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The Effect of Inventory Management on


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Article in International Journal of Productivity and Performance Management June 2008


DOI: 10.1108/17410400810881827

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The effects of
The effect of inventory inventory
management on firm performance management
Dimitrios P. Koumanakos
Industrial Management and Information Systems Laboratory, 355
Department of Mechanical Engineering and Aeronautics, University of Patras,
Rio, Greece Received May 2007
Revised January 2008
Accepted January 2008
Abstract
Purpose Lean management is getting more and more attention in todays highly competitive
environment. In this context, the aim of this study is to test the hypothesis that efficient (lean)
inventory management leads to an improvement in a firms financial performance.
Design/methodology/approach Data for the analysis came from the ICAP database, which
contains financial information on all medium to large Greek firms. The sample period extended from
2000 to 2002. For each year all manufacturing firms with the corporate form of societes anonyms
operating in any one of the three representative industrial sectors in Greece: food, textiles and
chemicals were selected.
Findings Preliminary results, obtained by cross-section linear regressions, reveal that the higher
the level of inventories preserved (departing from lean operations) by a firm, the lower its rate of
returns. Findings are additionally tested by the use of pseudo-likelihood ratio test which constitutes a
more reliable tool, thus verifying the robustness of the linearity of the relationship.
Research limitations/implications Given the great number of the possible determinants of
performance it is difficult to isolate the effect of inventories even by using large samples and advanced
methodologies.
Originality/value Since the results from other empirical studies on the microeconomic
determinants and consequences of inventories are somewhat contradictory, this study sheds more
light to this issue by employing more sophisticated statistical tests applied to a large and recent
sample of Greek manufacturers across different industries.
Keywords Lean production, Inventory management, Organizational performance, Greece
Paper type Research paper

