Relationships among information technology, inventory, and profitability: An investigation of level invariance using sector level data

Rachna Shah* Department of Operations and Management Science Carlson School of Management University of Minnesota Minneapolis, MN 55455 612-624-4432 RShah@csom.umn.edu

Hojung Shin Department of LSOM Business School, Korea University Anam-dong, Seongbuk-gu, Seoul 136-701, Korea +82-2-3290-2813 hojung_shin@korea.ac.kr

August 14, 2006

* Corresponding Author Copyright 2006.

Relationships among information technology, inventory and profitability: An investigation of level invariance using sector level data
Abstract Researchers studying multi-level theories use homologous models to represent parallel nomological networks among similar constructs across different levels of analysis. We use the logic underlying homologous models to examine whether relationships established at the firm level of data aggregation are also evident at the economic sector level. Specifically, we investigate the process-model (Barua et al., 1995) which posits that the relationship between IT investment and financial performance is mediated by operational performance, albeit in the manufacturing sector using firm level data. We examine the process-model using publicly available sector level data from 1960 to 1999 in the manufacturing, retail and wholesale sectors of the U.S. economy. Our results provide strong support for the process-model and highlight inter-sector variations suggesting that different contextual factors may be at play in the three sectors. Finally, examining the process-model at a higher level of aggregation contributes to the scant multi-level empirical research.

Keywords: IT investment; Inventory; Profitability; Cross-level longitudinal analysis

Relationships among information technology, inventory and profitability: An investigation of level invariance using sector level data

1.

Introduction Inventory management and investment in information technology have generated

great interest in the academic and business press in recent years because of the substantial monetary expenditures involved. In October 2006, the total adjusted inventory in the United States (U.S.) was $481 billion for all manufacturers, $492 billion for retailers, and $393 billion for wholesalers1. Similarly, investments in information technology (IT) increasingly account for a larger proportion of capital expenditures in U.S. companies, exceeding 50% in 2000 and comprising more than $400 billion (Carr, 2003). In the present study, we examine two important questions associated with IT investments impact. We first analyze whether increased IT investment has led to improved inventory performance. Then, we study the role of inventory performance between information technology and financial performance. Our research is motivated by the following observations. First, while IT investments impact on a firms inventory and/or financial performance has been extensively studied in several academic disciplines, few studies have linked all the three variables (i.e. IT investment, inventory, and financial performance) simultaneously. We fill this gap by holistically examining the empirical associations among these three constructs, using longitudinal data that span four decades. Second, the empirical evidence supporting the effect of IT investment on financial performance is mixed (Kohli and Devaraj, 2003), prompting researchers to coin it the profitability paradox (Dedrick et al. 2005). Carr (2003) argues that large investments in IT do not result in higher performance and are not a source of competitive advantage because IT is not
1

2006 Monthly Trade Survey of the U.S. Census Bureau.

a rent yielding resource in a resource based view sense, but it is an infrastructure that is easily imitable and, at best, provides only a rapidly eroding advantage to firms. Other IT researchers note that instead of directly affecting a firms financial performance, IT investments impact is indirect through intermediate operational performance related to inventory turnover, product quality, and plant productivity (Banker et al. 1990; Barua et al. 1995; Melville et al. 2004). The mediating role of operational measures between IT investment and financial performance is formalized as the process-model in the IT literature. The process-model explicitly specifies that IT investment leads to better financial performance indirectly through improving operational performance. In linking IT investment, inventory and financial performance, we aim to examine the process-model beyond its manufacturing origins into the retail and wholesale sectors. Third, previous studies have examined relationships among IT investment, inventory and financial performance with firm level data. In their meta-analysis of the IT literature, Kohli and Devaraj (2003) concluded that the impact of IT investment is most likely to be detected in manufacturing industries. Further, they noted that IT investments impact is easier to observe with primary data at the firm level than with secondary data at higher levels of aggregation. In contrast, organization systems scholars suggest that similar relationships may exist at multiple levels of an organizational system (Duncan, 1972). Multi-level organization system researchers use homologous models to represent parallel nomological networks among similar constructs across different levels of analysis (Chen et al., 2005a). Identifying such cross-level relationships is of considerable importance to theory building (Rousseau, 1985; Barney, 1992; Hackman, 2003) because they signal a boundary condition; however, empirical analysis of such relationships remains scarce (Chen et al., 2005a). To resolve these issues in the existing literature, we examine whether relationships

established at lower levels of data aggregation (e.g. firms) are also evident at higher levels of aggregation in the three main sectors (manufacturing, wholesale and retail sectors) of the U.S. economy. From a theoretical perspective, the process-model is consistent with the industrial organization paradigm proposed by Scherer and Ross (1990) that operational excellence in inventory performance is essential to appropriate financial benefits from implementing structural decisions such as IT investments. We examine our research questions using econometric data publicly available from the Bureau of Economic Analysis (BEA) and hierarchical regression analysis. The remainder of the paper is organized as follows: A brief review of the relevant literature and research hypotheses are presented in Section 2. Data sources and variables are discussed in Section 3. The statistical methods used to examine the hypotheses and results are described in Section 4, followed by a discussion of the findings and their implications in Section 5.

2.

Theoretical foundation, literature and research hypotheses To build the theoretical foundation for the present study, we reviewed three literature

streams. These are operations management (OM), supply chain management (SCM), and information systems/information technology (IS/IT). We conducted an extensive review of the relevant OM, SCM, and IS/IT literature focusing on studies that examined IT investment and its impact on inventory performance and/or financial performance. We classified these studies by the type and level of data and the analysis method used. The type of data used in the studies range from cross sectional to longitudinal, and the level of aggregation at which the analysis is conducted includes dyadic interactions, multiple firms in one or more industries, and industry

sub-groups aggregated by strategic business units (SBU) or standard industrial code (SIC) in the manufacturing, retail, or wholesale sectors. Data sources include survey or case-based data and publicly available data. Rather than a complete list of extant literature, we present a summary of the most relevant literature in Table 1. [Table 1 about here] Not surprisingly, we find that each research stream has developed with a distinct focus. One of the primary themes in OM research has been on examining the relationship between implementing a set of improvement practices and their impact on firm performance, including inventory performance (Billesbach and Hayen, 1994; Chang and Lee, 1995; Huson and Nanda, 1995; Balakrishnan et al. 1996; Fullerton et al. 2003; Shah and Ward, 2003). SCM researchers frequently investigate the extent of implementing coordination and collaboration practices and their performance impact (Frohlich and Westbrook, 2001; Frohlich and Westbrook, 2002; Shah et al. 2002; Vickery et al. 2003). In contrast, IS/IT researchers typically focus on whether the investment in IT pays off by assessing the mechanisms in which business value is generated from IT (Mukhopadhyay et al. 1995; Santhanam and Hartono, 2003) and by estimating the magnitude of benefits from IT investment (Strassmann, 1985; Brynjolfsson, 1993; Brynjolfsson and Hitt, 1996; Brynjolfsson and Hitt, 2000; Jorgenson and Stiroh, 2000; Kraemer and Dedrick, 2001). Our review of the OM and SCM literature suggests that at lower levels of aggregation, information sharing by coordinating internally within a firm and externally with suppliers and customers is positively associated with operational and financial performance, but the support for financial performance is weak (Cachon and Fisher, 2000; Vickery et al., 2003; Hendricks et al., 2007). Additionally, IT in OM/SCM literature is generally conceptualized as a specific type of

