Williams, 2011).

Because of the importance of the retail perspective within a supply chain, Randall et al.

(2011) conducted a study using qualitative and quantitative methods and combined

executive interviews with survey data to understand the trends and best practices of the

retail supply chain. The researchers used grounded theory techniques to analyze

interviews with 27 senior level retail executives and organized the results into emerging

themes and issues in the topic of retail supply chains. Based on the results, Randall et al.

(2011) developed a quantitative survey and administered the survey to a population of

310 industry professionals attending a conference, obtaining 210 usable survey responses.

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 The results suggested a shift in retail supply chain objectives from a cost control

and inventory reduction mindset to a more balanced approach where customer

expectations and service levels are sought out. This shift would require higher levels of

responsiveness and flexibility to achieve competitive advantages (Randall et al., 2011).

Supply chain management has allowed organized retailers to decrease capital investment

on inventory while reducing waste and transportation costs to provide consumers with the

right merchandise, at the right time, and at a lower price (Raghuram Naga &

Ravilochanan, 2014).

Previous research has established a link between inventory record inaccuracy and

supply chain uncertainty and performance (Bruccoleri et al., 2014). However, the

stability and psychological state of inventory personnel that deals with a range of

operational conditions have a multiplying effect on the discrepancy of inventory records.

Such behavioral aspects render inventory management policies as ineffective in

controlling the bullwhip effect (Bruccoleri et al., 2014).

Store Operations and Operational Efficiency

Kohli and Gupta (2010) suggested that small organizations that use principles of

management philosophies can improve efficiency, and this can be the basis for a

sustainable competitive advantage. The researchers detailed that failures of small

organizations are caused mainly by weak management practices. A research study

conducted by Harris, Gibson, and McDowell (2014) seem to support the findings by

Kohli and Gulpa (2010) where a strategic focus on internal organizational practices was

found to be correlated with organizational performance. Ton and Raman (2010), for

example, mention the concept of phantom products, which causes lower sales. This

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typically happens when the business process of receiving merchandise is efficient, yet the

replenishment business process is not (Ton & Raman, 2010). Therefore, new product

obtained is shelved and processed while product with historical sales is not replenished.

Employee stability and retention also seem to be a problem for smaller

businesses. Aastrup and Kotzab (2009), for example, suggested that small independent

retailers have a harder time attracting and retaining qualified personnel, and this caused

issues with establishing consistent replenishment policies and handling other store

processes. High employee turnover has a detrimental effect on an organization (Ferreira

& Almeida, 2015); therefore, the ability to maintain qualified employees should be an

important aspect of store management. Labor is critical to high service levels and

performance (Chuang, Oliva, & Perdikaki, 2016) as employees play a fundamental role

in maintaining accurate inventory information (Chaung & Olivia, 2015) and executing

store logistics tasks effectively (Ton, 2014). This indicates that while employee training

is important in the execution of a business processes, it is also vital to maintain well-

trained personnel and avoid high levels of rotation.

In a study by Ferreira and Almeida (2015), the researchers found that

organizations with lower employee turnover had better financial performance than those

with higher turnover rates. Although the study focused on a single organization and

single retail sector, the data used was retrieved from 26 stores covering a two-year period.

Data from the study included employee labor contract information and store specific

financial information, concluding that stores with higher levels of employee stability

performed better.

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 Research by Kohli and Gupta (2010) reinforced this notion when showing how a

small business achieved operational efficiency by implementing Theory of Constraints

(TOC), which is a management philosophy. However, to create value from any improved

business process, the organization must either change the way that the process is

organized, change the execution of a particular activity within the process itself, or

modify the engagement of the personnel that executes the activities associated with the

process (Sorescu, Frambach, Singh, & Rangaswamy, 2011).

Given the difficulties that small organizations face regarding capital constraints,

human resources, and survivability, this would suggest that small companies must be able

to institutionalize knowledge gained from experience to disseminate such knowledge

throughout their employee base. The implication is that knowledge obtained and gained

from experience managing inventory must be organizational and must survive the loss of

key employees.

The current business landscape requires organizational structures that take into

account how information and knowledge are created and managed (Peyman, Mohsen,

Hassan, Aboulghassim, & Zaman, 2011). This suggests that management must

understand the effect of information on the control and decision-making structure of an

organization and must also account for such an effect so that the retailer’s decision-maker

has both access and authority to make decisions in purchasing and inventory

replenishment.

The changing business conditions of this information-intensive era require a

change in decision-making (Peyman, et al., 2011) so that decisions such as inventory

replenishment are made in a decentralized fashion that is more flexible and proactive

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based on regional needs, local information, and projected sales. Research suggested that

an overwhelming percentage of decisions are made at the store level (Shankar, Inman,

Mantrala, Kelley, & Rizley, 2011), advancing the idea that improving in-store operations

can lead to efficiency gains and, consequently, improvements in profitability (Peyman, et

al., 2011).

In terms of operating a retail store, employees play a vital role in the success of

store operations (Chuang et al., 2016). These functions include reducing inventory

record inaccuracy and other inventory-policy related activities such as auditing. For

example, Zadeh, Sharda, and Kasiri (2016) proposed that while small organizations could

improve inaccuracies by implementing improved inventory management policies that

focused on auditing and alignment using basic scanning technologies, large organizations

can implement advanced technologies including ERP and RFID. The later improved

visibility and accuracy and reduces human interaction and error.

This type of implementation creates the ability to continuously monitor levels,

thus enabling the use of continuous-review order quantity policy that should eliminate

counting errors and help store managers identify theft or other factors that affect demand.

Nevertheless, Chuang (2018) suggested that even RFID is prone to errors that can lead to

miscalculations in demand. Furthermore, the researcher also indicated that deploying

RFID at the item level is still difficult to execute and has a high cost. Alternatively, when

a well-planned inventory audit policy is executed, such a strategy can provide increased

and efficient performance at a low cost (Chuang, 2018).

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 Technology

Investing in technology appears to be a daunting task given that return on

investment seems to be difficult to calculate. The evaluation of the investment, therefore,

is of significant interest to any organization looking to invest in technology (Kasiri &

Sharda, 2013). A decision maker must evaluate whether to invest early at a higher cost

and possibly develop a competitive advantage over the competition or adopt later in the

life cycle at a lower cost when the technology has been evaluated (Kasiri & Sharda,

2013). A retailer, however, would need to understand the risks and benefits of

technology adoption before investing (Kasiri, Sharda, & Hardgrave, 2012).

Alignment, however, seems to be a point of contention among corporate

executives (Suh, Hillegersberg. Choi, & Chung, 2012; Tallon, 2012), where management

requires proof of success before investing in IT projects (Suh et al., 2012). IT investment

does not always generate value, and one of the reasons is an absence of synergy between

the IT strategy of the organization and its overall business strategy (Mathaba et al., 2017).

Organizations can use IT as a tool to create business value and competitive advantages

(Suh et al., 2012; Tallon, 2012); however, success also relies on factors external to

information technology including employee and user acceptance (Almajali, Masa’deh, &

Tarhini, 2015; Chuang et al., 2016).

Tallon (2012) indicated that technological alignment with overall business

strategy remains an issue for organizations. The researcher advanced the idea that

upstream processes could have an effect, both positive and negative, with downstream

processes and, when properly aligned, value can be created downstream. The effect of

the spillover is primarily caused by the need for improvement in information sharing and

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collaboration among business partnerships that continue to be a challenge in

organizational settings (Tallon, 2012), implying that technology alone is not enough to

warrant the creation of value in the coordination and automation of business processes.

Data and Point of Sale Technology

The main type of technology used in the management of retail store inventory are

electronic point of sale systems. These systems capture information at the moment that a

sale takes place and can provide insight into demand and traffic patterns leading to cost

savings and a higher quality of information (Kasiri et al., 2012; Lwiki et al., 2011),

making the information stored in these machines ideal for replenishment decisions

(Cooke, 2013). POS Systems with barcoding capabilities were the first technology

systems available to retailers that significantly changed store operations by storing and

tracking customer purchasing information and managing inventory (Kasiri et al., 2012).

Gallucci and McCarthy (2009) discussed how the uses of data in the databases of

point of sale (POS) systems in retail establishments are better sources for forecasting

models. This implies that the accuracy of the information is indispensable to being able

to predict future demand given that inaccuracies would cause forecasting models to base

findings on incorrect data. Collaboration enhances the data sources and can drive

demand (Gallucci & McCarthy, 2009; Lapide, 2008), but these would also depend on the

accuracy of the information.

Data sources and access to such sources have pushed standardization that can

enable organizations with increasingly easier access (Gallucci & McCarthy, 2009). One

such standardization is Electronic Data Interchange (EDI). Lwiki et al. (2011) described

EDI as a technology link that allows customers and vendors to exchange information

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regarding product inventory quantities, demand, and forecasting so that activities within

the organizations are synchronized. The goal is to reduce paperwork, improve accuracy,

reduce costs, and reduce lead times that can result from the exchange of information in an

instantaneous manner (Lwiki et al., 2011). Gallucci and McCarthy (2009) added that the

use of data within the databases of point of sale (POS) systems in retail establishments

could assist in generating forecasting data for accurate procurement, also concluded by

Williams and Waller (2010). Organizations may use the data to drive demand given that

information obtained from such sources produce rich and accurate information that is an

improvement from data obtained solely from order history (Gallucci & McCarthy, 2009;

Lapide, 2008; Williams & Waller, 2010).

Williams and Waller (2010) conducted research to establish if using point of sale

data could improve forecasting errors using the demand data obtained from POS

databases instead of order history data generally used by vendors or distributors. The

authors used an Order Forecast Competition (OF-Competition) where orders forecasts

use POS data and order information from several categories of products and are then

compared. For the order forecast, Williams and Waller (2010) used common time series

methodologies. The results suggested that POS can significantly reduce errors in

forecasting for products that are fast-moving and non-seasonal with low SKU variability.

This infers that data sources that store demand-dependent data in the forecasting process

can improve the quality of the forecast.

The findings infer a critical piece of knowledge. The categories that did not

produce significant improvements in forecasting when using POS data were those that

seemed to have scanning issues at the POS register such as yogurt. For example, Raman

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et al. (2001) concluded that when cashiers are faced with similar products with identical

prices, such as different flavored yogurts, cashiers might scan one of the items twice and

thus cause inaccuracies. The critical implication derived from these findings is that the

value added by the technology used is only as efficient as the business process. In other

words, if the business process contains errors, such as skipping the scanning of a

particular SKU, the efficiency of the technology is diminished. Employees would then

need to be trained and evaluated based on the entirety of the business process, which, in

this case, is the scanning of each item regardless of product similarity.

The ability to have complete knowledge of inventory has been impossible to

obtain in any environment (Ketzenberg, Geismar, Metters, & Laan, 2013). However,

with the advances in technology, the scenario is becoming plausible (Ketzenberg et al.,

2013). Ketzenberg et al. (2013) conducted a study on automatic merchandising, or

vending machines. The authors suggested that the scenario’s constraints are mainly the

time required for employees to visit each vending machine location and restock

merchandise. In this scenario, sales information is picked up during the replenishment

and there is no continuous monitoring of inventory levels. When technology is applied

that provides inventory visibility in real-time, profitability increased by more than 28%

(Ketzenberg et al., 2013).

The organizations making the routing decisions in Ketzenberg et al. (2013) were

able to send employees to restock only when the machines required, thereby extending

the amount of days between trips while maintaining needed service levels. The authors

suggested that although this scenario can be adapted to other retail environments,

capturing the value of information has to have a structured business process that can be

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supported by said technology. With this environment, the authors were able to prove that

consistent monitoring of inventory levels can provide valuable information that improve

business processes by helping make better decisions. In this case, the decision was when

replenishment should occur (dynamic) (Ketzenberg et al., 2013).

In analyzing the research study by Ketzenberg et al. (2013), the question

becomes, can micro-retailers implement a similar idea and obtain similar results? Some

literature suggested that the answer might be yes. For example, the results from Raj and

SajaSekaran (2013) and Shin and Eksioglu (2014) provided evidence that the added

inventory visibility using radio frequency identification tags can produce increase

visibility and reduce OOS. However, RFID seems too expensive for micro-businesses.