1. Introduction
Managing assets of all kinds can be viewed as an inventory problem, for the same
principles apply to cash and fixed assets as to inventories themselves. Traditionally,
the academic literature on inventory focuses on production and procurement as the
principal determinants of corporate inventory policy and management. In this sense,
the trade-off between ordering costs and holding costs characterizes the transactions
approach to inventory management represented by the EOQ and (S, s) models of
inventory developed many decades ago. In recent years, as the field of operations
management has developed, many new concepts have been added to the list of relevant
inventory control topics. These more management-oriented topics include the material International Journal of Productivity
requirements planning systems (MRP), just-in-time (JIT) and ERP methods while and Performance Management
Vol. 57 No. 5, 2008
another emerging stream of studies postulates that the characteristics of a firms pp. 355-369
demand and marketing environments also play an important role in determining q Emerald Group Publishing Limited
1741-0401
optimal corporate inventories. Notwithstanding the theoretical or practical DOI 10.1108/17410400810881827
IJPPM shortcomings inherent in these concepts and techniques, their application in real
57,5 business life should have an effect in firms performance (Koh et al., 2007)[1].
Building on this intuition, our purpose in the present paper is to investigate the
relationship (if any) between inventory management practices and company
performance. Inventory turnover ratio will serve as our proxy for the implementation
of inventory management practices whereas two profitability accounting ratios will be
356 interchangeably used for the evaluation of corporate performance.
In general, efficient or inefficient management of inventories is only one factor that
may influence firm performance. A range of other macroeconomic, industry and
firm-level factors are also important. Historically, economists have focused on industry
level variables using the structure- conduct-performance (SCP) framework. This
stresses the role of industry concentration and a firms market share, since higher
levels of both could be (theoretically) linked to higher profitability. Empirical studies
also investigate other possible determinants, for example, ownership structure of the
firm (Himmelberg et al., 1999), strategic direction (Bart and Baetz, 1998), size of board
(Eisenberg et al., 1998), innovation (Hall, 1993) etc. In this study however, in an attempt
to isolate the impact of inventory policies we do not consider other possible predictors
of performance.
Nearly all the literature on optimal inventory management uses criteria of cost
minimization or profit maximization. An inventory managers goal for example, is
modelled as minimizing cost or maximizing profit while satisfying customers
demands. If inventory decisions do not affect the revenue stream, these two criteria
result in the same optimal replenishment policy.
In the operations management literature the question of how much inventory a firm
should keep has been extensively studied but there is dichotomy in the views given
that inventory is both an asset and a liability. Too much inventory consumes physical
space, creates a financial burden, and increases the possibility of damage, spoilage and
loss. Further, excessive inventory frequently compensates for sloppy and inefficient
management, poor forecasting, haphazard scheduling, and inadequate attention to
process and procedures. In this context the lean production principle pioneered by
Womack et al. (1990) has been linked with reduced level of inventories (Rajagopalan
and Kumar, 1994; Herer et al., 2002; Wickramatillake et al., 2006) even if volatility of
demand may limit the application of this principle. On the other hand, too little
inventory often disrupts manufacturing operations, and increases the likelihood of
poor customer service. In many cases good customers may become irate and take their
business elsewhere if the desired product is not immediately available.
Empirical evidence in the inventory management-performance relationship
produced also mixed results. Specifically, Milgrom and Roberts (1988) and Dudley
and Lasserre (1989) indicated that timely and informative customer demand data can
result in improved firm performance through reduced inventories. Huson and Nanda
(1995) proved that the improvement of inventory turnover (following JIT adoption) by
a sample of 55 firms led to an increase in earnings per share. Deloof (2003) documents a
significant negative relation between gross operating income and the number of
inventories days for a sample of non-financial Belgian firms during the period
1992-1996, suggesting that managers can create value for their shareholders by
reducing the number of inventories days to a reasonable minimum. Additional