technology (e.g. EDI) or as serving a specific function (e.g. coordination) and is often operationalized in terms of the extent of use or extent of implementation. OM/SCM researchers are typically not interested in IT investment per se, but rather in the operational and organizational issues associated with deploying a new technology and its potential benefits. In contrast, IS/IT researchers have studied IT investments extensively and examined the impact broadly from a variety of perspectives (see for example, Brynjolfsson and his colleagues work). For comprehensive reviews of the IT investment literature, see Dedrick et al. (2003), Kohli and Devaraj (2003) and Melville et al. (2004). Our review also indicates the paucity of research linking IT investment, inventory performance and financial performance in one study. Two exceptions are Mukhopadhyay et al. (1995) and Barua et al. (1995). However, both studies examine a limited number of manufacturing firms using data that spans a short time duration. Specifically, Mukhopadhyay et al. (1995) collected data from Chryslers first tier suppliers to examine benefits of investing in a specific type of IT (EDI). Barua et al. (1995) used secondary data to examine the process-model and assess the impact of IT investment at the strategic business unit level in the manufacturing sector. These studies provide support for significant relationships among IT investment, inventory performance and financial performance, albeit in the manufacturing sector at the firm level of aggregation. Organization systems theorists contend that some relationships that manifest at one level (e.g., firm, individual) may also be found at other (e.g., sector, group) levels of aggregation (Rousseau, 1985). They use homologous models to represent similar relationships between parallel constructs across different levels and term these homology across levels (Kozlowski and Klein, 2000). Support for relationships at different levels of aggregation suggests level

invariance in relationships and adds to parsimony and breadth of theories (Chen et al., 2005a). Level invariance or cross-level relationships are critical to both theory development and the generalization of theoretical implications (Kozlowski and Klein, 2000). Replicating results at different levels of aggregation and in different contexts from the original formulation of a nomological network contributes to the iterative theory development process (Meredith, 1993) In the present study, we examine the relationships previously established at the firm level at the sector level of aggregation. Additionally, we extend the process-model from the manufacturing sector to the retail and wholesale sectors. Specifically, we examine the direct impact of IT investment on inventory performance and the relationship between IT investment and financial performance, and whether it is mediated by inventory performance. The objective is to determine whether the process-model can be verified at a higher level of aggregation in other industry sectors. Confirming or disconfirming these relationships with higher level data will either help identify important anomalies in which the expected relationships may not occur or buttress the findings of the existing models, leading to richer interpretations (Carlile and Christensen, 2004).

2.1.

Direct impact of IT investment on inventory performance IT investments have clearly played a leading role in accelerating economic growth during

the 1990s. Firms have invested substantial resources in new types of IT enabling them to improve efficiency in and coordination of material-handling operations, thereby reducing inventory levels. Highlighting the role of IT, the Economic Report of the President (2001, p.39) notes that technologies that improve the dissemination of information enable companies to react more promptly to market signals and to economize on inventories (by sharing point-of sales data,

for example). Likewise, Alan Greenspan, the former Federal Reserve Chairman, noted that the remarkable surge in the availability of real-time information in recent years has sharply reduced the degree of uncertainty confronting business management. This has enabled businesses to remove large swaths of now unnecessary inventory (Greenspan, 1999). A positive influence of IT on inventory performance is well supported at the firm level. For example, previous studies (Frohlich and Westbrook, 2002; Vickery et al. 2003; Barua et al. 1995; Mukhopadhyay et al. 1995) find that an increase in IT investment results in higher inventory turns and lower inventory holding costs. Similarly, a number of case studies and anecdotal evidence support that IT allows business partners to share information related to customer orders and inventory positions in supply chains. Such facilitation of information sharing by IT should help manage inventories more effectively and streamline operations. We expect that an increase in IT investment should lead to better inventory performance at the sector level because dynamics similar to the firm level are also influential at the sector level. Whether such a relationship exists at the sector level is an empirical question which we test as follows:
H1: IT investment has a positive influence on inventory performance in the manufacturing, retail and wholesale sectors.

A positive influence of IT investment on inventory performance is inferred by a negative correlation coefficient between these two variables because a lower level of inventory indicates better performance. Hypothesis 1 is based upon an implicit assumption that inventory performance has improved over time at the sector level in the U.S. Most empirical studies in OM use cross sectional data at the firm level and relate implementation of a specific improvement program or policy to a reduction in inventory levels (Im and Lee, 1989; Inman and Mehra, 1993; White et al. 1999; Shah and Ward, 2003). A few studies use publicly available data to examine

inventory trends over time. These studies are primarily descriptive in nature and do not attempt to identify possible causes of inventory reduction. For instance, Rajagopalan and Malhotra (2001) analyze U.S. Census Bureau data from 1961 to 1994 for 20 manufacturing industries at two digit level of SIC to determine whether raw material, work-in-process and finished goods inventory have decreased in these manufacturing industries. They find that the overall inventory levels decreased over time for the manufacturing sector, but there was significant variation across SIC codes and the type of inventory. While raw material and work-in-process inventories decreased in a majority of the manufacturing industries, finished goods inventory did not decrease in more than half of the SICs. Using COMPUSTAT data, Chen et al (2005b) find that inventory days in publicly traded U.S. manufacturing firms decreased from 96 days to 81 days between 1981 and 2000. In contrast, inventory trends in the retail and wholesale trade sectors are less clear. While Gaur et al. (2005) find that average inventory turns in retail firms decreased between 1987 and 2000, indicating higher levels of inventory, Chen et al. (2005c) report an opposite result. Chen et al. (2005c) find that retail inventory decreased between 1981 and 2003 and the decline began in 1995. Both Chen et al. (2005c) and Gaur et al (2005) use firm level data from COMPUSTAT. We found only one study that examined inventory trends in the wholesale sector (Chen et al. 2005c). The results indicate that the wholesale inventory days have decreased from 72 to 52 days between 1981 and 2003. As a group, these studies highlight the varying inventory trends in the different sectors of the U.S. economy.