Therefore, although the technology can provide the visibility needed, the cost of

implementing makes it impossible to apply in smaller stores. The results of these studies

may be suggesting that if the business processes that resolve around areas where

inventory inaccuracies are prone to error include continuous monitoring, it may be

possible to increase visibility. Therefore, if the objective of visibility is achieved by the

business practices adopted, then the possibility of obtaining similar results are possible.

POS Data, OOS, and OSA

Given that POS information provides the best type of data for replenishment

decisions (Cooke, 2013), companies develop forecasting or decision-making models on

historic sales information. Meaning, past sales make up the basis for future procurement

decisions. Furthermore, the use of this type of information reduces forecast errors when

compared to using information that comes from warehouse data sources (William &

Waller, 2010). However, there is a basis for error when using POS data. For this

69
scenario to be accurate and represent true first-choice demand, a store would need to

source every single product variation and brand and OSA would always have to be 100%

(Cooke, 2013). This suggests the sales data would represent behavior of scenarios when

buyers face stock-out of their primary choice, including purchasing substitute items or

not purchasing anything.

In store execution becomes a central need for retailers. Business owners have

traditionally used out-of-stock to trigger a replenishment signal (Zondag & Ferrin, 2014).

Nevertheless, on-shelf availability is a better gauge because it is what the consumer sees.

If a product is in stock but not on the shelf, there is no way for a customer to purchase the

item. Furthermore, a decision-maker may not realize that the product needs to be moved

from the backroom to the shelf. Therefore, in-store execution is indispensable to a store’s

performance (Zondag & Ferrin, 2014).

However, Zondag and Ferrin (2014) hypothesized that the data that originates

from POS systems are influenced by non-demand factors. This is important because

retailers and supply chain partners use this type of data as a demand signal, indicating

that the information may not be accurately depicting true consumer demand. For

example, store’s may be limited in product or category selection because of strategy,

budget, or size. Additionally, inefficient store execution policies can lead to low OSA.

These factors can lead to the sale of other items and, therefore, such data may not be

indicative of what the consumer is really looking for.

Zondag and Ferrin (2014) used a sample of large companies operating in the

United States that owned multiple retail stores totaling 3920 locations between 25,000

and 181,000 square feet in size. To test the proposition, the researchers looked at the

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store-level activities of representatives of CPG manufacturers given that this type of

personnel has the task of monitoring OSA and restocking shelves. The basis of the idea

was to test if their actions influenced POS data. One group of stores would include those

that were not visited by these representatives while the other group received visits.

The results of the study indicated that stores that received visits and assist store

personnel had a higher OSA than those that did not. Because of the way the researchers

tracked SKUs and sales, they were able to establish that if OSA increases, so does the

presence of the item in the sales data of the POS system. This proved that focusing on

the internal business process that moves product from the backroom to the shelf

influences availability and, consequently, demand. Therefore, inventory management

policy and decision-making affects OSA and sales. A limitation of the study is that,

along with most research, the sample uses only large retail organizations. Therefore, it is

difficult to conclude if the results are representative of micro-retailers

Radio Frequency Identification

Radio frequency identification tags are a significant advancement in retailing

technology as these systems allow for the storage and processing of data via a computer

chip and antenna that can communicate with a transponder (Kasiri et al., 2012; Raj &

RajaSekaran, 2013). However, Hardgrave et al. (2011) and Raj and RajaSekaran (2013)

suggested that their successful implementation depends greatly on a retailer’s ability to

minimize risk factors and maximize benefits through the critical success factors that the

technology provides. The identified benefits from the successful implementation of

RFID technology include an improvement in the accuracy of inventory, better order and

inventory visibility, lower logistics costs, higher efficiency in store operations, improved

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sales floor planning, improved customer service levels, and higher levels of security

(Hardgrave et al., 2011; Shin & Sksioglu, 2014; Raj & SajaSekaran, 2013). Retailers can

implement radio frequency identification technology to reduce OOS and improve

inventory visibility by sharing information throughout the supply chain while reducing

error rates (Raj & SajaSekaran, 2013; Shin & Eksioglu, 2014).

While larger organizations can use size to reduce the cost of implementation,

smaller organizations would have a higher up-front cost in the implementation (Shin &

Eksioglu, 2014). Shin and Eksioglu (2014) conducted a study where U.S. retailers were

divided into two groups: companies that adopted RFID and companies that did not adopt

RFID. The authors then compared the financial performance and inventory efficiency of

both groups to find a relationship between RFID implementation and efficiency and

profitability using Compustat data and financial statements from U.S. retailers. The total

sample size was 141 companies where 24 retailers had adopted RFID. The authors

grouped the companies into industry categories to compare results against similar

businesses. After the researchers had conducted independent sample T-tests, the results

of said experiment suggested that the profitability of RFID-adopting companies were not

significantly higher than companies that did not adopt RFID. The results of the study

also indicated that while RFID technology did not have an impact on revenue efficiency,

it did influence cost efficiency.

The purpose of the study by Raj and RajaSekaran (2013) was to identify the

perceived risks and benefits of RFID in the retail industry and the impact that such

technology had on business. The authors used a survey instrument where 80 retail

executives and managers responded and identified benefits that included an improvement

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in inventory management, high retail cycle speed, better supply chain integration, and

improved store operations. The risks identified by the study included a high level of

complexity in the technology, a lack of experience and expertise, and uncertainty in the

direction of the technology. However, the study had significant limitations that include a

small sample size and conclusions based on the perception of retail managers and

executives.

Inventory is a critical component of practically all organizations (Mathaba,

Dlodlo, Smith, & Adigun, 2011). The researchers suggested that the improper

management of this asset can lead to lower sales and consequent failure of the business.

Although the implementation of technologies such as RFID can improve product

replenishment and misplacement issues (Hardgrave et al., 2011, Mathaba et al., 2011)

without the requirement of human intervention by sending such information to a

backoffice system, such issues may be identified only when someone reviews the

information being sent to said system (Mathaba et al., 2011). This suggests that even

with high-end and efficient technology, a lack of a specific business process or policy

that addresses such conditions would render the technological solution useless as no one

would identify the problem being flagged by the automated system. Al-Kassab et al.

(2013) suggested that little research has been conducted that identify necessary business

process adaptations that can leverage the advantages of RFID implementation to improve

the results of implementing such a technology.

Advantages, barriers, and implementation.

RFID can provide increased visibility not only throughout the supply chain but

also within a store where customer behavior can be tracked (Kasiri et al., 2012; Mashuri,

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Suryono, & Suseno, 2018). Kasiri et al. (2012) suggested that extensive research in pallet

and case level implementation of radio frequency identification technology has

conclusively shown that inventory accuracy is improved significantly, and that RFID

adoption reduces OOS scenarios. Adoption at the item level enhances visibility at a

greater level where in-store inventory operations improved significantly by automating

not only the general inventory operations such as transaction updates but also

automatically updating perpetual inventory via direct visibility to current inventory levels

(Kasiri et al., 2012).

RFID can be expensive to implement and, specifically, at the item level, such

costs can add complexity to the decision-making process (Kasiri et al., 2012). The

technology also has certain weak points such as operational issues when placed on wet

surfaces or surfaces made of iron (Mathaba et al., 2011). Additionally, the uncertainty

around return on investment in the implementation of RFID and lack of definitive cases

where RFID is profitable has caused U.S. retailers to forgo investing in said technology

(Shin & Eksioglu, 2014).

A major barrier also seems to be a lack of guidance on how to effectively

implement and deploy the technology (Hardgrave et al., 2011). It may be possible to

obtain similar results with improved processed using human elements, thus eliminating

the need for high implementation costs in the small retail environment (Chuang, 2018;

Tao et al., 2016). The implication, however, is that if RFID is not implemented, small

retailers would need to develop an all-encompassing inventory management policy to

offset the potential issues.

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 Enterprise Resource Planning and Other Technologies

To compete on the global market, small and medium businesses need to improve

their use of hardware and software (Almajali et al., 2016). This will lead to an

improvement in capabilities and effectively market products worldwide. For large

organizations, the adoption of technologies such as Enterprise Resource Planning (ERP),

when successful, has improved operational efficiency, among other positive results (Ali

Syed, 2014; Almajali et al., 2016). However, these types of installations tend to have

failure rates estimated to be between 60 and 90 percent (Ahmad, Haleem, & Ali Syed,

2014; Sun, Ni, & Lam, 2015). However, Sun et al. (2015) indicated that there are more

than 80 factors that prove to be critical for a successful implementation, yet most

companies fail to understand the use of such factors. Some of these factors are non-

technical and revolve around user acceptance and an understanding of the new

technology (Grainger & McKay, 2015; Gupta & Misra, 2016).

Companies can assess a technology like ERP by using indicators of user

satisfaction to gauge results (Ram, Corkindale, Wu, 2015). These technologies tend to

have a high rate of disappointment and abandonment and are costly and complex to

adopt. To increase the rate of success, employee training is key. Almajali et al. (2015)

found that there is a relationship between employee training and successful ERP

implementation, thus supporting the idea that educating personnel on the use of a tool is

indispensable to success. More so, Madlock (2018) found that employee attitudes toward

technology are related to job satisfaction and performance rates. Therefore, employee

involvement in the adoption process may be a contributing factor to the success of the

implementation.

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 Much of the failure seems to arise from a lack of user acceptance and involves a

user’s unwillingness to utilize the technology (Motiei, Zakaria, Aloini, & Sekeh, 2015).

Along with improperly implementing the technology (Edith Galy, 2014), lack of vendor

support, and managerial reluctance to make use of the technology severely hinders the

possibility of success (El Sayed & Hubbard, 2013). Once users are trained, employee

rotation can further complicate the situation (Motiei et al., 2015). Therefore, although

technology and software systems have to potential to enhance the performance of an

organization (Almajali et al., 2016), it requires an alignment that includes training and

user acceptance at the employee and managerial level to be successful (Nyguyen,

Mewby, & Macaulay, 2015).

This may imply that employee training may need to include expanding their

understanding of process-oriented tasks that are supported by technology. Moon, Kim,

and Ham (2014), for example, found that the perception of users’ beliefs regarding the

need or usefulness of point of sale technology is influenced by the fit between a specific

task, the user-friendliness of the system, and the underlying technology. Therefore, to

increase the likelihood of adoption, employees should be trained on why and how the

technology will improve and facilitate their tasks.

Business Processes Standardization and Technology

A business process is defined as a standard set of activities to accomplish a

specific task (Aarnio, 2015). According to Romero, Dijkman, Grefen and Weele (2015),

in the realm of technology implementation, such standardization is a critical factor for

success. The reason is that the step help align software systems to a respective business

activity, thus ensuring compatibility (Romero et al, 2015). This implies that businesses

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need to work to adjust their processes in order to successfully implement technology.

However, software systems may also hamper standardization. If software systems are too

rigid and cannot be aligned, such incompatibility will also lead to failure (Romero et al.,

2015). Therefore, the implication is that companies need to analyze and understand the

underlying system and achieve a balance.

The idea of standardization of these processes is to create uniformity among

similar tasks. Such uniformity lowers costs and improves collaboration (Romero et al.,

2015). In the realm of inventory management, a task can be product reception, the sales

process, or product movement from the backroom to the shelf. Even with the

overwhelming amount of research and literature on the topic, organizations still face

problems regarding procedures, tasks, and responsibilities, among others (Aarnio, 2015).

Nevertheless, large companies have been able to save billions of dollars by

increasing quality and delivery rates using business process standardization (Afflerbach,

Bolsinger, & Roglinger, 2016). Such achievements have come by way of improving

internal and external processes though systematizing procedures in their business

processes (Aarnio, 2015). The focus of most of the research in BPS is in the use of

information systems, organizational design, and operations management. In operations

management, organizations have been able to create value using standardization to reduce

inventory buffers and balance the uncertainty of demand (Afflerbach et al., 2016).

Harris et al. (2014) conducted a study to examine organizational performance

based on internal and external strategies by business owners with differing levels of

experience. The authors surveyed 237 small businesses in the North Carolina area from a

total population of 1500, collecting information regarding the type of business,

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demographics, and strategy. In said study, the researchers found a positive correlation

between the use of internal strategies and the performance of experienced small business

owners. Furthermore, Harris et al. (2014) also found a positive correlation between

inexperienced business owners that placed emphasis on improving internal processes and

organizational performance.