evidence from Belgium is provided by Boute et al. (2004), who found no overall
decrease of inventory ratios despite any increased focus on inventory reduction and The effects of
Boute et al. (2006), who concluded that companies with very high inventory ratios have inventory
more possibilities to be bad financial performers. This is consistent with the findings of
Shin and Soenen (1998), which reported a strong negative relation between the cash management
conversion cycle and corporate profitability for a large sample of public American
firms. Chen et al. (2005) by examining how the market values the firms with respect to
their various inventories policies, reported that firms with abnormally high inventories 357
have abnormally poor stock returns, firms with abnormally low inventories have
ordinary stock returns while firms with slightly lower than average inventories
perform best over time. Furthermore, in a more recent study, Shah and Shin (2007)
examined the empirical associations among three constructs inventory, IT
investments and financial performance using longitudinal data that span four
decades, where they conclude that reducing inventories has a significant and direct
relationship with financial performance.
Contrary to the findings of the aforementioned studies, Balakrishnan et al. (1996), with
the use of a small sample size though (46 firms), reported that the accounting
performance of JIT adopters declines slightly compared to a matched sample of
nonadopters. Blazenko and Vandezande (2003) who show a significantly positive
coefficient on gross margin regressed as a determinant of finished goods inventories
argue that their results are consistent with the fact that profitability is deterrent to stock
outs. Further, Rotemberg and Saloner (1989) reported that a commonly identified
positive association between corporate inventories and sales is greater for more
concentrated industries. Yet, Vastag and Whybark (2005) by means of an international
group of manufacturing companies found no significant relationship between inventory
turnover and performance. Similarly, Demeter (2003) and Tunc and Gupta (1993) showed
that inventory turnover did not affect return on sales and level of sales respectively.
In the Greek context, Voulgaris et al. (2000) in an attempt to address the evaluation
of Greek SMEs performance on the basis of a financial ratio analysis used a sample of
143 industrial firms during the period 1988-1996 and found that the efficiency of
inventory management policy (measured by the inventory turnover ratio) is the
dominant factor of the performance of the Greek firms.
Given that the results from the above few empirical studies on the microeconomic
determinants and consequences of inventories are somewhat contradictory, our study
will try to shed more light to this issue by employing more sophisticated statistical
tests applied to a large and recent sample of Greek manufacturers across different
industries. Greece represents an ideal context for the purposes of our investigation,
given that it is exemplary of an economy in transition. Having made remarkable
progress towards macroeconomic convergence during the last few years, Greece is now
part of the EMU and thus sets the example for a number of other candidate economies.
The use of Greek evidence may lead to an assessment of the general applicability of
inferences drawn from relevant research in different countries.
To sort out the independent effects of inventories management in firms
performance we initially utilized a simple cross-section linear regression model
estimated by three representative industries[2] and for each of the years 2000 to 2002.
We expect the sign on inventory turnover (independent variable) to profit margin
(dependent variable) to be significantly negative because in our opinion, other things
held equal, a lean company who set operational speed as a key strategic approach
IJPPM should in overall be more efficient[3]. Next, for cases where the parameter of
57,5 independent variable proves statistically significant we have the motivation of
verifying linearity by means of pseudo-likelihood ratio test (PLRT). The PLRT is used
to check the appropriateness of a linear regression model versus a Nadaraya-Watson
local linear Kernel estimator.
The results of our study suggest that a positive strong linear association exists
358 between lean inventories management and accounting based performance only for
sporadic periods of time in only two out of three industries analysed.
The structure of the paper is as follows. Section 2 looks at the data for the analysis,
which comes from the ICAP database for the years 2000 to 2002 with up to 800 firms
included in some regressions. Section 3 presents the regressions models and initial
results, while section 4 develops the methodology used to verify the robustness of
previous inferences. Conclusions, limitations and future research issues are discussed
in section 5.

