Inventory Management and

Financial Performance of
Mercury Drug Franchise Stores
in Luzon, Philippines
Jason M. Metra
Master in Management major in Financial Management
Chapter I. Background of the Study
 Managing inventory effectively and efficiently is of paramount importance to any
pharmacy like Mercury Drug.
 Hence, sustainable operation of Mercury Drug franchise stores depends largely on how
well they manage their inventory.
 It has been observed, however, that most franchise stores have become habituated
with high levels of stock availability resulting in higher stock holding levels.
 Mercury Drug is one of the most trusted pharmacy chain in Asia (International Brand
Consulting Corporation, 2018).
 Mercury Drug is more than just a pharmacy - it is the country's trusted and caring
health and wellness partner, providing the widest range of branded and generic
medicines, as well as a complete line of health care and personal care products,
including medical devices, and basic everyday needs.
 Mercury Drug franchise stores are considered pioneers in drug retailing in North and
Central Luzon.
Background of the Study (con’t…)
 In the retail industry where Mercury Drug franchise stores belong, medicines, milk,
cosmetics and other non-pharmaceutical products are the core of its business thus any
shortages or overages of its inventory can be extremely unfavorable to the company.
 The goal of this research is to measure the inventory management performance of
Mercury Drug franchise stores in order to find possibilities for improvement.
 Therefore, it is important that we examine in this study the effects of inventory
management on financial performance and identify the problems and concerns that
Mercury Drug franchise stores are experiencing.
Statement of the Problem
 Inventory constitutes a major component of working capital of each franchise store.
Thus, this study will attempt to determine the relationship between inventory
management performance and financial performance of Mercury Drug franchise stores
in North and Central Luzon.
 Specifically, the study shall provide answers to the following questions:
 What is the profile of Mercury Drug franchise stores in terms of:
a. Company Size;
b. Length of Operation; and
c. Number of Employees?
 What is the level of performance of Mercury Drug franchise stores based on the
following measures:
a. Inventory Turnover; and
b. Shrinkage?
Statement of the Problem (con't...)

 What is the level of financial eprformance of Mercury Drug franchise stores in

terms of:
a. Return on Sales;
b. Return on Assets; and
c. Return on Equity?
 What is the relationship between the inventory management performance and
financial performance of Mercury Drug franchise stores?
 What are the problems of Mercury Drug franchise stores related to inventory
management?
Chapter II. Highlights of Literature Review
 This chapter presents the review of related literature which includes the following:
 Meaning of Inventory
 Types of Inventory
 Classification of Inventory
 Reasons for Holding Inventory
 Motives of Holding Inventory
 Costs Associated to Inventory
 Concept of Inventory Management
 Scope of Inventory Management
 Inventory Management Systems
 Inventory Management Metrics
 Financial Performance Ratios
Highlights of Related Studies
 On the other hand the review of related studies includes the following:
 Average Days to Sell Inventory and Profitability
 Inventory Conevrsion Perido and Profitability
 Assets and Profitability
 Shrinkage and Profitability
 Return on Equity and Profitability
 Reorder Point and Order Size
 Inventory Management Practices and Profitability
 Inventory Managment and Financial Performance
 Business Models in Franchising
Theoretical Framework
 The two (2) theories that are particularly tested and accepted in franchising as a
business model are agency theory and resource scarcity theory.
 Resource Scarcity Theory. The scarcity principle is an economic theory in which a
limited supply of good, coupled with a high demand, results in a mismatch
between the desired supply and demand equilibrium. It assumes that firms
franchise because they are capital resource controlled.
 Agency Theory. There is an established “agency relationship”. Agency theory holds
thathe purpose of contracts with an agent is to allow for the necessary transactions
of the business to be conducted in an integrated way.
Conceptual Framework
 Figure 1 shows the
conceptual framework of this Inventory Management Financial
study. It posits that
inventory management Performance Performance
performance is related to
financial performance. The
extent of this relationship is Return on Sales
to be tested in the research
scope and study area. Each Inventory (ROS)
of the metrics of inventory Turnover
management performance
(inventory turnover and Return on Assets
shrinkage) is related to each
of the metrics of financial (ROA)
performance (return on sales, Shrinkage
return on assets and return
on equity). Return on Equity
(ROE)
Hypotheses
 The following research hypotheses will be tested:
1.There is no significant relationship between inventory turnover and return on
sales of Mercury Drug franchise stores.
2.There is no significant relationship between shrinkage and return on sales of
Mercury Drug franchise stores.
3.There is no significant relationship between inventory turnover and return on
assets of Mercury Drug franchise stores.
4.There is no significant relationship between shrinkage and return on assets of
Mercury Drug franchise stores.
5.There is no significant relationship between inventory turnover and return on
equity of Mercury Drug franchise stores.
6.There is no significant relationship between shrinkage and return on equity of
Mercury Drug franchise stores.
Chapter III. Methodology
 Research Design
 This study will use a descriptive-correlational design where the researcher will
attempt to describe the variables and relationship between and among the
variables.
 This research also uses panel data analysis. Panel data is a data-set in which
the behaviour of entities are observed across time.