Internal integration.

Internal integration, defined as the alignment of cross-departmental or functional

units by using collaboration strategies and information sharing techniques, impacts the

profitability and process efficiency of a firm (Swink & Schoenherrm 2015). This

alignment allows companies to increase process efficiency while also improving asset

productivity. Given the hypercompetitive and fast-changing market conditions, such

improvements are important to companies (Aarnio, 2015; Swink & Schoenherr, 2015).

With internal integration, workers across different functional units or departments have

access to information and can distribute it to decision-makers thus creating value. (Swink

& Schoengerr, 2015).

Swink and Schoenherr (2015) hypothesized that internal integration is positively

associated with the profitability of a firm. They viewed profitability as return on assets.

To test their theory, the researchers used a survey instrument and matched the results

with secondary data found in COMPUSTAT that included firms’ financial records. A

total of 115 respondents had survey records that could be matched to the publicly

available database. Using the primary and secondary data, Swink and Schoenherr (2015)

confirmed the hypothesis. Furthermore, the researchers noted that the benefits of internal

integration are greater with organization that have wider spans. This suggests that retail

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companies, who are part of a wide supply chain, can benefit from this type of integration.

A problem with the study is that it is limited to large publicly traded companies;

therefore, its finding may not necessarily represent the small business community.

Technology Adoption in Small Businesses

Globalization is impacting small and medium businesses by creating an

environment where these types of companies face competition from domestic and

international counterparts (Abebe, 2014). However, technology adoption, including e-

commerce, is not always a priority for smaller companies. One of the research questions

that Abebe (2014) addressed is the degree to which a manager’s entrepreneurial

orientation moderated the relationship between ecommerce adoption and the performance

of the organization. The importance of this question is that in SMEs, owners are

generally managers and are involved in strategy and operational decision-making.

Therefore, the attitude of the owner-manager toward technology can impact the overall

performance and competitiveness of the firm (Abebe, 2014).

One example of widespread adoption of technology by small organizations is the

Internet. This demonstrates how small businesses can leverage technology to grow.

Companies with a strong presence in the web grow twice as fast as those that do not

(Alford & Page, 2015). However, according to Alford and Page (2015), such success is

limited to the development of sustainable competitive advantages through aligning their

business processes, innovation, and management. The implication is that technology

requires an alignment with organizational processes to be successful. Nevertheless,

integrating fast-changing technologies into a small business is a difficult task and poses a

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challenge to said organizations, thus creating barriers to adopting tools that can help a

business increase competitiveness (Abebe, 2014; Alford & Page, 2015).

Micro-businesses work differently than large organization and, the adoptability of

technology depends highly on the attitude that the owner-manager has toward technology

(Alford, 2014). Generally, if the owner-manager sees a long-term benefit that enables

business and, to a certain degree, is influenced by customer demand, the adoption will

more likely be successful (Alford & Page, 2015; Nyguyen et al., 2015). This may

suggest that companies that feel pressure from customers to implement new technologies

and tools. Even when micro-businesses have a positive attitude toward technology, a

lack of understanding or poor competence in the area creates a barrier. Nevertheless, in

micro and small businesses, the role of information and communication technologies has

increased in importance given their ability to improve performance, operations, and

generate value for organizations (Malaquias & Hwang, 2016).

In the United Kingdom, microbusinesses, or those defined by the European

Commission as those with less than fifty employees, account for 96 percent of all

companies and 92.4 percent of all companies operating in the European Union member

countries, excluding the financial sector (Alford & Page, 2015). These statistics are

similar around the world, and the impact of the small business community and its role in

the economy of a nation is clear and important (Alford & Page, 2015; Li, Liu, Belitski,

Ghobadian, & Regan, 2016; McDowell et al., 2014). Nevertheless, even with the impact

that these types of businesses have and their economic significance, the body of research

specifically on the adoption of technology for companies that fit the size description is

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limited (Alford & Page, 2015). The fact is that little research is conducted on this critical

segment of the business pupation.

Small Businesses

Individuals elect to commence a small business for varying reasons (McDowell,

Gibson, Aaron, Harris, & Lester, 2014; Small Business Administration, 2016) and the

founders possess varying degrees of experience and backgrounds (Harris et al., 2014;

McDowell, et al., 2014). The success of small businesses is therefore difficult to

understand and measure as the definition of success may differ from individual to

individual (Headd, 2003). Headd (2003), for example, suggested that exit strategies that

were designed with a future closing in mind are examples of businesses that close after

success. The principle objective of each small organization may differ between small

businesses and the entrepreneurs or small business owners that initiated such

organizations (Harris et al., 2014).

Business closers, however, do not always represent failed enterprises. As

concluded by Headd (2003), many small businesses are successful while closing due to

the sale of the business or retirement. Furthermore, the complexity and uniqueness

among small businesses also add to the difficulty in determining success (Simpson,

Padmore, & Newman, 2012). Therefore, the main reason for the lack of research in the

area of micro-retail seems to be the uniqueness of each business and the complexity of

handling such differences.

Importance and Significance

Small businesses represent 99.7% of all employers (Small Business

Administration, 2016). Furthermore, Headd (2010), Headd and Kirchhoff (2009), and

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Hugh (2013) all indicated that small businesses add value to economies by generating

jobs, creating new products, and developing industries. Additionally, small businesses

have generated 64% of new jobs in the last 15 years. Organizations considered very

small, however, are not well tracked yet spend 67% more on tax compliance than larger

businesses (Small Business Administration, 2016). Small firms account for about 40% of

new jobs over the last 20 years (Small Business Administration, 2015b). Based on

research data from the Small Business Administration (2015b), new business

establishments have recovered from the low levels of the great recession.

By 2013, new businesses openings were about 20% higher than levels observed in

2009; however, jobs created by these new businesses remain at lower levels (Small

Business Administration, 2015b). New businesses are not creating as many jobs as

before and are staying smaller on average (Small Business Administration, 2015b), and

this could be a psychological effect of the great recession on company owners wary of

hiring in unstable economic conditions. The Great Recession, which started in 2007

(Farlie, 2012), slowed down job growth by large organizations at an even faster pace

during said recession (Moscarini & Postel-Vinay, 2012). However, small businesses are

important because they tend to fill underserved niches in the labor market such as

Hispanics, undereducated individuals, and other minorities (Headd, 2010).

Microbusinesses, or organizations with less than ten employees, are the most

common type of employer making up 75.3% of the private sector, yet only account for

10.8% of private sector jobs (Small Business Administration, 2015a). From 1978 to

2011, this group has dropped employment rates by 15%. 62% of microbusinesses are

more than five years old while 65% of their employment base have remained with the

82
organizations for more than five years (Small Business Administration, 2015a). These

statistics seems to suggest that the great recession has affected microbusinesses’ ability to

create jobs, where this type of employer has remained smaller to survive.

Over the last 20 years, 60% of private sector jobs were created by existing

establishments while the remaining 40% were created by the result of the difference

between the number of startups and business closures (Small Business Administration,

2012a). Economic and job growth are mainly a consequence of the net effect of gains

and losses in the job market created by new businesses and closing businesses

respectively (Headd, 2010; Headd & Kirchhoff, 2009; Small Business Administration,

2012a). Yet, small businesses continue to outperform large businesses in the creation of

new jobs by creating 1.4 million new jobs in the first three quarters of 2014 (Small

Business Administration, 2015c). The Small Business Administration (2015c) stated that

organizations with less than 50 employees added the most amount of new jobs. Small

businesses are also increasingly exporting more, growing their export value by 4.5

percent (Small Business Administration, 2015c).

The role of small business in economic activities is also an active one, and these

types of companies typically operate cost-effectively, responding and adapting to change

quickly (Xie, 2012). To survive, small businesses must match their internal situations to

the characteristics of their industry given that such businesses have limited resources

(Xie, 2012). However, Xie (2012) suggested that small firms hold a competitive

advantage in that, for the most part, they can create customer value, which allows them to

compete and survive. Although a vast majority of these companies will not obtain high

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growth, such businesses are still vital to economies as they make up a large percentage of

the population of businesses (Rae, Price, Bosworth, & Parkinson, 2012).

The role of small and medium organizations is essential to the economy of the

European Union and the United States, and these types of companies are strong sources

of jobs, innovations, and economic stability (Batrancea, Morar, Masca, Catalin, &

Bechis, 2018; Li et al., 2016). Furthermore, they help economies by contributing to gross

domestic product, stimulating exports, and supporting stability (Batrancea et al., 2016).

Because their size provides flexibility, SMEs are critical for responding to change that

creates competitiveness in evolving markets (Batrancea et al., 2018; Elephant &

Maphela, 2018). One of the most important characteristics of small businesses is their

support for the local economy (Batrancea et al., 2018; Filho, Albuquerque, Nagano,

Philippsen, & Oliviera, 2017). The impact is clear and suggests that governments need to

place more emphasis in the small business community.

Business Sustainability

Escobar Cazal and Escobar Reyes (2015) suggested that factors such as the lack

of innovation and technological productivity, financial dependency, and lack of business

knowledge plague the informal business sector that inhibits the development of growth.

The smaller the business, the more likely it will be informal; therefore, the availability of

credit and financial resources through financial institutions will be more difficult

(Escobar Cazal & Escobar Reyes, 2015). Furthermore, Harris et al. (2014) added that

factors such as a lack of experience, in some cases, might contribute to a lack of

sustainability. Other factors such as a lack of management and leadership development,

84
which are critical aspects of survival, can contribute to a lack of performance that inhibits

growth in the small business sector (Rae et al., 2012).

However, as small businesses age, their rates of survival improve (Small Business

Administration, 2012a). Small businesses with employees have about a 66% chance of

survival after two years and about 50% survival rate after five years. Survival rates even

out after the first few years given that volatility decreases. These survival patterns are

consistent across different industries (Small Business Administration, 2012a), and this

may be attributed to a gain in business experience.

The results from the study by Harris et al. (2014) suggested that an emphasis on

organizational policy that focuses on internal strategy is correlated with the performance

of small businesses regardless of experience. Another study by McDowell et al. (2014)

found no correlation between business performance and level of education. Therefore,

the key concept is that an emphasis on internal processes is necessary to achieve such

favorable outcomes. Such a concept may be implemented in the area of inventory

management where business owners can focus on internal processes revolving around

inventory control to improve performance.

Small Businesses Worldwide

Small business patterns seem to be similar worldwide. The health and growth of

the economies of developing nations depend significantly on small businesses as they

provide momentum and job growth (Filho et al., 2017; Madishetti & Kibona, 2013).

Small and medium enterprises are a vital part of economic development in developing

nations given their critical role in employment, exports, national income, and business

development (Batrancea et al., 2018; Filho et al., 2017; Nyabwanga & Ojera, 2012). In

85
countries like Colombia, SMEs represent 99% of all businesses and employ 80% of the

workforce (Escobar Cazal & Escobar Reyes, 2015; Pulgarín Legarda & Zapata Giraldo,

2014), playing a major role in the overall Colombian economy.

Escobar Cazal and Escobar Reyes (2015) denoted that most of these small

businesses are micro-businesses. Such businesses are located within the major cities in

Colombia such as Bogota, Medellin, Valle del Cauca, Cundinamarca, Santander, and

Atlántico (Escobar Cazal & Escobar Reyes, 2015). Many of these companies in Latin

America are formed as the basis for economic survival of families where financing comes

from savings and from friends and family (Escobar Cazal & Escobar Reyes, 2015). The

authors suggested that most will end up employing family and will promote the economic

development of their local region. In Latin America, these types of businesses can

employ about 88% of the workforce (Escobar Cazal & Escobar Reyes, 2015).