2.2.

Direct impact of IT investment on financial performance Using cross sectional (Prasad and Harker, 1997) and longitudinal (Lehr and Lichtenberg,

1998; Hitt and Brynjolfsson, 1996) data, researchers have empirically linked IT investments to labor productivity (Hitt and Brynjolfsson, 1996), multi-factor productivity (Brynjolfsson and Hitt, 2000), and total factor productivity (Hitt and Brynjolfsson, 1996) at the firm level (Barua and Lee, 1997). IT investments have also been linked to economic value added (Bresnahan et al., 2002), ROI (Brynjolfsson, 1993) and other similar measures of performance. However, the evidence directly linking IT investment with financial performance is less clear; Dedrick et al. (2003, p. 23) term the general failure of studies to show a positive relationship between IT investment and profitability or other overall financial performance measures the profitability paradox in IT research. Kohli and Devaraj (2003, p. 136) support Dedrick et al.s (2003) observation and state that the impact of IT investment on measures of profitability is mixed at best. Logically, if IT investments by leading firms in an industry are viewed as a source of competitive advantage, the remaining firms in the industry would mimic the leaders and make similar investments. Such isomorphic behavior explains firms resemblance to one another according to institutional theorists (DiMaggio and Powell, 1983; Haunschild and Miner, 1997). In the long term, marginal and comparative advantage associated with IT investment continues to decrease and the differential competitive advantage dissipates at the firm level (Carr, 2003). However if the net impact of IT investment on profitability is truly positive, we should be able to detect it at the sector level of analysis using cross sectional data. To examine this link, we test the following hypothesis:
H2: IT investment has a positive influence on financial performance in the manufacturing, retail and wholesale sectors.

2.3.

Mediating effect of inventory performance

In contrast to the direct relationship between IT investment and profitability, several researchers have found support for a mediating role of operational performance between IT investment and profitability at the firm level (Barua et al. 1995; Mukhopadhyay et al. 1995; Banker et al. 1990). IT researchers have labeled the inclusion of intermediate measures such as operational performance in explaining the effect of IT investments as the process-oriented model. IT researchers examining the process-model of IT investment argue that the association between IT investment and financial performance attenuates as the distance between cause and effect widens (Barua et al. 1995). Therefore, they argue that the relationship should be easier to detect through an intermediate measure of operational performance such as inventory turns (Barua et al. 1995), inventory holding cost and obsolescence cost (Mukhopadhyay et al. 1995). While most process-models have been examined at the firm level, whether the mediating relationship should also be observed at a higher level of aggregation is an empirical question. We examine the mediating role of inventory performance as follows:
H3: Inventory performance mediates the relationship between IT investment and financial performance in the manufacturing, retail, and wholesale sectors.

To establish the mediating role of inventory performance (H3), we decompose the total effect of IT investment on financial performance into its underlying components: the effect of IT investment on inventory performance (H1), the effect of IT investment on financial performance (H2), and the effect of inventory performance on financial performance (H4). The hypothesis linking inventory and financial performance (H4) is essential for examining the mediating role of inventory performance. The relationship between inventory performance and financial performance is not straightforward in the literature. The absence of a clear empirical link between inventory and

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financial performance may stem from the fact that inventory is both a source of costs (in the income statement) to a firm and an asset base (in the balance sheet) for future revenues. However, researchers generally agree that excess inventories at the firm level indicate supply-demand mismatch and are frequently associated with poor operational performance (Singhal, 2005; Fisher, 1997). Inventory-related costs such as carrying, material handling, obsolescence, and insurance undermine profit margins and lower stock price (Singhal, 2005; see Calloni et al. 2005 for a comprehensive discussion on various inventory-driven costs). Thus, better inventory performance (typically operationalized as higher inventory turns or reduced inventory levels) is frequently associated with better financial performance at the firm level. We anticipate that this relationship is level-invariant, and thus better inventory performance should translate into financial performance gains at higher levels of aggregation. We test this relationship as follows:
H4: Inventory performance has a positive influence on financial performance in the manufacturing, retail and wholesale sectors.2

3.

Data source, measures, and model The present study is conducted using data obtained from the BEA at the Department of

Commerce of the United States3. BEA compiles monthly data from three surveys: Retail Trade Survey, Wholesale Trade Survey, and the Manufacturers Shipments, Inventories and Orders Survey. BEA reports monthly and annual data, both at industry level (SIC codes) and at the sector level. The data are used to appraise monthly and annual economic activities and form the basis of many macro and micro economic decisions. For instance, the data constitute part of the Economic Report of the President, which is delivered each year to the U.S. Congress.
As with Hypothesis 1 in Section 2.1, the positive influence of inventory performance on financial performance signifies a negative correlation coefficient between the two variables. 3 The raw data are available at the Bureau of Economic Analysis site http://www.bea.gov/) or U.S. Census Bureau site (http://www.census.gov).
2

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In this research we use the annual sector level data from the three major sectors of the U.S. economy: manufacturing, wholesale and retail sectors. Sector level data offer many advantages over data collected at other levels. First, this level of data aggregation allows us to examine the level invariant nature of the empirical relationships among IT investment, inventory performance, and financial performance. Second, we can sidestep the measurement issues caused by definitional changes in the industry classification systems (from SIC to NAIC). Lastly, noise in the firm level data can be reduced at the sector level data. For example, the impact of drastic changes in individual firms status and performance, which may occur due to strategic decisions or business failures such as mergers, acquisitions, spin-offs, and bankruptcies, can be offset at the sector level. BEA constitutes a rich source of secondary data; it includes a large number of variables that have been tracked since the 1920s and is frequently used by economics, accounting and finance researchers. We use five variables (IT investment, Private Investment, Inventory, Sales, and Profit) in the current research; detailed definitions of the variables are provided in the Appendix A. BEA provides annual data in raw dollar values measured at the end of each year. However, the dollar measures are influenced by macro-economic factors such as the economic growth rate, industry output level, and inflation rate. To minimize their impact, we develop ratio scales to measure inventory performance, financial performance, and IT investment. These ratio scales have been frequently used in previous research (e.g., White et al. 1999; Chen et al. 2005b), and are described below in detail. Financial performance (FP). Financial performance of an economic sector is the primary dependent variable of interest. Many ratios exist to measure financial performance. Return on investment, economic value add, profitability and net profits have all been used in the