 Locale of the Study

 This study is to be conducted in Mercury Drug franchise stores in North and
Central Luzon. The franchise stores are near and convenient for the researcher
to conduct the study.
 Laoag City Mercury Drug Franchise
Stores in North Luzon

Vigan City

Cauayan City

Urdaneta City
 Mercury Drug Franchise
Paniqui, Tarlac Stores in Central Luzon

Angeles City Cauayan City

San Fernando City

Olongapo City
Population and Sampling
 The population of this study consists of Mercury Drug franchise stores in North and
Central Luzon.
 The sampling technique that will be used for this study are purposive and
convenience sampling.

Location Total Number of

Franchise Stores
NorthLuzon 5
Central Luzon 9
Total 14

 The target number of respondents would be at 50% to 75% of the total number
of franchise stores.
Data Gathering Instrument & Procedure
 The study depends on both primary and secondary data.
 Questionnaires and informal interviews are to be used as the research primary
data.
 Secondary data will come from Audited Financial Statements (AFS) of Mercury
Drug franchise stores submitted to the Securities and Exchange Commission (SEC)
for the three (3) year period from 2015 to 2017.
 The survey questionnaire will be distributed personally to the managers of the
identified Mercury Drug franchise stores.
 The data will be collected for a period of two (2) weeks.
 All data pertaining to financial performance will greatly rely on the submitted
Audited Financial Statement (AFS) to the Securities and Exchange Commission
(SEC).
Ethical Considerations
 The researcher will ask permission from the management of each respective
franchise stores.
 The respondents of this study are not forced to answer any or all of the items but
will do it voluntarily.
 Information provided by the representatives of Mercury Drug franchise stores are
assured of utmost confidentiality and will not be used for any other purpose
except for the attainment of the objectives of this research study.
 The researcher shall exercise a great deal of care and fairness throughout the
research process.
Statistical Treatment of Data
 Inventory management performance will be measured using inventory turnover
and shrinkage while financial performance will be measured using return on
assets, return on sales, and return on equity.
 These metrics will be computed using the audited financial statements. Since this
study will make use of panel data, regression analysis will be applied.
 To obtain unbiased and consistent estimates, several diagnostic tests will be
carried out on the data series.
 Pre-regression Test
 Regression Test
Interpretation of Data
 1.To interpret the inventory management performance of Mercury Drug franchise
stores, the computed values will be interpreted using the following ranges:
a. Inventory Turnover
Range Level of Performance
12 and above Very Good
6 – 11.99 Good
5.99 and below Poor
b. Shrinkage
Range Level of Performance
0.20% and below Very Good
0.21% to 0.30% Good
0.31% and above Poor
Interpretation of Data
 2.To determine the level of financial performance (ROA, ROS and ROE) of Mercury
Drug Franchise stores, the values are interpreted as follows:
Range Level of Performance
100% and above Very Good
0.99% and below Poor
Questionnaire
Par t I. Business Pr ofile of Mer cur y Dr ug Fr anchise Stor es

Instr uct ion: Please respond to the following questions by placing a check mark (√) in
the answer box that corresponds to your response and/or fill in the blank where
indicated.

Name: (Optional)

______________________________________________________

a. Category Based on Total Assets of Mercury Drug Franchise Store

Micro (up to 3 million of total assets) Medium (15,000,001 to 100,000,000)

Small (3,000,001 to 15,000,000) Large (above 100,000,000)

b. Length of Operation: _____________ years

c. Number of Employees (both regular and contractual)

1 to 9 10 to 99 100 and above

Questionnaire (con't...)

Par t II. Per for mance of Mer cur y Dr ug fr anchise stor es in ter ms of Inventor y
Management Metr ics:

Instr uct ion: The data will depend on the submitted Audited Financial Statement
(AFS) te Securities and Exchange Commission (SEC). In this regard, kindly furish a
copy of the AFS as basis oin the computation of the inventory management and
financial performance of the company.

2017 2016 2015

Inventory Turnover

Days to Sell Inventory

Shrinkage
Questionnaire (con't...)

Part III. Financial Performance of Mercury Drug franchise stores in terms of:

2017 2016 2015

Return on Assets

Return on Sales
 Questionnaire (con't...)
P a r t IV. P r ob lems a n d C on cer n s of M er cu r y Dr u g fr a n ch ise stor es r ela te d to
In ven tor y M a n a gemen t

In str u ct ion : Please place a check mark (√) in the box/es that you think your store
is/are currently experiencing.

Failure to track demand because temporary out-of stock lis t is not consid ered
before ord ering.
Having an excess inventory due to guestimates and /or inaccurate ord ers.

Infrequent checking and monitoring of stock control book.

Difficulty on id entifying demand patterns due to demand changes and trends.

Disregard ing the computation of safety inventory level.

Limited and controlled order of stocks because of poor cash flow.

Uses manual processe s to track and record s inventory.

Increase on stock damages due to mishand ling and/or uncontrollable pests.

Overstocking or having slow-moving items or non-moving (d ead) stocks.

Stocks cannot be returned due to “no return, no exchange” policy of some

suppliers.

Inaccurate record ing of documents such as sales and supplier ’s invoice s.

Lack of monitoring of expired items.

Encounters improper or wrong dispensing of stocks.

Sometimes stocks are not properly labelled and displayed on their respective
gondolas.
Merchand ise inventory level is more than four (4) weeks supply.

Others, please specify

_________________________________________________
___________________________________________________________________
Thank you! 