The importance of the micro and small business sector in the economy of any

country is high given the capacity of such businesses to create employment and create

income distribution (Pulgarín Legarda & Zapata Giraldo, 2014; Vera-Colina, Melgarejo-

Molina, & Mora-Raipira, 2014). Generally, this highly dynamic and flexible sector is

also plagued with growth and sustainability issues. Many of the weaknesses associated

with micro and small businesses are associated with limited available resources such as

financial, material, human, and intellectual resources (Vera-Colina et al., 2014). In

Colombia, microbusinesses are those that employ fewer than 10 employees and have

assets that do not exceed 160,000 USD while small businesses are those that employ

between 11 and 50 employees and whose assets are between 160,000 USD and 1,473,000

USD (Pulgarín Legarda & Zapata Giraldo, 2014; Vera-Colina et al., 2014). Colombian

86
small businesses primarily finance themselves using their own resources and short-term

resources. This may be attributed to the lower appeal to investors and financial

institutions and is also widely seen in other developing economies (Vera-Colina et al.,

2014).

Most of the research reviewed in the current study illustrates how performance

enhancements, efficiencies, and cost reductions can be achieved by improving an

organization’s business processes and technological automation. However, the available

studies have not targeted micro-businesses, organizations defined by the Small Business

Administration (2016) as those with fewer than 20 employees. Most of the research

conducted targets medium and large organizations, or small and medium enterprises

(SME’s) with more than 100 employees. However, most businesses are micro businesses

(Headd & Kirchhoff, 2009). Even with higher representative percentages, there is a lack

of literature on the effect that any of the presented strategies, ideas, or methodologies will

have on micro-retailers and if such results are transferable to micro-businesses.

Summary

Even though young firms have disproportionately created more jobs and

contribute to a higher percentage of rates of job growth, these rates have been on the

decline (Farlie, 2012; Haltiwanger, Harmin & Miranda, 2012). There seems to be a

lower rate of entrepreneurship that may be contributing to fewer younger firms that

generate such jobs. In 2015, startup rates showed improvement; yet, such statistics are

still well below historical trends (Farlie, Reedy, Morelix, & Russell, 2015).

Consequently, this may lead to a lower number of overall employment positions created

in the economy and can have a financial impact nationwide. Therefore, it is critical to

87
find ways to both increase entrepreneurship and therefore generate the jobs that have

typically been created by young firms while also assisting small businesses in improving

growth and performance in order to sustain current employment levels while also

generating new jobs.

Raman et al (2001) concluded that improving the business processes and

execution on said processes revolving around receiving, processing, and selling of

merchandise can improve inaccuracies, thus improving business operations. When

strategy and information technology are aligned, there is a potential for positive effects

(Yayla & Hu, 2012). Furthermore, creating value by improving business processes can

create advantages (Sorescu et al., 2011), which can lead to sustainability. With the

limited access of small businesses to advanced technologies, micro-retailers may need to

leverage accessible and readily available technologies such as point of sale systems with

aligned business processes to obtain similar results seen with advanced technologies in

larger organizations.

Based on these statistics, researchers may be able to direct future developments

toward practices that can allow smaller organizations to improve their business practices

and procedures. Additionally, researchers can develop studies that analyze how the

improvement of processes translates to overall effectiveness as well as competitiveness

and profitability. Combining point of sale technology that is readily available and

financially feasible for micro-retailers with a comprehensive strategy that includes all

areas that play a role in inventory management may have the potential to increase the

operational efficiency and profitability of said businesses.

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 Chapter 3

Methods

Study results such as Corsten and Gruen (2003) and Raman et al. (2001)

suggested that inaccuracies and OOS scenarios could be improved by focusing on store

operations and business process execution. The results of these studies revealed that the

use of readily available technology used for replenishment and forecasting do not

produce efficiencies given that the information used include inaccurate data and such data

creates inaccurate results. Business process execution must then be improved for such

technology to produce positive results. Other more recent research study results that used

advanced technologies such as RFID and JIT inventory systems have confirmed that

increased visibility in inventory will lead to a reduction in inventory inaccuracies and will

ultimately reduce out-of-stock scenarios (Hardgrave et al., 2011, 2013; Ketzenberg et al.,

2013; Sahiri et al., 2012).

However, these have mainly used advanced technologies to generate visibility and

seem to have created scenarios in which business processes are aligned with the

implemented technologies. Most of the research focused on large organizations or small

businesses with over 25 employees and revenues over one million dollars. Furthermore,

the cost of the technologies implemented in the studies is out of the realm of possibilities

for micro-retailers. The question remained, if micro-retailers can focus on improving the

operational efficiency of business processes that revolve around inventory management,

are these businesses able to obtain similar results? Does implementing a comprehensive

an inventory policy affect store performance? The purpose of this study was to determine

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if comprehensive inventory management policy has an effect on the profitability of an

independent micro-retailer.

Research Method and Design Appropriateness

To determine if a relationship existed between the level of comprehensiveness of

inventory management policy and profitability of a micro-retailer, a descriptive

quantitative correlational research method was used. Neuman (2011) suggested that

descriptive research describes the current state of an event or occurrence using variables.

Such research is appropriate for this research study as correlational research does not

imply a cause and effect and strictly looks to establish a relationship between the

variables (Neuman, 2011). Given the proposed variables and their operationalization, the

researcher opted for this type of design. Profitability was set up as the dependent variable

(criterion) and the level of comprehensiveness of inventory policy was established as the

independent variable (predictor).

To measure an organization’s profitability, net profit margin was used. Net profit

margin is the net profit divided by net sales. This measure is often used in determining

financial health, solvency, and liquidity (Zarb, 2018); therefore, the researcher opted to

use this measure to determine the success of the stores’ operations. Other variables,

including gross margin, were used in similar studies, as reviewed in Chapter 2.

Nevertheless, gross margin does not determine if a business is profitable because it does

not consider operational expenses. Hence, net margin was selected.

To further test profitability, GMROII (gross margin return on inventory

investment) was used. GMROII is a retail industry standard used to determine

performance and inventory efficiency (Charness, 2002) and is a combination of sales,

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gross margin, and inventory turnover. GMROII is calculated by subtracting the cost of

goods sold from the sales revenue and dividing the resulting value by average inventory.

It was selected as a variable to help understand the efficiency of the capital invested in

inventory for the participating micro-retailers.

Research Questions

RQ1: What is the relationship between comprehensive inventory management

policy and profitability in independent micro-retailers?

H0: There is no relationship between comprehensive inventory management

policies and the profitability of a micro-retail store.

HA: There is a relationship between comprehensive inventory management

policies and the profitability of a micro-retail store.

Population

The population for this study were micro-retailers with yearly sales revenue

below one million dollars that have less than 20 employees using the services rendered in

the United States by Buckstore, Inc. The company exclusively markets products and

services to micro retail stores and has the capability of producing the data necessary for

the current study. The store information was provided by the company, and such data

included active users that fall within the definition of the Small Business

Administration’s definition of micro-businesses.

Given time limitations, differences in store sizes, number of employees,

demographics, and budgetary constraints, conducting the study on the full population of

15,423 stores in Buckstore’s database was unfeasible. Therefore, eight retailers were

selected from a subset of the population. Each store had comparable products,

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demographics, sales volumes, number of employees, and store sizes. Furthermore, the

selected stores were using a point of sale system with a database that is ODBC-

compliant, thus ensuring that the records could be accessed. The total populations with

these constraints consisted of 214 stores. Four stores served as a control group while the

other four served as the experimental group.

Sampling Frame

In purposive sample, individuals are chosen from a larger group for a specific

purpose given that they fit a specific criterion (Leedy & Ormrod, 2013; Lee-Jen, Hui-

Man, & Hao-Hsien, 2014). Researchers using such a technique obtain all cases that are

particularly informative (Neuman, 2011). Although, with purposive sampling, a

researcher cannot be sure that the case represents a population, this technique is valid and

useful for selecting members of a population that are difficult to reach or when a

researcher needs to gain a deeper understanding (Neuman, 2011), as was the case with

the current study.

This type of non-probability sampling is useful for locating subjects that can

provide the required information in the best manner (Neuman, 2011). Given the

appropriateness, the study used purposive sampling. All members of the population had

the same probability of being selected. Such sampling was taken from a population of

214 stores that met the specifics that make each store similar.

Geographic Location

The geographic location of the sample population used for this study were micro-

retailers, specifically independent retailers, located in diverse areas using services

rendered by Buckstore. These retailers were in suburban settings in which the population

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of the surrounding areas were similar. The geographic location of the study focused on

the above parameters. These businesses were retrieved from a list provided by Buckstore

that included stores that fall under the definition of micro-businesses as provided by the

Small Business Administration.

Informed Consent

The enlistment process used for this study was strictly voluntary. Participants

were free to choose whether they wanted their small business to participate in the study.

All active participants were required to sign a consent form giving permission to collect

data. Although the study did not involve human subjects, the legal company

representative of the small business signed the informed consent form granting

permission to review and collect information regarding their business. All participants

were provided with written information contained within the consent form explaining the

purpose of the study, the type of data being collected, the risks and benefits associated

with the participation, the confidentiality assurance, and the right to withdraw or withhold

information at any time. A copy of the form is available in Appendix A.

Confidentiality

To ensure confidentiality, pseudonyms were used to provide anonymous

participation and representation. These aliases were randomly assigned using a software-

automated process to each company to ensure that the researcher could not identify the

company. Confidentiality was ensured and only the results, without ties to the specific

organization, were presented in the results. Furthermore, the identifiable information of

the company inside the collected database tables were replaced during the random

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assignment process with the automated pseudonyms using an SQL Update command

before reviewing any database-related information.

All other information also used the pseudonyms so that the identity cannot be

traced back to the original participant. Therefore, no one knew the identity of the

organization. A Non-Disclosure Agreement (NDA), available in Appendix B, was signed

that ensured that the researcher handled all aspects of privacy and confidentiality in an

agreed upon manner and that no information was released without the written consent of

the parties involved. Information related to the study and the study participants was

stored securely and encrypted. Retailers granted permission for the collection and use of

the corporate data by completing the Data Use and Permission Form available in

Appendix C.

Instrumentation

The instrument that was used for this study were the point of sale software

database currently used by the micro-retailers for the purposes of managing the store.

Each of the selected stores used software that had the capability of controlling every

aspect that influence inventory levels, including store setup, product setup, product

reception, product replenishment, sales process, employee training, auditing, and

stockroom to floor movement. Researchers have studied each of these aspects and have

determined that each can have a positive or negative effect on inventory record accuracy

and management in general. Thus, managing each process and creating policies and

practices for all areas was considered a highly comprehensive handling of inventory.

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 Validity and Reliability

Leedy and Omrod (2013) described instrument reliability as how consistent said

instrument is; meaning, if it is replicable, it is reliable. Unpredictability from differing

occasions and times will show as reliability error were the instrument itself is inconsistent

(Leedy & Omrod, 2013). For this research study, the instrument’s reliability was tested

using controlled transactions with previously established and manually determined values

to ensure that the software properly calculated costs of goods sold, profit margin, profit

level, sales revenue, and other pertinent information.

Furthermore, for reliability, Leedy and Omrod (2013) and Neuman (2011)

suggested the use of pilot studies in which a test-retest of the instrument is conducted.

For the current study, a pilot test was conducted that included four retail stores. The

same stores were retested a week later to determine the consistency of the instrument.

The results of the test and retest were analyzed to ensure that no variation existed

between the questionnaire results.

Validity refers to how relevant or appropriate a measure is for what is being

studied (Leedy & Omrod, 2013). Content validity, which was used for the current study,

is the extent to which the instrument appears to measure the intended characteristic

(Leedy & Omrod, 2013). To measure validity, a panel of five experts in the realm of

inventory management and business process standardization were assembled to review

the instrument and determine its validity.

Data Collection

The current study collected data stored in the databases of the point of sale

systems of the selected retailers. Such data was a representation of sales, inventory, and

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cost information generated by the activities of a retailer such as product data entry, sales,

and product replenishment. The compiled information provided a clear description of the

costs of goods sold, inventory movement, sales, and replenishment that were used to

perform the necessary calculations. Furthermore, the study collected accounting

information at the store level that includes operational expenses such as payroll, rent,

utilities, and others.