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previous research. We measure financial performance as a ratio of a sectors profit to its sales volume. The profit to sales ratio represents firms pretax profits in aggregation as a percentage of their sales and is a frequently used indicator of overall profitability of a firm, industry and sector. A higher value of the ratio is associated with greater profitability. Inventory performance (IP). A number of different inventory ratios have been considered in OM research. These are inventory to sales ratio, inventory to assets ratio, and inventory turnover (White et al. 1999; Chen et al. 2005b). The three measures are highly correlated and their use depends on data availability and the objective of the research. We use inventory to sales ratio to measure inventory performance because by measuring the relative amount of inventory used to achieve a certain sales volume, it represents a sectors overall inefficiency in inventory management. In other words, a high value of inventory to sales ratio indicates a high level of inventories and consequently a lower level of relative efficiency (operational performance). Investment in information technology (IT). A sectors IT investment is the primary predictor in this study. The nominal (raw) data and the first-order ratio scales of IT investment (such as IT investment to sales ratio and IT investment to private investment ratio) are strongly time-dependent (or persistent) due to the continuous increase in IT investment over time. Timedependent data in regression may cause collinearity, inflate regression coefficients, generate serially correlated residuals, and violate the normality assumption for the error terms. Moreover, the ratio scales for IT investment can be biased for a variety of reasons, and require that the measures be calibrated to reduce the bias, using deflators (for a complete discussion see Brynjolfsson and Hitt, 1996, pp. 552-555). To mitigate the effects of persistency and possible bias in the ratio scales for IT investment, we transform the IT investment ratios and subsequently

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deflate them as suggested by Brynjolfsson and Hitt (1996). We briefly define these steps below: IT(t) = [(ITR(t) ITR(t-1))/(ITR(t-1))](ITR(t)) (1)

Where IT(t) measures IT investment at time t, ITR(t) represents the ratio of IT investment to total private investment at time t, and t represents the year of investment. In Eq. (1), the term in square brackets, [(ITR(t) ITR(t-1))/(ITR(t-1))], represents the change in IT investment to private investment ratios over two consecutive years (see Appendix A for detailed description of IT investment and private investment). This procedure reduces persistency (Wooldridge, 2003). Multiplying this term by the current years ITR (i.e. ITR(t)), lessens the bias in our IT scale; left uncorrected it overstates the value of IT investments in earlier years. In essence, the ITR(t) component outside the brackets serves the role of a deflator. The detailed process for IT scale computation and bias reduction is provided in Appendix B. Overall, the IT investment ratio in Eq. (1) embodies the effects of both cumulative IT asset value and the importance of net increase in IT investment over two consecutive years. Covariates: We use three covariates in our analysis. 1) Time (t) is an index of year ranging from 1 to 40 representing the 40 years (1960-1999) in the dataset. Time (t) is included to control for the time dependence (or persistence) in the dependent variables. 2) Lagged effects of IT investment (IT(t-1), IT(t-2), and IT(t-3)) are included to examine whether benefits of IT investment occur with a lag of one, two or three years after the investment is made (Brynjolfsson and Hitt, 1998). 3) Past performance is an autoregressive term used to control autocorrelation effects of the dependent variable that manifest as halo effects" (Santhanam and Hartono, 2003). Halo effect refers to the phenomenon where past performance significantly affects current performance (Sine et al. 2003). In this research, past inventory performance (IP(t-1)) and past financial performance (FP(t-1)) are used to control for the halo effects related to IP(t) and FP(t),

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respectively. 4. 4.1. Statistical Methods and Results Impact of IT Investment on inventory performance Prior to examining the IT investments impact on inventory performance, we investigate whether the inventory levels have decreased over the last four decades. To do so, we categorized 40 years into four groups of ten years that reflect the four decades (1960s, 1970s, 1980s, and 1990s) and used average inventory performance as the dependent variable in ANOVA4. There is a widely held perception that overall inventory levels have declined due to the adoption of improved management practices and new information technologies (Rajagopalan and Malhotra, 2001; Frohlich and Westbrook, 2001; Frohlich and Westbrook, 2002; Vickery et al. 2003). However, our analysis indicates that the average inventory levels have trended upwards for both the retail and wholesale sectors whereas the manufacturing sector has had a significant decline (Figure 1). The ANOVA results confirm the trends shown in Figure 1 and suggest that inventory performance differs significantly over the four decades in the three sectors (Table 2). [Figure 1; Table 2 about here] To assess hypotheses 1, 2 and 4, we use ordinary least squares (OLS) regression analysis (see Figure 2 for the conceptual framework of the regression models). The residuals for the regression analysis satisfied distributional assumptions. The normal probability plot of the standardized residuals suggested that the residuals are normally distributed. The plot of standardized residuals against the standardized predicted values indicated linearity and equality of variance. Multicollinearity, as indicated by variance inflation factors, was also consistently

We conducted the Kolmogorov-Smirnov (Lilliefors, 1967) and the Shapiro-Wilk (Shapiro and Wilk, 1965) normality tests to ensure that grouping the data into ten year periods does not violate the assumptions of normality in ANOVA. Overall, the test results validate our categorization scheme. Post-Hoc results comparing pairwise difference are available upon request from the authors.

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low. We also examined the Gauss-Markov assumptions for time-series analysis (Wooldridge, 2003, pp. 95-104, pp. 397-399) and find that these were not significantly violated. The direct effect of IT investment on inventory performance (H1) was assessed using inventory performance as the dependent variable and sequentially entering each of the independent variables. Table 3 shows the hierarchical regression results with current inventory performance as the dependent variable, and time (Model 1), past inventory performance (Model 2), and current IT investment (Model 3) entered sequentially, in each of the three sectors. Finally, we included additional IT terms with one, two and three year lag (Model 4) to assess whether inventory benefits of IT investment appear with a time lag. The statistical significance of the incremental change in R2 is critical in selecting the final model and in interpreting results (Cohen and Cohen, 1983 p. 120). When the incremental change in R2 between two sequential steps is insignificant, then the model corresponding to an earlier step is preferred. Because the incremental change in R2 from Model 3 to Model 4 is not significant in any of the three sectors, we select Model 3 as the final model for interpretational purposes. [Figure 2 and Table 3 about here] In the manufacturing sector, time is negatively associated with the inventory performance (see Model 3) indicating the reduction in the sectors inventory level over the last four decades, but this association is not statistically significant. In contrast, inventory performance with a one year lag term is positively associated with the current years inventory performance ( = 0.544, p<0.01). Together, the two independent variables account for 71.7% of the variance in the inventory performance for the manufacturing sector. Current IT investment is negatively associated with inventory performance ( = -0.236, p<0.05) and adding it explains an additional 3.2% of the variance in the inventory performance. The results confirm that an increase in IT

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investment leads to a significant reduction in the inventory level in the manufacturing sector. These hierarchical regression results provide support for Hypothesis 1 in the manufacturing sector. In the wholesale sector, we find that past inventory performance has a positive association ( = 0.593, p<0.01) and time has a positive but insignificant association with current inventory performance. Together, time and past performance explain 41.3% of the variance in current inventory performance. However, adding the current IT investment does not have a significant incremental impact on inventory performance. Thus, Hypothesis 1 is not supported for the wholesale sector. In the retail sector, both time ( = 0.459, p<0.05) and inventory performance with a one year lag ( = 0.419, p<0.05) have a positive impact on inventory performance and account for 42.4% of variance in the current inventory performance. In addition, current IT investment has a significant negative impact on the inventory performance ( = -0.371, p<0.05), and adding it explains an additional 9.0% of the variance in inventory performance. This result implies that the current years IT investment contributes to a decrease in inventory levels in the retail sector, providing support for Hypothesis 1 in the retail sector.