2. Sample and variables


The firm-level data for the analysis come from the ICAP database, which contains
financial information on all medium to large Greek firms. The sample period extends
from 2000 to 2002. For each year we initially select all manufacturing firms with the
corporate form of societes anonyms[4] operating in anyone of the three representative
industrial sectors in Greece: food, textiles and chemicals. According to the National
Statistical Service of Greece the manufacturing output of these three sectors accounted
in year 2000 for one third (33 per cent) of the total. Further, only firms which employed
at least five employees were considered in the sample to ensure a minimum operating
structure of each firm.
After eliminating firms with insufficient data an unbalanced panel set of 3,727
firm-year observations was obtained, with observations of 1,358 firms over the
2000-2002 period. Number of days inventories is calculated as [inventories 365]/cost
of sales. Profitability is measured with two slightly different accounting ratios in order
to obtain a greater insight in our sample firms operational activity. The first is gross
margin which is defined as sales minus cost of goods sold divided by sales and the
second is net operating margin which is calculated as net operating income divided by
sales plus other operating income. Panels A,B,C of Table I exhibit descriptive statistics
for each of the years 2000,2001,2002 considered in our study.
It is worth noting that the gross margins of the sample firms are considered
relatively low while the net operating margins, if we look at the mean values, are in all
years negative (however, the median value of net operating margins in all cases and
years remains positive). At the same time it takes on average 150 days for the firms (of
the whole sample) to sell inventory, which is much more than that of other developed
countries. The rationale behind could be that since Greece is mainly importing
intermediate goods as manufacturing inputs is likely to have higher inventory levels
because this procedure involves longer and more uncertain delivery times as well as
greater transaction costs leading to larger and less frequent shipments. A closer look at
different industries profile reveals that the textile industry having the higher mean
absolute level of inventories across time is ranked below the average in terms of
efficiency as measured by both the mean of gross and operating margins.
The effects of
SE
Mean Median TrMean StDev Mean Min Max Q1 Q3 inventory
Panel A year 2000
management
Food (n 782)
GRM 16.22 17.48 18.66 37.71 1.35 2648.6 85.84 9.04 26.63
NOM 23.84 2.08 1.79 63.47 2.27 21190.96 48.29 21.52 6.14
INVDA 104.79 61 78.51 212.35 7.59 1 3,760 29 108 359
Textiles (n 281)
GRM 20.214 20.09 20.181 15.387 0.918 248.67 96.91 13.07 27.935
NOM 2.6 4.58 4.73 22.05 1.32 2261.76 56.25 0.63 10.14
INVDA 163.2 103 120.8 290.4 17.3 1 3,671 41 185.5
Chemicals (n 158)
GRM 25.72 25.45 25.61 13.38 1.06 217.05 83.91 18.54 31.71
NOM 4.14 4.92 5.15 16.02 1.27 2136.37 62.64 0.93 9.09
INVDA 105.7 94 96.67 82.92 6.6 5 725 52.75 130
Panel B year 2001
Food (n 799)
GRM 17.973 16.31 18.245 17.417 0.616 2139.95 82.91 9.29 26.44
NOM 24.56 1.97 1.45 87.97 3.11 22321.77 43.33 21.6 5.97
INVDA 108.31 63 81.8 231.41 8.19 1 5,026 30 116
Textiles (n 289)
GRM 17.091 17.15 17.342 16.683 0.981 256.99 96.22 9.115 25.585
NOM 22.68 2.47 1.69 42.76 2.52 2540.71 64.85 22.77 6.59
INVDA 299 112 140 1916 113 2 32,016 48 186
Chemicals (n 159)
GRM 24.51 24.79 24.93 17.27 1.37 287.13 98.84 17.03 31.58
NOM 29.8 3.4 4.3 162.9 12.9 22041.1 70.3 0.6 7.3
INVDA 212.3 92 102.8 937.2 74.3 7 10,644 57 139
Panel C year 2002
Food (n 805)
GRM 18.426 17.16 18.877 19.278 0.679 2181.09 83.55 9.745 28.025
NOM 21.167 2.06 1.504 24.563 0.866 2334.72 48.17 21.36 5.9
INVDA 106.44 68 85.86 149.25 5.26 1 1,702 32 126.5
Textiles (n 297)
GRM 15.25 15.96 16.51 28.88 1.68 2338.18 95.5 8.29 25.46
NOM 21.62 1.7 0.52 20.13 1.17 2197.08 55.23 23.49 5.94
INVDA 288 106 132 1889 110 1 32,226 35 200
Chemicals (n 157)
GRM 24.32 26.01 26.42 28.76 2.3 2270.6 85.49 19.44 32.64
NOM 21.03 3.72 4.97 44.08 3.52 2357.38 61.85 0.37 9.5
INVDA 129.3 100 109.4 144.6 11.5 5 1,373 62.5 156.5
Notes: GRM: Gross margin is (sales cost of sales)/sales. NOM: Net operating margin is net operating Table I.
income/sales+other income. INVDA: Number of days inventories is (inventories 365)/cost of sales Descriptive statistics

Further, for our analysis we shall use the mean[5] values of all variables considered but
before that we exclude outliers through the hi leveraged values (Ryan, 1997). These
outliers for any firm may be due to unexpected events or even policy making issues at
a specific period of time.
An interesting point is emerging from the Figures 1 and 2 where a clear visual
negative correlation between inventories levels and profitability is graphed.
IJPPM
57,5

360

Figure 1.

Figure 2.
As clearly shown in Figures 1 and 2, at the firm level the impact of these high levels of The effects of
inventories in competitiveness is crucial[6] given the high cost of working capital in inventory
Greece. As a consequence the higher the interest rates the costlier are inventory levels
which in 2001 could not be absorbed due to the recession of the Greek economy in that management
year (following the trends of the economies globally). Of course, many other factors
should have played an important role in the step-down of profitability of Greek
manufacturers in 2001 but the contribution of inventories behavior remains significant. 361