Data Analysis

While descriptive statistics are useful in describing how data looks, researchers

use inferential statistics to test a hypothesis (Leedy & Omrod, 2013). Although such

types of statistics rely mainly on a random sample (Neuman, 2011), the use of the tool

can still allow for a level of confidence in determining a statistical significance that

results are not due to random chance and instead demonstrate a relationship. Therefore,

given the research design and nature of the study, the use of inferential statistics was

appropriate. Specially, investigators use t-tests to determine if the results’ statistical

significance for two groups reflect a difference (Neuman, 2011). Therefore, the current

research study used this statistical tool for determining the difference between the control

and the experimental group.

Furthermore, Leedy and Omrod (2013) and Neuman (2011) indicated that the

Pearson product momentum correlation, also known as Pearson r, measures the extent of

the relationship between two variables and to what point that relationship is linear. In the

case of the current research study, Pearson r correlation was used to determine if there is

a relationship between the level of comprehensiveness of inventory management policy

and profitability. The hypothesis was that as the level of comprehensiveness of inventory

96
policy increases, profitability will increase in a linear manner, thus implying a positive

relationship. Furthermore, the level of measurement for the variables used in the study

were quantitative ratio-type data. Therefore, Pearson product momentum correlation was

an appropriate test.

Each store began with a baseline test that established an initial profitability

reading. The experimental group received the full implementation that accounted for

each aspect of inventory management while the control group continued operating the

store as normal. After a full month, the test was performed on both groups to determine

if there was an effect on profitability. The Statistical Package for Social Sciences (SPSS)

for Microsoft Excel and IBM’s SPSS tool was used to perform the specified tests.

Independent and Dependent Variables

The independent variable for this research study was the comprehensive inventory

management policy. The dependent variable were the results that determine the level of

profitability of a store which included net profit margin and gross margin return on

inventory investment (GMROII).

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 Chapter 4

Analysis and Results

The purpose of this quasi-experimental quantitative exploratory study was to

explore the relationship between comprehensive inventory management policy (CIP) and

profitability of micro-retailers. Participants provided their point of sale databases for

analysis. A comprehensive inventory management policy test was conducted to assess

each area that can affect stock levels. In the case of the experimental group, store owners

allowed the researcher to modify any product management practice or policy that lacked

control or negatively affected the handling of inventory. Once the implementation was

completed, the experimental group was tested to ensure that controls were in place. This

was corroborated with a high score.

The contents of Chapter 4 include the research questions that guided the research,

a summary of the data collection process, an overview of the demographics of the

participants, an explanation of the reliability and pilot tests, and a description of the data

analysis. The degree to which a relationship exists between the level of

comprehensiveness of inventory management policy and profitability is also discussed.

The chapter concludes with an explanation of the results and a summary.

Research Questions and Hypothesis

The objective of the research was to determine if a significant relationship exists

between the profitability of an independent micro-retailer and comprehensive inventory

management policy. The research question that guided the study is: what the relationship

between comprehensive inventory management policy and the profitability of a micro-

retail store?

98
 The hypotheses for the study were established as follows:

H0: There is no relationship between comprehensive inventory management

policies and the profitability of a micro-retail store.

HA: There is a relationship between comprehensive inventory management

policies and the profitability of a micro-retail store.

Data Collection

Data from this study came from the point of sale system database of each

participating store. Business owners voluntarily participated by providing access to their

data (Appendix C). A test was performed on each store to calculate the level of

comprehensiveness of their inventory management policy. This test included aspects that

can influence inventory levels and their subsequent control (Appendix D). The results

had a range of 0 to 100 points, where the lower the number, the lower the control of

inventory and the higher the number, the higher the control. A perfect score is indicative

of a store that has policies and processes in place to control every aspect of inventory.

To develop a baseline measurement, the test was performed on all stores before

the study began. For the experimental group, the test was performed a second time after

the comprehensive inventory management process was implemented. Retailers in the

experimental group provided consent for modifications to their business processes and

practices that guaranteed that each area of inventory management aligned with the

inventory control requirements for the study as determined by the initial result. The

experimental group was required to have a high score. Training, consulting, and

assistance was provided to each experimental store to guarantee that the controls were in

99
place for the duration of the research study. All of the stores’ uniquely identifiable

information was removed and an alphanumeric code assigned to maintain store identity.

Demographics

The target population for the study was micro-retailers that use the services of

Buckstore, Inc., have fewer than 20 employees, and yearly sales revenues less than one

million dollars. Therefore, the study targeted stores that fit the micro-business

description, sold similar products, generated comparable sales volume, employed a

related number of people, and had similar store sizes. The total sample used was eight

stores. All participated for the duration of the study. These stores were independently

owned and operated, and all had an owner-manager that ran the store’s daily operation.

Furthermore, all micro-retailers that participated in the study had been in business more

than one calendar year.

Reliability Testing and Pilot Study

Two style of instruments were used in the research study. The first was a test that

calculated the comprehensiveness of inventory management policy for every store. A

panel of five subject matter experts from the retail industry was asked to review the

survey to ensure that the questions accounted for the different areas that can influence

inventory control. Additionally, the instrument was tested for reliability.

Comprehensiveness of Inventory Policy Instrument

The Comprehensiveness of Inventory Policy was a questionnaire of 25

dichotomous questions that account for each area of inventory management policy

including store setup, product setup, product reception, product replenishment, sales

process, employee training, auditing, and stockroom to floor movement. Each

100
affirmative response was graded as 4 points while each negative answer yielded no

points. A perfectly controlled store will obtain a top score of 100 while a store with no

control will obtain a zero.

A pilot test was conducted on four of the eight stores at random prior to initiating

the study. The test was then conducted a week later to ensure that the answers did not

vary. The results are summarized in Table 1.

101
 Table 1

Test and Retest Results for CIP Instrument

CA001 CA001 CC003 CC003 EA001 EA001 EC003 EC003

Store T1 T2 T1 T2 T1 T2 T1 T2
Q1 Y Y N N Y Y Y Y
Q2 Y Y Y Y Y Y Y Y
Q3 N N N N N N N N
Q4 N N N N N N N N
Q5 N N N N N N N N
Q6 N N N N N N N N
Q7 N N N N N N N N
Q8 Y Y Y Y Y Y Y Y
Q9 N N N N N N N N
Q10 N N N N N N N N
Q11 N N N N N N N N
Q12 N N N N N N N N
Q13 N N N N N N N N
Q14 N N Y Y Y Y Y Y
Q15 N N N N N N N N
Q16 N N N N N N N N
Q17 N N N N N N N N
Q18 Y Y Y Y Y Y Y Y
Q19 N N N N Y Y N N
Q20 N N N N N N N N
Q21 N N N N N N N N
Q22 N N N N N N N N
Q23 N N N N N N N N
Q24 N N N N N N N N
Q25 N N N N N N N N
Score 16 16 16 16 24 24 20 20
Variance 0% 0% 0% 0%

The test and retest were examined by a separate surveyor to account for

possible bias when evaluating each answer. All stores yielded zero variance, meaning

that each store answered the same question in the exact same manner after a week.

102
 Database and POS Instruments

Before starting the pilot test, reliability testing was performed on each instrument

to ensure consistency and accuracy. The same data were added to each point of sale

system at each store and the same transactions were performed. The test included adding

three inventory items to the database with a price of one, three, and five dollars

respectively. The cost of the items was set to half of the price ($0.50, $1.50, and $2.50).

The total inventory per item was set to six so that when the transactions were completed,

the quantity in stock would be zero. The items added to the inventory are visible in Table

2.

Table 2

Added Test Inventory

SKU Description Sales Price Cost Margin Quantity

1001 Test Item 1 $1.00 $0.50 50.00% 6
1002 Test Item 2 $3.00 $1.50 50.00% 6
1003 Test Item 3 $5.00 $2.50 50.00% 6

The examinations allowed each instrument to be tested manually and the results

compared with the system’s outcome. The expected results for each transaction are

displayed in Table 3 while the results of each of the test transactions per store are visible

in Table 4, Table 5, and Table 6 respectively. The instrument used in each of the stores

accurately computed each transaction total, cost of goods sold, profit, and profit margin.

Additionally, the system also deducted the correct quantities from the database, leaving

the total quantity in stock at the expected value per transaction and at a level of zero after

each transaction. The inventory level fluctuation after each transaction is displayed in

Table 7.

103
Table 3

Expected Results

Test Type Transaction 1 Transaction 2 Transaction 3

Total $9.00 $18.00 $27.00
Profit $4.50 $9.00 $13.50
COGS $4.50 $9.00 $13.50
Margin 50% 50% 50.00%

Table 4

Results for Test Transaction One per Store

Test Type CA001 CB002 CC003 CD004 EA001 EB002 EC003 ED004
Total $9.00 $9.00 $9.00 $9.00 $9.00 $9.00 $9.00 $9.00
Profit $4.50 $4.50 $4.50 $4.50 $4.50 $4.50 $4.50 $4.50
COGS $4.50 $4.50 $4.50 $4.50 $4.50 $4.50 $4.50 $4.50
Margin 50.00% 50.00% 50.00% 50.00% 50.00% 50.00% 50.00% 50.00%

Table 5

Results for Test Transaction Two per Store

Test Type CA001 CB002 CC003 CD004 EA001 EB002 EC003 ED004
Total $18.00 $18.00 $18.00 $18.00 $18.00 $18.00 $18.00 $18.00
Profit $9.00 $9.00 $9.00 $9.00 $9.00 $9.00 $9.00 $9.00
COGS $9.00 $9.00 $9.00 $9.00 $9.00 $9.00 $9.00 $9.00
Margin 50.00% 50.00% 50.00% 50.00% 50.00% 50.00% 50.00% 50.00%

Table 6

Results for Test Transaction Three per Store

Test Type CA001 CB002 CC003 CD004 EA001 EB002 EC003 ED004
Total $27.00 $27.00 $27.00 $27.00 $27.00 $27.00 $27.00 $27.00
Profit $13.50 $13.50 $13.50 $13.50 $13.50 $13.50 $13.50 $13.50
COGS $13.50 $13.50 $13.50 $13.50 $13.50 $13.50 $13.50 $13.50
Margin 50.00% 50.00% 50.00% 50.00% 50.00% 50.00% 50.00% 50.00%

104
 Table 7

Inventory Level

Test Type CA001 CB002 CC003 CD004 EA001 EB002 EC003 ED004
Item 1 (1001)
Before T1 6 6 6 6 6 6 6 6
After T1 5 5 5 5 5 5 5 5
Before T2 5 5 5 5 5 5 5 5
After T2 3 3 3 3 3 3 3 3
Before T3 3 3 3 3 3 3 3 3
After T3 0 0 0 0 0 0 0 0
Item 2 (1002)
Before T1 6 6 6 6 6 6 6 6
After T1 5 5 5 5 5 5 5 5
Before T2 5 5 5 5 5 5 5 5
After T2 3 3 3 3 3 3 3 3
Before T3 3 3 3 3 3 3 3 3
After T3 0 0 0 0 0 0 0 0
Item 3 (1003)
Before T1 6 6 6 6 6 6 6 6
After T1 5 5 5 5 5 5 5 5
Before T2 5 5 5 5 5 5 5 5
After T2 3 3 3 3 3 3 3 3
Before T3 3 3 3 3 3 3 3 3
After T3 0 0 0 0 0 0 0 0

After the instrument was tested with controlled transactions, a pilot test using a

test and retest scenario was conducted. The pilot included each store’s point of sale

system. All transactions that occurred on a specific day were analyzed for the gross

sales, cost of goods sold, profit, and profit margin values. The values of each inventory

item sold was evaluated and manually calculated using Microsoft Excel and then

compared with the values obtained from the instrument. The same operation was

performed a week later. The results of the test and retest both demonstrated that the

105
instruments are accurate and consistent. The values of the pilot are visible in Tables 8

and 9.