4.2.

Impact of IT Investment and inventory performance on financial performance Hierarchical regression analysis is also used to test H2 and H4 in the three sectors (Table

4). Financial performance is the dependent variable in each of the regression models. We entered time (Model 1), past years financial performance (Model 2), current inventory performance (Model 3), current IT investment (Model 4) and the three lagged IT investment terms (Model 5, not shown in Table 4) sequentially in five steps into the regression model. The sequence of

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entering independent variables allows us to assess the incremental direct effect of IT investment after controlling for time and past performance effects. Adding lagged IT investment terms (Model 5) last allows us to examine whether lagged effects explain additional variance in financial performance (i.e. in addition to current IT investment). The incremental R2 associated with adding the lagged IT investment terms is not significant in any of the three sectors, and none of the coefficients for the lagged IT investment terms is significant. Thus, we omit the detailed results of Model 5 for brevity and clarity of presentation. Additionally, the incremental R2 associated with adding current IT investment (Model 4) is not significant, thus failing to support the direct impact of IT investment on financial performance (i.e., Hypothesis 2). We select and report results from Model 3 based on the change in R2 and its significance. [Table 4 about here] In examining the impact of time on financial performance (Model 3), we find a significant negative association in the manufacturing sector ( = -0.848, p<0.01), a significant positive association in the retail sector ( = 0.518, p<0.01), and an insignificant association in the wholesale sector. Overall, these results indicate that the manufacturing sector has become less profitable over time while the retail sector has become more profitable. Past financial performance is a positive and significant predictor of current financial performance in all three sectors. Adding current inventory performance to the regression model increases the explained variance in all three sectors; as a predictor, current inventory performance is negatively associated with financial performance in all three sectors, although the strength of the associations varies. These results indicate that lower inventory levels (i.e. higher inventory performance) lead to higher financial performance in each of the three sectors after controlling for the effects of time and past financial performance. Thus, Hypothesis 4 is supported in each of

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the three sectors, but the support is relatively weak in the wholesale sector ( = 0.10). 4.4. Mediating role of inventory performance We use the Sobel test to examine the mediating role of inventory performance (Baron and Kenny, 1986) using the approach described by Venkatraman (1989). In general, a complete mediation effect exists if the direct effect of IT investment on financial performance is not significant but both the relationships between IT investment and inventory performance and between inventory performance and financial performance are significant. Figure 3 illustrates the structure of the decomposed mediation model (process-model) and provides the unstandardized coefficients from individual regression analyses that were used to conduct the Sobel tests. The Sobel test results summarized in Figure 3 indicate that inventory performance plays a significant mediation role between IT investment and financial performance in the manufacturing (t = 2.048, p<0.05) and the retail (t = 2.254, p<0.05), but not in the wholesale sector (t = 0.514, p>0.10). Thus, Hypothesis 3 is supported only in the manufacturing and retail sectors. These results show that a positive influence (i.e., benefits) of IT investment on financial performance is realized indirectly, and is mediated through an improvement in inventory performance. [Figure 3 about here]

5.

Discussion and conclusion Our study makes three important contributions to the literature. First, we empirically

demonstrate that inventory levels have changed non-uniformly in the three sectors. Second, our results confirm the absence of a direct link between IT investment and financial performance in all three sectors. Instead, our results indicate that inventory performance plays a significant

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mediating role in the manufacturing and retail sectors, thus lending support to the process-model of IT investment at the sector level of aggregation. Together, these results highlight the differences among the manufacturing, retail and wholesale sectors and have broader implications for generality than results obtained from single sector studies. Finally, our results make an important theoretical contribution to the cross-level research. Examining relationships that are established at the firm level at a higher level of aggregation helps us identify logical boundaries of relationships and advance theory development. We discuss each of our contributions in detail below.

5.1.

Inventory trend in manufacturing, wholesale and retail sectors With regard to inventory trends from 1960 to 1999, the results reported here are

encouraging but provide a mixed picture. We find that inventory levels trended downwards in the manufacturing sector, showing a sign of improvement, but increased in the wholesale and retail sectors during that period. Interestingly, while the decline in the manufacturing sector occurred rapidly during the 90s, inventories increased gradually over the 70s and 80s in the wholesale and retail sectors. Our results are consistent with the conventional wisdom and empirical evidence that the decrease in inventory levels is an outcome of the increased focus on process improvement in the manufacturing sector (Shah and Ward, 2003; Inman and Mehra, 1993; Im and Lee, 1989). A possible explanation for the increased inventory levels in the wholesale and retail sectors is the increasing proliferation of products that is required to meet divergent consumer needs. According to Fisher et al. (1994), product variety has increased considerably in every product category in the recent years, but the increase is steeper in the wholesale and retail sectors due to

20

the increasing number of imported products. For example, the number of automobile models has increased from 140 in the early 1970s to 260 in the late 1990s and running shoe styles from 17 to 140 during the same time period (Federal Annual Report, 1998). Increased product variety is frequently associated with increased demand variability which is negatively correlated with inventory performance and may induce a higher level of safety stock (Zipkin, 2000). Analytical studies offer alternative insights into why there are contrasting patterns in inventory performance across sectors. For example, Croson and Donohue (2003) show that sharing demand information, facilitated by IT such as EDI, is most beneficial to the upstream participants (manufacturers) in the supply chain. As material-handling activities have been integrated across sectors over time, manufacturers in general have been able to reduce the mismatches between demand and supply, leading to better inventory performance. However, the burden of keeping higher levels of inventories remains with downstream participants (i.e., retailers) in the supply chain because they must directly cope with the variability in consumer demand. Moreover, a rising emphasis on customer service under increasing competition may have resulted in retailers holding excess inventories.

5.2.