3. Empirical results
In order to investigate the impact of inventories management on corporate profitability
we successively applied the ordinary least squares (OLS) procedure by year and
industry. Our goal is to address the microlevel relationship between inventory
optimization strategy and performance, while isolating macro industry level
influences. Therefore, we restrict our analysis to one industry each time and as a
consequense, the results obtained are less noisy while performance gains and losses
can be more plausibly linked to the strategy of inventory policy.
The cross-sectional model used is yi b0 b1 xi 1i (1) where xi is the (mean)
number of inventories days for firm i, 1i is the error term that we consider iid normal
and yi is the (mean) profitability ratio for firm i. OLS was run for both alternatives of
profitability ratios tested: gross margin and net operating margin respectively. This is
done to find out as to what extent the results vary with variations in the dependent
variables used.
As the model (1) was run for two different alternatives and for each of the three
industries and three years, it had 18 runs. Of these, for simplicity, we show in Table II
the results when net (mean) operating margin (NOM) is used[7], disaggregated by year.
In the majority of sectors and years under investigation the relationship between
profitability and inventory management is negative and statistically significant at
least at 10 per cent level of significance. Undoubtedly, the values of R 2 show, in
general, a low magnitude of this relationship while does not exist problem of serial
correlation (Durbin-Watson criterion). We used also the Breush-Pagan powerful
criterion for testing the assumption of homoscedasticity which unfortunately is
rejected for all regressions[8].
Probably the most important items to note are these on the chemicals sector.
Consistent with the prediction that a lean manufacturer would be efficient in terms of
profitability the coefficient on inventory turnover ratio is negative and statistically
significant at 1 per cent for the years 2000 and 2001. Similarly, in the food sector for the
period 2000 to 2001, a strong negative linear relationship between the two variables
examined is shown. On the other hand, the weak evidence (and in one case
contradictory results i.e. the positive sign in year 2002) shown in the textiles indicate
that the application of a non-parametric model may be a good choice for this sector.
At this point recall that previously, we detected problem of heteroscedasticity at
every specification of model (1). A possible explanation for the sharp movements in the
volatility of firms profitability could be the result of the slowdown realized in the
global economic activity during the period under investigation. The impact of these
fluctuations in the dependent variables is reflected through the non-constant variance
of disturbance term.
57,5

362
IJPPM

Table II.
Ordinary least squares
estimation of model (1)
Dependent
variable Food Textiles Chemicals
(NOM) 2000 2001 2002 2000 2001 2002 2000 2001 2002

Constant 2.649 7.868 * * * 2.367 * 4.036 * 2.772 21.339 5.803 * * 7.055 * * * 4.842 *
INVDA 20.065 * * 20.412 * * * 20.088 * 20.017 20.027 * 0.012 20.229 * * * 20.294 * * * 20.133 *
R 2 (%) 27.4 58.9 25.8 16.1 26.0 8.1 49.9 63.1 33.1
D-W 2.05 1.84 1.97 2.05 2.18 1.87 1.80 2.12 2.01
Breush-
Pagan
test S1 20.318 * * * S1 19.621 * * * S1 17.579 * * * S1 16.609 * * * S1 23.788 * * * S1 19.915 * * * S1 26.630 * * * S1 23.004 * * * S1 16.738 * * *

Notes: *significant at 10%, * *significant at 5%, * * *significant at 1%


4. Testing linearity The effects of
Returning to the cross-sectional model, we need to point out the fact that the statistical inventory
significance of independent variables parameter (in years 2000, 2001 for both the
chemicals and food sectors) does not ensure the linearity of the model[9]. Consequently, management
it is almost imposed to employ the PLRT as supplementary to linearregression. The
21 t
ordinary least squares estimator
 via matrix
t algebra is m ^ LS X X t X X y where X
the design matrix and y y1 ; :::; yn . The Nadaraya-Watson
 local linear kernel 363
estimator (NW) is m^ NW Wy where W wj xi i;j1;:::;n the weight matrix and:
 
K x 2 xi =h
wi x n
X  
K x 2 xi =h
i1

K(x, h) the kernel function with smoothing parameter h.