Table 8

Pilot Test Results per Store

Gross Sales COGS Profit Margin

CA001
System Value $510.00 $153.00 $357.00 70.00%
Expected $510.00 $153.00 $357.00 70.00%
CB002
System Value $425.00 $94.09 $330.91 77.86%
Expected $425.00 $94.09 $330.91 77.86%
CC003
System Value $5,382.60 $2,723.95 $2,658.66 49.39%
Expected $5,382.60 $2,723.95 $2,658.66 49.39%
CD004
System Value $1,965.00 $759.17 $1,205.83 61.37%
Expected $1,965.00 $759.17 $1,205.83 61.37%
EA001
System Value $580.00 $213.50 $366.50 63.19%
Expected $580.00 $213.50 $366.50 63.19%
EB002
System Value $460.00 $164.90 $295.10 64.15%
Expected $460.00 $164.90 $295.10 64.15%
EC003
System Value $1,062.50 $443.31 $619.19 58.28%
Expected $1,062.50 $443.31 $619.19 58.28%
ED004
System Value $1,595.00 $499.17 $1,095.83 68.70%
Expected $1,595.00 $499.17 $1,095.83 68.70%

106
 Table 9

Pilot Re-Test Results per Store

Gross Sales COGS Profit Margin

CA001
System Value $125.00 $42.13 $82.88 66.30%
Expected $125.00 $42.13 $82.88 66.30%
CB002
System Value $295.00 $90.20 $204.80 69.42%
Expected $295.00 $90.20 $204.80 69.42%
CC003
System Value $1,902.50 $772.01 $1,130.49 59.42%
Expected $1,902.50 $772.01 $1,130.49 59.42%
CD004
System Value $1,755.00 $718.39 $1,036.61 59.07%
Expected $1,755.00 $718.39 $1,036.61 59.07%
EA001
System Value $505.00 $90.60 $414.40 82.06%
Expected $505.00 $90.60 $414.40 82.06%
EB002
System Value $525.00 $161.80 $363.20 69.18%
Expected $525.00 $161.80 $363.20 69.18%
EC003
System Value $1,325.00 $589.54 $735.47 55.51%
Expected $1,325.00 $589.54 $735.47 55.51%
ED004
System Value $1,135.00 $442.01 $692.99 61.06%
Expected $1,135.00 $442.01 $692.99 61.06%

Data Analysis

Data were collected from the independent retail store databases and downloaded

into Microsoft Excel® for coding and analysis. The data were then organized and broken

down into tables and basic calculations were performed on sales revenue, cost of goods

sold, gross profit margin, operating expenses, net profit margin, and gross margin return

on inventory investment. For uniformity and standardization, a list of common expenses

107
was used for operating expenses that included rent, payroll, electricity, office supplies,

phone, internet, professional services, business insurance, marketing expenses, and

miscellaneous expenses. All other non-essential line-item costs were ignored.

A reading using the last 12 months of data was conducted as the baseline. The

compiled information provided a basic profit and loss (P&L) for each store. These are

illustrated in Table 10 through Table 17. The comprehensiveness of inventory

management policy results is depicted in Table 18. The table shows the results of the

baseline score which represents the control prior to the commencement of the study and

the experimental month once the control practices were implemented.

108
Table 10

Store CA001 Profit and Loss

Line Item Baseline Month Experimental Month

Sales Revenue
Sales Revenue $16,771.99 $16,744.76
COGS
COGS $4,989.92 $4,989.07
Income Before Expenses $11,782.07 $11,755.69
Margin Before Expenses 70.25% 70.21%
Expenses
Rent $4,100.00 $4,100.00
Employee #1 $2,600.00 $2,600.00
Employee #2 $1,700.00 $1,700.00
Electricity $195.00 $199.00
Office Supplies $50.00 $50.00
Phone $50.00 $50.00
Internet $80.00 $80.00
Professional Services $50.00 $50.00
Business Insurance $110.00 $110.00
Marketing Expenses $200.00 $200.00
Misc. Expenses $100.00 $100.00
Total Expenses $9,235.00 $9,239.00
Operating Income $2,547.07 $2,516.69
Net Profit 15.19% 15.03%

109
Table 11

Store EA001 Profit and Loss

Line Item Baseline Month Experimental Month

Sales Revenue
Sales Revenue $17,576.75 $22,660.77
COGS
COGS $5,299.84 $6,571.62
Income Before Expenses $12,276.91 $16,089.15
Margin Before Expenses 69.85% 71.00%
Expenses
Rent $4,000.00 $4,000.00
Employee #1 $2,400.00 $2,400.00
Employee #2 $1,600.00 $1,600.00
Electricity $265.00 $273.00
Office Supplies $48.00 $52.00
Phone $30.00 $30.00
Internet $70.00 $70.00
Professional Services $50.00 $50.00
Business Insurance $90.00 $90.00
Marketing Expenses $300.00 $300.00
Misc. Expenses $100.00 $100.00
Total Expenses $8,953.00 $8,965.00
Operating Income $3,323.91 $7,124.15
Net Profit 18.91% 31.44%

110
Table 12

Store CB002 Profit and Loss

Line Item Baseline Month Experimental Month

Sales Revenue
Sales Revenue $6,213.38 $6,152.65
COGS
COGS $1,809.11 $1,847.06
Income Before Expenses $4,404.26 $4,305.59
Margin Before Expenses 70.88% 69.98%
Expenses
Rent $1,450.00 $1,450.00
Employee #1 $2,200.00 $2,200.00
Electricity $125.00 $127.00
Office Supplies $50.00 $50.00
Phone $45.00 $45.00
Internet $85.00 $85.00
Professional Services $50.00 $50.00
Business Insurance $52.00 $52.00
Marketing Expenses $50.00 $50.00
Misc. Expenses $50.00 $50.00
Total Expenses $4,157.00 $4,159.00
Operating Income $247.26 $146.59
Net Profit 3.98% 2.38%

111
Table 13

Store EB002 Profit and Loss

Line Item Baseline Month Experimental Month

Sales Revenue
Sales Revenue $6,334.09 $9,932.71
COGS
COGS $1,900.18 $3,079.14
Income Before Expenses $4,433.91 $6,853.57
Margin Before Expenses 70.00% 69.00%
Expenses
Rent $1,575.00 $1,575.00
Employee #1 $2,100.00 $2,100.00
Electricity $119.00 $124.00
Office Supplies $48.00 $52.00
Phone $35.00 $35.00
Internet $79.00 $79.00
Professional Services $50.00 $50.00
Business Insurance $64.00 $64.00
Marketing Expenses $50.00 $50.00
Misc. Expenses $60.00 $60.00
Total Expenses $4,180.00 $4,189.00
Operating Income $253.91 $2,664.57
Net Profit 4.01% 26.83%

112
Table 14

Store CC003 Profit and Loss

Line Item Baseline Month Experimental Month

Sales Revenue
Sales Revenue $62,303.82 $61,567.57
COGS
COGS $24,805.49 $23,395.68
Income Before Expenses $37,498.33 $38,171.89
Margin Before Expenses 60.19% 62.00%
Expenses
Rent $10,900.00 $10,900.00
Employee #1 $3,200.00 $3,200.00
Employee #2 $2,400.00 $2,400.00
Employee #3 $1,500.00 $1,500.00
Electricity $429.00 $432.00
Office Supplies $170.00 $170.00
Phone $150.00 $150.00
Internet $130.00 $130.00
Professional Services $125.00 $125.00
Business Insurance $120.00 $120.00
Marketing Expenses $575.00 $575.00
Misc. Expenses $125.00 $125.00
Total Expenses $19,824.00 $19,827.00
Operating Income $17,674.33 $18,344.89
Net Profit 28.37% 29.80%

113
Table 15

Store EC003 Profit and Loss

Line Item Baseline Month Experimental Month

Sales Revenue
Sales Revenue $63,717.58 $77,271.27
COGS
COGS $26,165.69 $30,135.80
Income Before Expenses $37,551.88 $47,135.47
Margin Before Expenses 58.93% 61.00%
Expenses
Rent $10,200.00 $10,200.00
Employee #1 $3,100.00 $3,100.00
Employee #2 $2,300.00 $2,300.00
Employee #3 $1,400.00 $1,400.00
Electricity $536.00 $540.00
Office Supplies $150.00 $150.00
Phone $120.00 $120.00
Internet $85.00 $85.00
Professional Services $100.00 $100.00
Business Insurance $115.00 $115.00
Marketing Expenses $550.00 $550.00
Misc. Expenses $100.00 $100.00
Total Expenses $18,756.00 $18,760.00
Operating Income $18,795.88 $28,375.47
Net Profit 29.50% 36.72%

114
Table 16

Store CD004 Profit and Loss

Line Item Baseline Month Experimental Month

Sales Revenue
Sales Revenue $47,686.12 $44,781.93
COGS
COGS $19,799.47 $17,912.77
Income Before Expenses $27,886.64 $26,869.16
Margin Before Expenses 58.48% 60.00%
Expenses
Rent $8,500.00 $8,500.00
Employee #1 $3,200.00 $3,200.00
Employee #2 $1,500.00 $1,500.00
Employee #3 $1,500.00 $1,500.00
Electricity $225.00 $240.00
Office Supplies $125.00 $125.00
Phone $95.00 $95.00
Internet $75.00 $75.00
Professional Services $100.00 $100.00
Business Insurance $85.00 $85.00
Marketing Expenses $350.00 $350.00
Misc. Expenses $100.00 $100.00
Total Expenses $15,855.00 $15,870.00
Operating Income $12,031.64 $10,999.16
Net Profit 25.23% 24.56%

115
Table 17

Store ED004 Profit and Loss

Line Item Baseline Month Experimental Month

Sales Revenue
Sales Revenue $52,138.00 $62,729.23
COGS
COGS $22,837.49 $25,718.98
Income Before Expenses $29,300.51 $37,010.24
Margin Before Expenses 56.20% 59.00%
Expenses
Rent $9,000.00 $9,000.00
Employee #1 $3,000.00 $3,000.00
Employee #2 $1,400.00 $1,400.00
Employee #3 $1,400.00 $1,400.00
Electricity $190.00 $220.00
Office Supplies $135.00 $135.00
Phone $100.00 $100.00
Internet $85.00 $85.00
Professional Services $90.00 $90.00
Business Insurance $75.00 $75.00
Marketing Expenses $375.00 $375.00
Misc. Expenses $100.00 $100.00
Total Expenses $15,950.00 $15,980.00
Operating Income $13,350.51 $21,030.24
Net Profit 25.61% 33.53%

Table 18

Comprehensiveness of Inventory Policy Results

Store Code Baseline Score Experimental Month

CA001 16 16
CB002 16 16
CC003 16 16
CD004 16 16
EA001 16 100
EB002 16 96
EC003 16 96
ED004 16 92

116
 Responses to the tests on the level of comprehensiveness of inventory

management provides ratio data. Similarly, the level of profitability and the GMROII of

each store provides ratio data. The type of data retrieved provided the scenario to use t-

test analysis to determine the statistical significance between the control group and the

stores receiving the experimental treatment. T-tests were performed using a significance

level of 0.05. The Pearson product momentum correlation was used to measure the

extent of the relationship between the level of the two variables.

Results

The hypothesis assisted testing the research question: what is the relationship

between comprehensive inventory management policies and profitability in independent

micro-retailers? This research question used an independent variable that measured the

level of comprehensiveness of inventory management policy and a dependent variable

which was the net profit margin of the independent micro-retail store. The data for these

two variables is presented in Table 19.

Table 19

Store CIP and Net Profit

Store CIP Margin %

CA001 16 15.03
CB002 16 2.38
CC003 16 29.8
CD004 16 24.56
EA001 100 31.44
EB002 96 26.83
EC003 96 36.72
ED004 92 33.53

117
 The data from Table 19 was used to create the scatterplot seen in Figure 2. To

measure the level of correlation between CIP and net margin, a Pearson Product

Correlation was performed using IBM’s SPSS. The results of the analysis are

summarized in Table 22. There was a correlation between CIP and net margin, r = 0.670,

n = 8, p = 0.069. Overall, the analysis indicated a moderate positive correlation between

the comprehensiveness of inventory policy and net margin. Increases in CIP were

correlated with increases in profitability.

An independent samples t-test was conducted to determine the statistical

significance of the results of the Pearson correlation. The data are summarized in Table

20. There was not a significant difference between the control group (M=17.94;

SD=12.042) and the experimental group (M=32.13; SD=4.15). The results of the

analysis suggested that no statistical significance was reached (t(2.44)=6, p=0.067). The

summary of the results is depicted in Table 21. For a 95% reliability level, the p-value

was set to 0.05 where there is a 5 percent change that the findings are due to chance.