Direct and mediation effects We did not find a significant direct effect of IT investment on financial performance in

any of the three sectors. This result provides partial support to Carrs (2003) assertion that perhaps IT does not matter in appropriating higher profitability. In fact, as firms in an industry or a business sector become increasingly similar, the unique advantages associated with IT erode and IT serves as an infrastructure element that is essential to conducting business. This explains the equivocal results from empirical studies that have shown a positive, negative, and even no

21

impact of IT on financial performance at lower levels of aggregation. The empirical ambiguity is often considered a consequence of the level of data aggregation that is adopted to measure IT investment. Kohli and Devaraj (2003) contend that as the aggregation level increases from the firm level to a macro industry level, the impact of IT investment on the performance becomes less evident. Our findings, however, do not conform to either of these contentions. Using sector-level data, we find that IT investments matter, but their benefits are indirect through improvement in operational performance. These results provide support for the process-model at the sector level of aggregation in the manufacturing and retail sectors but not in the wholesale sector. The results are intuitive in manufacturing; increased IT investment improves inventory performance (i.e. lowers inventory levels), which in turn positively influences financial performance. But, how does one explain the negative association between IT investment and inventory levels when both have increased over time in the retail sector? We believe that partialling out the effects of time (trend) and past inventory performance using hierarchical regression helps us uncouple the linear relationship between the two variables more accurately. Specifically, the result implies that, in the absence of increased IT investment, inventory levels might have been even higher in the retail sector. We did not find a significant mediating effect of inventory performance in the wholesale sector. Although the wholesale sectors IT investment has been increasing at a faster rate than that of the manufacturing and retail sectors, why this increase in IT investment has not resulted in inventory reduction in the wholesale sector is an interesting question. It is possible that the IT investment in the wholesale sector is concentrated on enhancing coordination activities with trading partners in the manufacturing and retail sectors, making them the bigger beneficiaries of

22

the increased IT investment. This result needs further examination in future studies. Collectively, these results provide interesting insight into the diverse nature of these three sectors. Differences in inventory trends and the role of inventory performance may be related to the unique characteristics of the three sectors. The three sectors differ considerably in the type of inventories that they hold and the focus of their process improvement. It appears that firms in the manufacturing sector have been able to manage their inventories more efficiently by implementing process improvement practices such as pull production and Just-in-Time delivery from suppliers. In other words, manufacturing firms in aggregation may have reduced inefficiencies in their internal operations and in interactions with their suppliers. This pattern of inventory reduction can be gleaned from firm level analysis in the manufacturing sector. Both Chen et al. (2005b) and Rajagopalan and Malhotra (2001) found that work in process and raw material inventories showed largest declines whereas finished goods inventory did not show a similar decline. They surmised that finished good inventory is strongly influenced by variability in customer demand and that firms have been slow in countering the effects of customer demand and its variability with process improvement efforts. Because firms in the retail and wholesale sectors primarily hold finished goods inventory, the same dynamics may apply to them and thus, causing that their inventories have not declined. Moreover, firms in the retail and wholesale sectors are more acutely impacted by variation in consumer demand because of their proximity to the end-consumers in the supply chain.

5.3.

Theoretical contribution Finally, our results make an important theoretical contribution to cross-level research.

Cross-level research has the potential to help us develop a finer-grained understanding of the

23

relationships and their logical boundaries. Our results point to the robustness of the processmodel and suggest that it may not be contingent on the level of data aggregation. Our results also provide support for the phenomenon of spillovers in which firms in an industry benefit not only from private investment in an asset but also from growth in the asset stock of all firms. For instance, Wal-Marts investment in IT and associated management practices spurred its competitors into increasing IT investments. These contribute to their improved performance, raising the overall profitability of that industry (McKinsey Global Institute, 2001). Comparing and contrasting results from cross-level research across sectors also sheds light on the contextual and contingency factors that affect relationships and will facilitate future theory building. For instance, while product variety and resulting customer variability have been extensively studied in the manufacturing and retail sectors, their effects are virtually unknown in the wholesale sector. Whether product variety is the underlying cause for the wholesale sectors differing behavior in the process-model and inventory trends is an interesting question.

5.4.

Managerial Implications Our research findings have important managerial implications. First, the results suggest

that reducing inventories has a significant and direct relationship with financial performance. This provides strong justification for managers continued emphasis on efficient inventory management and supply chain inventory coordination. The results have added salience for the managers in the wholesale sector, given that the inventory levels in the wholesale sector have been increasing over the years. Perhaps wholesale sector managers need to seek out appropriate improvement programs applicable to their specific operations. Second, the importance of operational performance cannot be ignored for one other reason. Our findings suggest that the

24

financial benefits of IT investment are realized indirectly through improvement in inventory performance. The large effect size of inventory performance on financial performance and the significant mediation test results collectively demonstrate that operational excellence is a necessary condition for reaping long term benefits from implementing structural investments.

5.5.

Limitation and Future Research The findings of this research not only make important contributions but also raise

meaningful research questions. In contrast to the conventional wisdom, we find that inventory levels have not reduced overtime in all three sectors. It is unclear why the inventories in the retail and wholesale sectors have increased at a time when the focus on inventory reduction and supply chain management is intense. Although our analysis does not directly address whether the inventories are being shifted downstream from the manufacturing sector, it promises to be an interesting question for future research. In addition, underlying factors that contribute to opposing inventory patterns in different sectors are worth studying in the future. For instance, the impact of product variety and customer demand variability on inventory performance can be examined in the context of the wholesale sector. Identifying such factors can help firms promote positive influences while minimizing the impact of factors that negatively affect inventory trends. Despite these unanswered questions, our study helps bridge the gap between the OM and IT literatures and at the same time contributes to cross-level research.