The PLRT, which proposed initially by Ramsey (1969) and later by Azzalini and
Bowman (1993), tests the null hypothesis that mx b0 b1 x versus the alternative
that m(x) is a smooth non-linear function of x. The PLRT assumes the normality of the
errors 1 exploiting the properties of the NW estimator. The hypotheses are:
 
H0. E 1^i 0 for any i and xi .
 
H1. 1^i g xi i.e. a function of x 1^i Y i 2 b^0 2 b^1 xi and Y i mxi 1i .
PLRT turn out at three parameters a, b, c that are used at p-value 1 2 F(q). q 2 c/a
and F(.) is the distribution function of a chi-square random variable with b degrees of
freedom.
Before proceeding, we refer that NW estimator will be applied on the residuals of
models (1) specifications. A first view is taken through the scatter plots of residuals
with the number of inventory days (independent variable). The continuous smoothed
line depicts the fitting of locally weighted regression at data with fraction of
observations f 0.5. The locally weighted regression has better properties than NW
estimator (see Ryan, 1997) but cannot be used in PLRT.
In the chemicals sector for the years 2000 and 2001 by regressing the residuals on
inventory turnover we do not observe important departure from linear relationship
(Figures 3 and 4). The data are distributed randomly over zero without a specific shape
although is apparent the characteristic shape of cone that implies heteroscedasticity.
On the other hand, in the food sector for both years examined (2000, 2001) the
departure from linearity is obvious (Figures 5 and 6). Probably, the OLS procedure
does not support linearity in the latter cases but the opposite seem to happen for the
chemical sector in years 2000 and 2001. However, PLRT will offer a more reliable result
than a scatter plot.
First, as Kernel function we use the Gaussian Kernel. Moreover, the nearly
normality of residuals aloud us to define h-optimal as:
 
215 IQR
hopt 1:059sn and s min ;s :
1:345
IQR is the interquartile range and s the standard deviation (Simonoff, 1996). Table III
exhibits the results[10].
IJPPM
57,5

364

Figure 3.

Figure 4.

Figure 5.
The effects of
inventory
management

365

Figure 6.

Chemicals Food
Dependent variable Year 2000 Year 2001 Year 2000 Year 2001

h 0.003525 0.002190 0.003493 0.004418


a 0.50848 0.31820 1.069217 1.055474 Table III.
b 56.689 61.691 28.515 28.517 Pseudo-likelihood ratio
c 22.7531 213.929 246.2006 246.1998 tests for sectors and years
p-value 0.5121 0.4996 0.03155 * 0.04349 * where linearity according
to model (1) was initially
Note: * significant at 5% detected

Apparently, PLRT does not reject the null hypothesis at the specification of model (1)
in the chemicals sector for both years 2000 and 2001. Thus, the cross-sectional
relationship between profitability and inventory turnover in chemicals during the
period 2000-2001 may be supported by a simple linear regression model like the one we
used in the previous section. By contrast, in the other two cases (as far as the food
sector for years 2000 and 2001 is concerned), PLRT rejects the null hypothesis so, for
describing the relationship between profitability and inventory turnover we must look
for a different parametric model or use a non-parametric model such as NW local linear
estimator and locally weighted regression.
It therefore seems that no consistent patterns can be detected in various industries.
Different tendencies in examined industries might result from many factors inherent to
industries specific structural elements. Within this context, a possible interpretation
for the examined adverse (positive) relationship shown in the textiles sector is that a
more competitive market, as it becomes the textiles market following the expansion of
Chinese industries, increases the consequences of stock outs and firms respond by
increasing inventories.
However, one potential concern with inferences so far is that we consider a broad
sample of undifferentiated firms where one might expect both opportunistic behavior
and efficient contracting to influence firms accounting choices. That is, one could
argue that our tests potentially lack power if the managers of sample firms deliberately
IJPPM manipulate the financial figures utilized such as the earnings and inventories. Toward
57,5 this notion, Hodge (2003) argues that perceived earnings quality has declined over time
while according to Greene (2002) inventory fraud possesses a significant problem for
businesses because:
[. . .] it is more difficult to prevent and detect than other asset thefts because of a large volume
of items in inventory, the number of employees with access to assets, complicated processes
366 involved in production, and the many entries and complex systems used to account for the
inventory and the production process.
Hence, it is also important to control for inventory accounting choices so as to ensure
that the results that we report arise from the economics of the situation and not as an
unrepresented accounting phenomenon.