Hence, any p-value greater than 0.05 cannot be considered statistically significant. Since

the resulting p-value was 0.067, even with the moderate correlation established by the

Pearson value, the null hypothesis could not be rejected.

118
Table 20

Store Net Profit Margin

Group Margin %
Control 15.03
Control 2.38
Control 29.8
Control 24.56
Experimental 31.44
Experimental 26.83
Experimental 36.72
Experimental 33.53

Table 21

t-Test: Net Profit Assuming Equal Variance

Control Experimental
Mean 17.9425 32.13
Variance 145.0218917 17.19806667
Observations 4 4
Pooled Variance 81.10997917
Hypothesized Mean Difference 0
df 6
-
t Stat 2.227838616
P(T<=t) one-tail 0.033733119
t Critical one-tail 1.943180281
P(T<=t) two-tail 0.067466239
t Critical two-tail 2.446911851

119
Table 22

Pearson Correlation CIP and Net Margin

CIP Margin
CIP Pearson Correlation 1 0.670

Sig. (2-tailed) 0.069

N 8 8
Margin Pearson Correlation 0.670 1

Sig. (2-tailed) 0.069

N 8 8

120
Figure 2. Scatterplot of CIP versus Margin.

To gain a deeper understanding of profitability, an examination into the effect of

CIP on GMROII was conducted. A scatterplot of the data values of the variables seen in

Table 23 was used. The results are summarized in Figure 3. To measure the level of

correlation between CIP and GMROII, a Pearson Product Correlation was performed

using IBM’s SPSS. The results of the analysis are summarized in Table 25. There was a

correlation between CIP and GMROII, r = 0.900, n = 8, p = 0.002. Overall, the analysis

indicated a strong positive correlation between the comprehensiveness of inventory

121
policy and GMROII. Increases in CIP were correlated with increases in gross margin

return on inventory investment.

An independent samples t-test was conducted to determine the strength of the

relationship between comprehensive inventory policy on GMROII. The scores for each

variable are presented in Table 23. A significant statistical difference between the control

group (M = 0.4275; SD = 0.025) and the experimental group (M = .6950; SD = .11121)

was found. The results of the analysis, with a p-value lower than 0.05, suggested that a

statistical significance was reached (t(4.69) = 6, p = 0.0033). The summary of the results

is depicted in Table 24.

Although GMROII is not directly tied to profitability, the measure does take

margin into account. Therefore, the statistical significance suggests that stores with a

higher CIP increase their inventory rotation and overall inventory efficiency. The

GMROII increase also suggests that such stores have a higher return on investment, thus

can make a higher profit in the long term. The result does not lead to the acceptance or

rejection of the null hypothesis. Nevertheless, it does provide some insight and should be

considered in future research.

Table 23

Store CIP and GMROII

Store CIP GMROII

CA001 16 0.44
CB002 16 0.44
CC003 16 0.44
CD004 16 0.39
EA001 100 0.80
EB002 96 0.78
EC003 96 0.58
ED004 92 0.62

122
Table 24

t-Test: GMROII Assuming Equal Variance

Control Experimental
Mean 0.4275 0.695
Variance 0.000625 0.012366667
Observations 4 4
Pooled Variance 0.006495833
Hypothesized Mean Difference 0
df 6
-
t Stat 4.693765056
P(T<=t) one-tail 0.001673868
t Critical one-tail 1.943180281
P(T<=t) two-tail 0.003347737
t Critical two-tail 2.446911851

123
Figure 3. Scatterplot of CIP versus GMROII.

124
 Table 25

Pearson Correlation CIP versus GMROII

CIP GMROII
CIP Pearson Correlation 1 .900**

Sig. (2-tailed) 0.002

N 8 8
**
GMROII Pearson Correlation .900 1

Sig. (2-tailed) 0.002

N 8 8
**. Correlation is significant at the 0.01 level (2-tailed).

Summary

The purpose of this quasi-experimental quantitative explanatory study was to

explore the connection between comprehensive inventory policy and profitability in

independent micro-retailers. Pilot testing of the instrument used to measure the level of

comprehensiveness of inventory policy revealed no variance between the first test and a

retest conducted a week afterwards. Furthermore, pilot testing of the point of sale

systems also indicated that the values of the test transactions coincided with the expected

values for each manually calculated operation. Data from the instruments were collected

and coded using Microsoft Excel and the SPSS package was used to perform the

statistical analysis. IBM’s SPSS was also used for analysis.

The statistical tests conducted were Pearson product momentum correlation and

independent samples t-test with the data gathered from the point of sale databases and the

result of the CIP instrument. The results of the Pearson correlation demonstrated a

moderate correlation between CIP and net margin. However, the t-test revealed that there
125
was no significant statistically relationship between the variables. Statistical analysis was

also performed using the same two tests between CIP and GMROII. The Pearson

correlation indicated a strong positive relationship. T-test analysis on the variables

indicated that the relationship was statistically significant. The implication of the results

is significant as they suggest possible opportunities for future studies.

Chapter 4 included information on the process of data gathering and the

subsequent analysis from the eight participating stores. The research included and

applied the design and methodology presented in Chapter 3. In Chapter 4, tables and

figures were presented that summarized the data and the results for CIP, net margin, and

GMROII.

The results of the analysis did not yield a statistically significant relationship

between comprehensive inventory policy and net profit margin; thus, the null hypothesis

could not be rejected. However, the results did yield a relationship between GMROII and

CIP. Given the results of the study, Chapter 5 includes the research question and

hypothesis, a discussion of the findings, the limitations of the current study,

recommendations to leaders and practitioners, and thoughts on possible future research

considerations.

126
 Chapter 5

Conclusions and Recommendations

The purpose of this quasi-experimental explanatory quantitative study was to

explore the relationship between comprehensive inventory management policy and the

profitability of independent micro-retail stores. For the research study, databases from

participating stores were obtained and analyzed. The experimental group was tested by

using an instrument that evaluated the strength of their current practices and modified

each area as needed to guarantee a high level of control in every aspect that affects

inventory stock levels. The results were compared to stores that did not have the

treatment. Included in Chapter 4 was a description of the data collection process, the

population and demographics, a review of the reliability and pilot testing, and an

interpretation of the analysis and results along with a summary of key finding.

Chapter 5 includes a statement of the research questions and hypotheses, a

discussion of the findings, and a presentation of the limitations of the study.

Furthermore, the chapter includes a recommendation to leaders and practitioners

followed by recommendations for future research. Finally, a summary of the section and

findings and how these contribute to the body of knowledge is provided.

Research Questions and Hypothesis

The objective of the research is to determine if a significant relationship exists

between profitability and comprehensive inventory management policies.

RQ1: What is the relationship between comprehensive inventory management

policy and profitability in independent micro-retailers?

127
 H0: There is no relationship between comprehensive inventory management

policies and the profitability of a micro-retail store.

HA: There is a relationship between comprehensive inventory management

policies and the profitability of a micro-retail store.

Discussion of Findings

As reviewed in Chapter 1, the specific problem that the research study addressed

is that for micro-retailers, there is no comprehensive and cost-efficient tool or strategy

that can help guide small retailers in inventory-related business processes. Because of

this, there is a tendency for these types of stores to exhibit inefficiencies in their

management of inventory in the multiple areas that deal with product. These

inadequacies lead to higher costs, lower margins, lower inventory rotations, and lost sales

(Chuang & Oliva, 2015; Raman et al., 2001).

The problem is not solved with implementing technology like point of sale

systems or radio frequency identification as there is a lack of technical knowledge and

process alignment that makes implementation difficult (Chuang et al., 2016; Chuang et

al. 2018), specially for smaller organizations. During the process of the research study,

these problems were displayed by the eight participating stores where most had few

controls in the areas that greatly affects inventory levels.

The study sought to answer the question, what is the relationship between

comprehensive inventory management policy and profitability in independent micro-

retailers? In other words, if these stores had controls that were easy to implement using

policies and practices that accounted for the different aspects of inventory management,

128
would the store be more profitable? Multiple studies reviewed in Chapter 2 attempted to

answer similar questions regarding profitability and inventory efficiency.

Some of the differences between this study and other research is that all use large

organizations and most studied companies in industries with simple inventory. For

example, Panigrahi (2013) studied a cement manufacturer. Retail inventory is more

complex because it involves thousands of SKUs. Therefore, results in industries with

simple inventory may not be generalized to the retail sector. Furthermore, results in large

organizations with access to departments that manage information technology may

produce different results that may not represent those of smaller businesses.

A similar study was that of Eneje et al. (2012). The researchers attempted to

determine the effect of efficient inventory management on profitability. However, the

investigators used brewery companies as their research subjects, and found a strong

positive and statistically significant association between the variables. Like the current

research, the study used Pearson correlation to determine the relationship. Furthermore,

the study used a small sample size in which two breweries participated, thus suffering

from the same limitation. The results of Eneje et al. (2012) align with those of

Panigraphi (2013) and Mittal et al. (2014).

Mittal et al. (2014) studied the impact of inventory management on gross

profitability using the fertilizer industry as their subject base. As with the current

research study and Eneje et al. (2012), the investigators used Pearson correlation to

determine if the variables were related. However, Mittal et al.’s (2014) study looked for

a relationship between profitability and inventory turn ratio and found a strong negative

129
relationship. A main difference is that the current research examined net margin, thus

taking operating expenses into account.

Another study that reviewed inventory management was Shin et al. (2015). The

authors used the Compustat database to obtain a sample size of 1,289 United States

manufacturing firms of all sizes. Nevertheless, the company sizes in the Compustat

system would not include micro-retailers, as was used in this current study. Furthermore,

the studies differ in company type, and the results may not be generalizable. The Shin et

al (2015) study is also different in that it looked to determine if the management of low

levels of inventory had a positive result on profitability. The results suggested that lower

levels of inventory increased profitability, and the authors indicated that the effect was

higher in smaller firms because of the improvement opportunity in contrast to larger

companies.

The results of Shin et al. (2015) are specially interesting when compared to the

current study because of the larger sample size. Furthermore, the research includes small

businesses. Eneje et al. (2012), Mittal et al. (2014), Panigraphi (2013) and Shin et al.

(2015) all demonstrated a statistically significant relationship between inventory

management measures and profitability measures. However, a major difference is that

these studies used data from multiple years whereas the current study was limited to a

month.

Although the results of this study did not yield a statistically significant result,

there was a moderate relationship between comprehensive inventory policy and

profitability. Furthermore, there was an improvement in the profitability in all stores in

the experimental group, consistent with the findings of the reviewed literature. Another

130
major difference between these studies is in the interpretation of inventory management.

This study is the first one to include a value to each aspect of a store that affects stock

levels and use the total of the value as a measure of control.

Limitations

The limited amount of time to conduct the study may have negatively impacted

the significance of the result. The reordering of merchandise may occur in a period of

more than a month. Likewise, the rotation of product may occur in a period of more than

a month. Therefore, it may take more time for the profit margin to be positively affected

by having a complete control of inventory.

The results do show some improvements in the profitability of stores when the

level of control increases and a significant statistical result in the efficiency of inventory

through GMROII. Therefore, with a longer time span, it may be possible to see a

significant statistical relationship with profitability.

Another limitation was the employee turnover rate at some of the stores. This

created a scenario where re-training on the business processes that involved inventory

was necessary. Furthermore, the new employees had a higher number of mistakes that

may have limited the results of the study. At another store, language barriers made

teaching some of the processes difficult and may have also negatively affected the study.

Recommendations to Leaders and Practitioners

Although the research study did not find a statistically significant relationship

between comprehensive inventory policy and profitability, there was a moderate

relationship between the two variables. Therefore, leader and practitioners in the micro-

retail industry need to work on developing inventory management practices that account

131
for each area that influences stock levels, including store setup, product setup, product

reception, product replenishment, sales process, employee training, auditing, and

stockroom to floor movement. As has been shown in previous studies reviewed in

Chapter 2, technology alone is not enough.

One area in which all participating stores showed a high level of weakness was in

the understanding of implementing proper controls in areas that have an effect on

inventory. This is visualized in the baseline results of the CIP test where the numbers are

low. The numbers remained low in the retest of the control group.