25

APPENDIX A We summarize the terms and their definition used in this research. These are also available on the Bureau of Economic Analysis site (http://www.bea.doc.gov/bea/glossary/glossary_i.htm) and U.S. Census Bureau site (http://www.census.gov/mtis/www/mtis.html). Thus, additional citations are omitted. I. Industry-group [sector] classification Manufacturing sector comprises companies engaged in the mechanical or chemical transformation of materials or substances into new products. Wholesale Trading sector comprises companies with one or more establishments engaged in wholesaling merchandise, generally without transformation, and rendering services incidental to the sale of merchandise. The wholesaling process is an intermediate step in the distribution of merchandise. Retail Trading sector comprises companies with one or more establishments that sell merchandise and related services to final consumers. II. Variable definitions Inventory represents the total value of the end-of-month stocks. While inventories in the manufacturing sector includes purchased materials and supplies, goods in process, or finished goods regardless of stage of fabrication, inventories in the wholesale and the retail sectors are mainly merchandise inventories held for sales purposes. Inventories associated with the non-business activities are excluded. Sales of each sector use monthly shipment data with seasonality adjusted. Sales are net values after deductions such as refunds and allowances for merchandise returned by customers. The sectorwide sales estimates are aggregated from three surveys conducted by the U.S. Census Bureau: the monthly retail trade survey, the monthly wholesale trade survey, and the manufacturers shipments, inventories, and orders survey. Profit represents aggregated Corporate Profits (quarterly data) of a sector with Inventory Valuation Adjustment. Corporate profits are the income earned by corporations as a result of current production and established business. It excludes capital gains and losses, and it is calculated by valuing depreciation of fixed assets and inventory withdrawals at current cost, rather than at historical cost. Inventory valuation adjustment is an adjustment made to corporate profits in order to remove inventory profits, which are more like a capital-gain than like profits from current production. IT investment (quarterly data) represents the sum of three components (Computers and peripheral equipment, Software, and Other) as asset, which is categorized as information processing equipment investment and software in the non-residential area. Total private investment (quarterly data) is a sum of the investments as asset including the investments in buildings, utilities, mining exploration, shafts, wells, industrial equipment, transportation equipment, information processing equipment and software, and others. APPENDIX B In the retail sector, the IT investment-to-private investment ratios (ITRs) are 0.0018 and 0.0038 in 1962 and 1963 respectively compared to 0.2385 and 0.2702 in 1998 and 1999. The numbers reflect the marginal importance of IT investment in the sixties whereas they had become a more important investment category in the 1990s. Using these initial ratios, the changes in IT investment-to-private investment ratios for 1963 and 1999 can be computed as 1.1111 (= [(0.0038 0.0018)/0.0018]) and 0.1329 respectively. Note that the changes in ratios (1.1111 and 0.1329) are free of persistency (i.e., time dependency), but extremely biased in favor of IT investment in 1963 because they only capture the relative increase in two consecutive years. In other words, the term in square bracket in Eq. (1) neglects the importance of IT investment relative to total private investment. To deflate and smooth, we multiply them with the current years IT investment-to-private investment ratio. The resulting IT investment measure is 0.0042 (= 1.1111 0.0038) for 1963 and 0.0359 (= 0.1329 0.2702) for 1999.

26

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Zipkin, P.H., 2000. Foundations of inventory management. McGraw Hill/Irwin Publishers, New York.

31

2.000

1.800

1.751

1.766 1.707

Inventory-to-Sales Ratio

1.600 1.507 1.522 1.474 1.400 1.442 1.294 1.228 1.200 1.294 1.309

1.459

1.000 '60s '70s '80s '90s

Manufacturing

Wholesale

Retail

Figure 1: Inventory performance measured as inventory to sales ratio in the manufacturing, wholesale and retail sectors

32

(H2)

Current Year (t)

IT Investment (t)

(H1)

Inventory Performance (t)

(H4)

Financial Performance (t)

Prior Year (t-1)

IT Investment (t-1)*

Inventory Performance (t-1)

Financial Performance (t-1)

Legend: * Three lagged terms for IT investment are included in the regression models with a one year, two year and three year lags represented by IT investment (t-1), (t-2), and (t-3) respectively. Concurrent effect (casual links of interest) Lagged effect (to control for the effect of time) Halo effect (to control for the effect of past performance)

Figure 2: A simplified schematic representation for the structure of hierarchical regression analyses.

33

Inventory Performance

(1)

(2)

(3)

(1)

(2)

(3)

Ma W R

-1.470 0.160 -1.204

0.718 0.449 0.488

0.049 0.724 0.019

M W R

-0.213 -0.061 -0.227

0.038 0.035 0.044

< 0.01 0.088 < 0.01

IT Investment
(1) (2) (3)

Financial Performance
M W R 0.270 0.001 -0.050 0.388 0.107 0.136 0.491 0.997 0.714

Legend a: M Manufacturing Sector; W Wholesale Sector; R Retail Sector b: (1) Unstandardized beta coefficient; (2) Standard error of beta coefficient; (3) p-value Sobel test statistics (p-value) Manufacturing Sector 2.048 (0.041); Wholesale Sector 0.514 (0.769); Retail Sector 2.254 (0.011).

Figure 3: The process-model used to examine the mediating role of inventory performance

34

Table 1: Selected literature review from operations management, supply chain management, and information technology literature
Research Article Data Typea Level of datab Type of Analysisc Central Research Question Independent and Dependent Variable Results

Operations Management and Supply Chain Literature Cachon & Fisher, (2000) Frohlich & Westbrook (2001) Frohlich & Westbrook (2002) Vickery et al. (2003) Rajagopalan & Malhotra (2001) NA Dyad One supplier & N identical retailers F (n=322) F (n =485) mfg and services 57 first tier suppliers to big 3 auto cos. Mfg sector M To assess value of information sharing To what extent must firms integrate with suppliers, customers or both? To assess the link between web-enabled supply chain strategy and performance To assess performance implications of integrative IT and supply chain integration To examine trends for raw material, work in process and finished goods inventory in 20 SIC codes in mfg sector To examine within firm and total variation in inventory turns in retail services IV: Information sharing policy DV: supply chain costs, lead time, and batch size IV: Extent of integration with suppliers and customers DV: multiple measures IV: web-enabled supply chain integration; adoption drivers DV: multiple measures IV: integrative IT, supply chain integration DV: customer service, financial performance IV: time DV: inventory turns in raw material, work in process and finished goods Full information sharing leads to better performance on all DVs The widest degree of arc of integration has the strongest association with performance. Demand chain management leads to highest performance in mfg, but there are few signs of it in services Supply chain integration impacts financial performance indirectly, through customer service Raw material and WIP inventory turns have increased in a majority of mfg SICs but FGs have not. Trends are stronger in the years 1980-1994. Annual inventory turns decreased over time in retail services with marked variation across firms; inventory turns are negatively correlated with gross margins and positively correlated with capital intensity and sales surprise Inventories reduced at the rate of 2% per year; highest increase is in work in process although finished goods did not decline; positive association between inventory reduction and long term stock returns While wholesale inventories have reduced, retail inventories did not begin to decline until 1995.

X X

E E

X L: 1961 - 1994

Gaur et al. (2005)

L: 1987 - 2000

F Retail services

M; E

IV: time, gross margin, capital intensity and sales surprise DV: annual inventory turns

Chen et al. (2005b)

L: 1981 - 2000 L: 1981 - 2000

F U.S. mfg firms

To examine the inventory levels of publicly traded manufacturing companies in the U.S. To examine the inventory levels of publicly traded manufacturing companies in the U.S.