5. Conclusion
The purpose of this study was the investigation of existence of a possible linear
relationship between inventory holdings and accounting based measures of
performance for a recent group of Greek manufacturing firms belonging to the food,
textiles and chemicals sectors. Results verified by the PLRT confirm the existence of a
robust linear relationship but only in the sector of chemicals. Therefore, another
parametric or a non-parametric model is needed to describe this relationship in the
other sectors.
Because our research is based on firm-specific financial data, it has certain
limitations that can be addressed in future research using more detailed data sets. In
this context, given the great number of the possible determinants of performance it is
difficult to isolate the effect of inventories even by using large samples and advanced
methodologies. Thus a major issue of concern is that of omitted variables.
Another limitation could be the questionable validity of the accounting data used
after the results presented by two recent international studies (Leuz et al., 2003;
Bhattacharya et al., 2003) the only two among others which include Greece in their
sample. Both studies conclude that earnings management is more pronounced in
Greece than in other countries. Given that the published accounting data is the only
input in our models we must interpret the results cautiously. Future research
examining whether or not (and if yes to what extent) the reported in the financial
statements earnings and inventory levels are manipulated would lead to a better
understanding of the relationship.

Notes
1. In the macroeconomic level also, studying inventory investment is important because its
movement is thought to be a major source of fluctuations in GDP growth (Lovell, 1994;
McConell and Perez-Quiros, 2000).
2. Since the majority of success stories in operations management stem from automotive and
machinery industries in this study we examine how operations methodologies have affected
other industries as well.
3. Even if in reality many manufacturers have found it difficult to minimize the levels of
inventories. For example, Haan and Yamamoto (1999) report that in Japan, where JIT
systems originated, many factories have not reached a desirable reduced level of inventories.
4. We excluded from the analysis limited liability companies while sole proprietorships and The effects of
partnerships are not contained in the database. However, this is not considered as a bias,
since this type of micro firms should be regarded rather as handicraft and not inventory
manufacturers. management
5. Results using median instead of mean values remain qualitatively the same.
6. As inventory is reduced there will be profit improvements due to interest savings as well as a
reduction in storage fees, handling, and waste. These savings have been estimated by the 367
literature to be on the order of 20-30 percent (Brigham and Gapenski, 1993).
7. With the gross margin (GRM) used as dependent variable in model (1) the results were
qualitatively identical (although less significant in general) to those presented.
8. S 1 follows Chi-square distribution with one degree of freedom. In addition, the normality
assumption for all cross sectional models was only partly verified via the normality test of
Kolmogorov-Smirnov.
9. Durio and Isaia (2004) demonstrate concrete examples.
10. The relationship between profitability and inventory turnover in the textiles sector (as well
as in the other sectors for the year 2002) is not tested as long as the linearity via OLS is not
supported.

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Vol. 19, pp. 250-72.

About the author


Dimitrios P. Koumanakos is a graduate of the Department of Mechanical Engineering and
Aeronautics of the University of Patras, Greece. He is currently a PhD student in the same
Department at the Industrial Management and Information Systems laboratory. His
research interests are mainly directed towards the concurrent design of products and supply
chains. His research interests also include lean supply chain management, inventory
management, as well as simulation of production processes and supply chains. His working
experience in the field includes the position of Venue Logistics Manager for the City of Patras at
the Olympic Games of Athens 2004. Dimitrios P. Koumanakos can be contacted at:
kouman@upatras.gr

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