This means that most stores are not understanding and not implementing

management policies nor aligning those policies with technology and tools. Furthermore,

all stores had access to point of sale systems that provided certain automation and a

higher level of control if implemented properly. Therefore, leaders and practitioners need

to consider better educational programs for their managers and employees that increases

their understanding of inventory policy tools for higher levels of control.

An additional recommendation to practitioners that develop tools for retail stores

is to consider automating processes that shield the user from the need to understand

terminology, inventory management processes, and other complex knowledge that seems

to be outside of the scope of understanding of micro-retailers. For example, inventory

auditing is a process that stores seem to skip because of a lack of understanding.

Specifically, micro-retail managers that participated in the study did not know

what to audit or why the practice was necessary for certain products. Most of the POS

systems in these participating stores had features to pull reports for suggested audits and a

way to update inventory and track discrepancies. Nevertheless, these where underutilized

132
and often misunderstood. The main reason was a perceived complexity resulting from

terminology or a general misunderstanding of technology.

Therefore, a simplified approach can be developed where managers can follow

instructions on a tablet that simply provides a list of tasks and a due date. Each area of

control can have associated tasks that different users can perform. This eliminates the

need to understand the underlying terminology or reasoning while the software system

learns from the input and provides recommendations.

Recommendations for Future Research

This quantitative research study helped in the analysis of the relationship between

comprehensive inventory policy and profitability. From the activities of the study and its

subsequent analysis, several suggestions for future research emerged. The current results

indicated that CIP had a positive effect on GMROII. Since this figure is a representation

of inventory efficiency that takes profitability into account, it may be possible to see an

effect on profitability in a longer time span. Therefore, extending the study to include a

full calendar year worth of data or more may provide statistically meaningful results.

An additional recommendation is to increase the sample size so that the results are

statistically meaningful. Finally, a future study may use a simpler methodology where

the survey instrument is provided to a large number of stores and includes a question on

net profit margin. Therefore, instead of limiting the study to a few cases that require

intervention in the development of business processes, the stores provide answers that

can be quantified, studied, and analyzed.

133
 Summary

This quantitative explanatory study sought to determine the relationship between

comprehensive inventory policy and profitability in independent micro-retailers. While a

statistically significant relationship between CIP and profitability was not found and,

consequently, the null hypothesis could not be rejected, the study did find a moderate

positive correlation between the variables. Furthermore, the results of the study did

determine a strong positive and statistically significant relationship between CIP and

GMROII. This result indicated that a high level of control of inventory correlated to a

higher GMROII, thus implying higher inventory efficiency and a better return on

inventory investment. The significance of this is that as inventory efficiency increases,

profitability can also increase.

The study findings also provide some evidence that micro-retailers need to focus

on educating personnel on the management of inventory-related tasks as these have an

effect on inventory efficiency and may affect profits. The CIP instrument can also serve

as a baseline to test the areas that retailers need to improve on. The study also

contributed to the body of knowledge by providing leaders and practitioners with insight

on how to improve inventory management practices.

134
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 Appendix A: Informed Consent

Informed Consent Form

Prospective Research Subjects: Please take a moment to read this consent form

thoroughly as it will provide detailed information regarding the study, its benefits, risks,

and other pertinent information. This information should provide enough clarity

regarding your desire to participate in the study. Should you require any clarification

or have doubts, you are free to ask questions at any time before, during, or after

participating in the study.

You are invited to participate in a research study to determine the relationship

between the level of comprehensiveness of inventory policy and the profitability of

independent micro-retailers. The results of this study may help micro-retailers develop

improved practices and techniques that can increase the survivability rate, increase

profitability, and improve the efficiency of small retailers. You have been selected as a

possible study participant because your store qualifies as a micro-retail store and because

your store’s characteristics meet the necessary requirements for participation in the study.

If you decide to have your retail store participate, we will collect your retail point

of sale ODBC-compliant database and other information related to your store’s business

processes. If in the experimental group, we will implement process and automation tools.

Any information obtained from this study will be kept confidential and will remain

confidential and the information will not be identifiable. The information will only be

disclosed by explicit written consent from the study participant, although there will be no

way to identifying a company after the database is processed. Therefore, information

154
disclosed for the purposes of the study will be limited as non-identifiable information.

Such information is also limited to statistics obtained from the analysis of the survey

results.

If you decide to have your store participate, you are free to withdraw participation

before, during, or after the study at any time without consequence or penalty. Once

withdrawn, all information obtained from your participation will be destroyed.

BY SIGNING THE FORM BELOW YOU ARE INDICATING THAT YOU

VOLUNARILY DECIDE TO PARTICIPATE IN THE STUDY DESCRIBED

ABOVE AND HAVE READ THE PERTINENT INFORMATION CONTAINED IN

THIS FORM.

A COPY OF THIS FORM WILL BE PROVIDED TO YOU.

_________________________

Date

_______________________________________________

Store Name and Address

_______________________________________________

Signature of Participant (Storeowner or legal representative)

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_______________________________________________

Signature of Researcher

_______________________________________________

Signature of Witness

156
 Appendix B: Non-Disclosure Agreement

Non-Disclosure Agreement

This Nondisclosure Agreement (the "Agreement") is entered into by and between

_______________ with its principal offices at _______________ ("Disclosing Party")
and _______________, located at _______________ ("Receiving Party") for the purpose
of preventing the unauthorized disclosure of Confidential Information as defined below.
The parties agree to enter into a confidential relationship with respect to the disclosure of
certain proprietary and confidential information ("Confidential Information").
1. Definition of Confidential Information. For purposes of this Agreement,
"Confidential Information" shall include all information or material that has or could
have commercial value or other utility in the business in which Disclosing Party is
engaged. If Confidential Information is in written form, the Disclosing Party shall label
or stamp the materials with the word "Confidential" or some similar warning. If
Confidential Information is transmitted orally, the Disclosing Party shall promptly
provide a writing indicating that such oral communication constituted Confidential
Information.
2. Exclusions from Confidential Information. Receiving Party's obligations under this
Agreement do not extend to information that is: (a) publicly known at the time of
disclosure or subsequently becomes publicly known through no fault of the Receiving
Party; (b) discovered or created by the Receiving Party before disclosure by Disclosing
Party; (c) learned by the Receiving Party through legitimate means other than from the
Disclosing Party or Disclosing Party's representatives; or (d) is disclosed by Receiving
Party with Disclosing Party's prior written approval.
3. Obligations of Receiving Party. Receiving Party shall hold and maintain the
Confidential Information in strictest confidence for the sole and exclusive benefit of the
Disclosing Party. Receiving Party shall carefully restrict access to Confidential
Information to employees, contractors, and third parties as is reasonably required and
shall require those persons to sign nondisclosure restrictions at least as protective as those
in this Agreement. Receiving Party shall not, without prior written approval of
Disclosing Party, use for Receiving Party's own benefit, publish, copy, or otherwise
disclose to others, or permit the use by others for their benefit or to the detriment of
Disclosing Party, any Confidential Information. Receiving Party shall return to
Disclosing Party any and all records, notes, and other written, printed, or tangible
materials in its possession pertaining to Confidential Information immediately if
Disclosing Party requests it in writing.
4. Time Periods. The nondisclosure provisions of this Agreement shall survive the
termination of this Agreement and Receiving Party's duty to hold Confidential
Information in confidence shall remain in effect until the Confidential Information no
longer qualifies as a trade secret or until Disclosing Party sends Receiving Party written
notice releasing Receiving Party from this Agreement, whichever occurs first.
5. Relationships. Nothing contained in this Agreement shall be deemed to constitute
either party a partner, joint venturer or employee of the other party for any purpose.

157
6. Severability. If a court finds any provision of this Agreement invalid or
unenforceable, the remainder of this Agreement shall be interpreted so as best to effect
the intent of the parties.
7. Integration. This Agreement expresses the complete understanding of the parties
with respect to the subject matter and supersedes all prior proposals, agreements,
representations, and understandings. This Agreement may not be amended except in a
writing signed by both parties.
8. Waiver. The failure to exercise any right provided in this Agreement shall not be a
waiver of prior or subsequent rights.
This Agreement and each party's obligations shall be binding on the representatives,
assigns, and successors of such party. Each party has signed this Agreement through its
authorized representative.
Disclosing Party Receiving Party
By: ____________________ By: ___________________
Printed Name: ___________ Printed Name: __________
Title: __________________ Title: __________________
Dated: _________________ Dated: _________________

158
 Appendix C: Data Access and Use Permission

Data Access and Use Permission

Project Title:
Principal Investigator: Affiliation: Choose Affiliation
Name of Organization or Individual that Owns the Data:
Name of Representative Providing Permissions: Title of Representative:

Address of Organization or Individual Providing URL for Organization:

Data:
Email Address of Representative: Phone Number of
Representative:

Data Permissions
Describe data that will be provided to the researcher for this study:

Provide a description of the data that will be provided to the researcher.

Yes No Answer the following questions about the data and permissions.

In granting this permission, I am providing the researcher with the specific

data described above. Will the data provided include individual
‫܆‬ ‫܆‬
identifiers (i.e. names, email addresses, or any other item or a collection
of demographic items that may make the data individually identifiable)?
In granting this permission, I am aware that the study’s findings may be
‫܆‬ ‫܆‬ published. May the source of the data be identified in the reporting
and/or publication of study results?
If the University of Phoenix researcher is a student, can relevant
information associated with this data be available to the faculty or school
‫܆‬ ‫܆‬
administrators working with this student, such as the dissertation chair
and dissertation committee for educational purposes?
Are there any other stipulations about how the data must be
‫܆‬ ‫܆‬
maintained?
If yes: Describe additional stipulations.

159
In granting this permission, I also understand the data will be maintained in a secure and
confidential manner and that all reporting will be done in the aggregate or in a manner
to protect the privacy of any identifiable individual.

In granting this permission, I am aware that the researcher will obtain an IRB review and
approval or exempt determination to conduct the study listed above before being given
access to any data for research purposes.

Signature of Organizational Representative or Data Owner:

Select Date

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 Appendix D: Comprehensiveness of Inventory Policy Questionnaire

Inventory Preparation

1. Are all your products barcoded and/or do you have a way to generate barcodes for
products that do not come with barcodes?

2. Do you have a process or procedure in place to register each product in the store’s
retail system?

3. Do you have written documentation of the inventory preparation processes and is

the documentation available to employees?

Inventory Auditing

4. Do you have a process or procedure in place to audit/cycle count inventory that

identifies discrepancies between system inventory and physical inventory?

5. Are these audits/cycle counts conducted periodically (i.e. weekly, bi-weekly,

monthly, annually)?

6. Do you train employees on the auditing/cycle count process?

7. Do you have written documentation of the auditing process and is the

documentation available to store employees?

Sales Process

8. Does your retail store use an information technology system with barcode
scanning capabilities?

9. Are products individually scanned or identified at checkout?

10. Do you have policies and procedures in place that allow cashiers to handle
products that come up without barcodes?

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 11. Do you have policies and procedures in place that allow cashiers to handle
products that have a damaged barcode or cannot be scanned by the system?

12. Do you have written documentation of these policies and procedures mentioned
above and is the documentation available to store employees?

Inventory Reception, Storage, and Movement

13. Does the store have a designated area for storing and processing incoming
product?

14. Does the store have a designated area for excess product that does not fit in the
sales area?

15. Do you have a process or procedure in place to handle the product reception
process?

16. Do you have a process or procedure in place to handle excess inventory?

17. Do you have written documentation of the reception process and handling of
excess inventory and is the documentation available to store employees?

Inventory Management and Review

18. Do you review system inventory levels periodically?

19. Do you compare discrepancy levels between system and physical inventory
periodically?

20. Do you have a process or procedure in place to handle periodic inventory review?

21. Do you have written documentation of the periodic inventory review process and
is the documentation available to store employees?

162
22. Do you have a procedure or policies in place to handle the reordering /
replenishment of merchandise?

23. Does each inventory item have a minimum quantity and a reorder point assigned?

24. Are said minimum quantities and reorder points calculated using a sales history
model or forecasting model?

25. Do you have written documentation of the previously mentioned policies for
Inventory Management and Review and is the documentation available to store
employees?

163