IV: Time DV: Days of inventory in raw material, work in process and finished goods; stock returns IV: Time DV: Days of inventory in raw material, work in process and finished goods; stock returns

Chen et al. (2005c)

F Wholesale & retail firms

35

Table 1 (Contd.)
Research Article Data Typea Level of datab Type of Analysisc Central Research Question Independent and Dependent Variable Results

Information Technology Literature Weill (1992) L: 19821987 F in a single industry To assess financial performance impact of three different types of IT investment To analyze the effect of IT (CNC machines) on the efficiency of operations IV: Investment in strategic, informational and transactional IT DV: sales growth, ROA, labor productivity IV: Types of IT DV: production hours per unit of output Other IVs: product attributes, production process, labor policies, work organization. IV: IT and non-IT capital for SBU DV: Capacity utilization, inventory turnover, and ROA IV: EDI penetration, EDI program launch DV: inventory turnover, obsolete inventory and premium freight IV: Computer & non computer capital, IS staff and non IS labor expense. DV: Total sales in 1987 $ IV: IT capability measured with investment in IT DV: Profit and cost measures Relationship between investment in IT and performance depends upon their operationalization. Conversion effectiveness moderates their relationship. Significant efficiency advantage from using CNC; Large volumes and frequent product changes contribute to learning. Correlation between IT investments and increases on return of assets is not significant; Impact is mediated by intermediate level operational variables. Total benefits of EDI per vehicle amount to $100. IT spending contributes significantly to firm output; productivity paradox essentially disappeared by 1991. Firms with superior IT investment exhibit superior current and sustained firm performance; Must take impact of prior performance or halo effects into account

Kelley (1994)

F (n=584)

Barua et al. (1995) Mukhopadhyay et al. (1995) Brynjolfsson & Hitt, (1996); Hitt & Brynjolfsson, (1996) Santhanam & Hartono (2003) a b c

L: 19791983 L: 19811990 L: 19871991 L: 19911997

SBU (n=60)

To assess impact of IT investment in a two stage model To assess the dollar value of improved information exchange between Chrysler and its suppliers due to EDI To empirically examine the productivity paradox To examine the robustness of the link between IT investment and firm performance

Dyad: Chrysler and its suppliers F 367 large U.S. firms F 46 large U.S. firms

Cross Sectional data = X; Longitudinal data (Duration) = L (19xx 20xx) Firm level = F, Industry level = I, Sector level = S, Country Level = C Mathematical = M, Empirical (Method used) = E (ANOVA, MANOVA, Regression, Path Analysis, Structural Equation Modeling)

36

Table 2: ANOVA results: Impact of time* on Inventory Performance

Sum of Squares 0.617 0.331 0.948 0.039 0.076 0.115 0.038 0.056 0.094 DF 3 36 39 3 36 39 3 36 39 Mean Square 0.206 0.009 0.013 0.002 0.013 0.002 F 22.340 p value < 0.01 R2 0.651

Manufacturing Sector Wholesale Sector Retail Sector

Between Groups Within Groups Total Between Groups Within Groups Total Between Groups Within Groups Total

6.245

< 0.01

0.342

8.183

< 0.01

0.405

* Factor: Decades the 1960s, 1970s, 1980s, and 1990s.

37

Table 3: Hierarchical Regression on Inventory Performance (Inventory to Sales Ratio)

Manufacturing Sector Independent Variable Blocks 1 1. Time (t) 2. Past inventory perf., IP(t 1) 3. Current IT investment, IT(t) 4. Past IT investment, IT(t 1) 5. Past IT investment, IT(t 2) 6. Past IT investment, IT(t 3) R2 F d.f. Change in R2 F Change (p-value) Durbin-Watson
* **

Wholesale Trading Sector Models 4 -0.142 0.492** -0.236 0.007 -0.063 -0.136 1 0.368
**

Retail Trading Sector Models 4 0.088 0.598** 0.079 -0.143 -0.038 0.147 1 0.520
**

Models 2
**

3
**

2 0.117 0.584**

3 0.067 0.593** 0.067

2 0.494
**

3 0.459
*

4 0.558* 0.353 -0.151 -0.504* 0.217 -0.043

-0.716

-0.313

-0.207 0.544** -0.236*

0.606**

0.510**

0.419* -0.371*

0.513** 36.878 (1, 35)

0.717** 43.153 (2, 34) 0.204** 24.581

**

0.749** 32.858 (3, 33) 0.032* 4.184

*

0.767** 16.463 (6, 30) 0.018 0.766 2.058

0.135* 5.479 (1, 35)

0.413** 11.969 (2, 34) 0.278** 16.09

**

0.415** 7.817 (3, 33) 0.002 0.127

0.440** 3.936 (6, 30) 0.025 0.448 1.876

0.271** 12.988 (1, 35)

0.424** 12.515 (2, 34) 0.153** 9.053

**

0.514** 11.616 (3, 33) 0.090* 6.080

*

0.601** 7.520 (6, 30) 0.087 2.179 1.934

p < 0.10 p < 0.05; p < 0.01 Significant parameter estimates of the final model and significant changes in R2 are set in bold in each model. IP and IT stand for inventory performance and IT investment respectively.

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Table 4: Hierarchical Regression on Financial Performance (Profit to Sales Ratio)

Manufacturing Sector Independent Variable Blocks 1 1. Time (t) 2. Past financial perf., FP(t 1) 3. Current inventory perf., IP(t) 4. Current IT investment, IT(t) R2 F d.f. Change in R F Change Durbin-Watson
* ** 2

Wholesale Trading Sector Models 4 -0.886** 0.439** -0.598

**

Retail Trading Sector Models 4 1 0.350*

Models 2 -0.151 0.764** 3 -0.848** 0.456** -0.613

**

1 -0.297

2 -0.051 0.683**

3 -0.024 0.657** -0.229

2 0.150 0.727**

3 0.518** 0.475** -0.575

**

4 0.547** 0.481** -0.589** -0.369

-0.717**

-0.024 0.657** -0.229 0.001

0.057 0.514** 37.039 (1, 35) 0.778** 59.690 (2, 34) 0.264
** **

0.891** 89.703 (3, 33) 0.112 33.969

** **

0.892** 66.350 (4, 32) 0.002 0.486 1.674

0.088 3.379 (1, 35)

0.494** 16.581 (2, 34) 0.406 27.250

** **

0.538** 12.835 (3, 33) 0.045 3.198

0.538** 9.335 (4, 32) 0.000 0.000 2.249

0.122* 4.884 (1, 35)

0.612** 26.776 (2, 34) 0.489 42.829

** **

0.794** 42.381 (3, 33) 0.182

* *

0.795** 30.988 (4, 32) 0.001 0.136 1.907

40.519

29.191

p < 0.10 p < 0.05; p < 0.01 Significant parameter estimates of the final model and significant changes in R2 are set in bold in each model. FP, IP, and IT stand for financial performance (profitability), inventory performance, and IT investment respectively.

39