Introduction:

With the modern day retail industry is booming and ecommerce penetrating into the
market, it is very important for a retailer to not delay the product availability. If a customer
doesn't find what he or she needs, they will simply move to another retailer. Inventory
helps manage the time to delivery by always having a ready stock of products. There is a
also a high chance that production will be uniform through the year, but buying patterns
will change; festivals and holidays will see a boom in purchase, whereas, the end of a
financial year will see a dip in buying. Retailers may want to hold back goods during a
price or stock revision, to increase demand or offer discounts.

Have tight control over items leaving the facility. This is often done with barcode scanners
so that point-of-sale (POS) information can be fed into the system to maintain inventory
record accuracy. It is critical that stores train personnel in proper scanning techniques to
make sure inventory records remain accurate. Attempts to defeat theft include antitheft
magnetic strips or security fixtures attached directly to the merchandise. These are used to
activate security alarms as a person exits the facility with unpaid merchandise. Other
retailers have personnel stationed near the exits for direct observation of customers leaving
the store. In some stores in high-loss areas, one-way mirrors can be used as well as direct
video surveillance

This study explored the effect of inventory control in retail industries and how they are
struggling to find a balance in their inventory strategies that will not only keep the
materials on hand to satisfy customer requests. Customers for retail merchandise can often
be satisfied with one of several items. Accounting for demand substitution in defining
customer service influences the choice of items to stock and the optimal inventory level for
each item stocked. Specifically this paper aimed to ascertain whether the importance of one
of the major strategic decisions in operation management, namely inventory management
within the retail environment.Our particular aspects of inventory management is examined
in closer detail and how it relates to the financial well-being of each retailer. Focus on
optimizing the product range. A narrow inventory leads to improved stock management,
lower warehouse costs and also removes the possibility of good expiring or becoming
harder to sell. It’s not difficult to guess the inventory needed for popular goods. But for no-
so-popular goods, inventory management is challenging but essential.
 When we compare service organizations with manufacturing organizations, a major
difference is that manufacturers have tangible inventory while service providers typically
do not. However, extensive tangible inventory is required in wholesale and retail services.
How well this inventory is managed often determines whether a service provider is
profitable. Consider the importance of inventory in the retail industry. In retail, it is
considered good performance when a company has an inventory loss of only 1 percent or
less. Some companies face losses exceeding 3 percent of the value of their inventory. Since
retailers deal with desirable consumer goods, it is critical for retailers to practice good
inventory control and maintain accurate inventory records

Review of Literature:

In the recent years, several research papers in operations management have addressed questions on
performance and drivers of performance through analysis of firm-level inventories, industry-level
inventories and other financial data. The data typically used in these studies are provided by the U.S.
Census Bureau, Standard & Poor’s Compustat database, Center for Research in Security Prices (CRSP)
database, and news archives such as ABI/Inform and LexisNexis. We review empirical research on
operational performance relevant to our paper. This includes event-studies, panel data models, models
relating inventory turnover to financial returns, and studies using case-based data.

1. Hendricks and Singhal (1996, 1997, 2001) conduct event-based studies to assess the impact of
operational decisions on firm performance using public financial data. They find that firms that receive
quality awards outperform a control sample on operating-income based measures such as increase in
operating income, improvement in operating ratios, etc. Further they find that the stock market reacts
positively when firms receive quality awards, and that there is a positive correlation between
implementation of TQM principles and long term financial health of firms. Hendricks and Singhal (2005)
investigate the effects of supply chain glitches on the financial performance of firms. Using a sample of
885 glitches announced by publicly traded firms, they compare changes in various operating
performance metrics for the sample firms against a sample of control firms of similar size and from
similar industries. They find that firms that experience glitches report lower sales growth, higher growth
in cost, and higher 5 growth in inventories relative to controls. Further, firms do not quickly recover
from the negative economic consequences of glitches. While the above papers study the impact of
various operational events on firm performance, other researchers have sought to conduct time-series
analysis of operational performance variables of firms.

2.Rajagopalan and Malhotra (2001) investigate whether inventory turns for manufacturers have
decreased with time due to the adoption of JIT principles. They study time trends in each of raw
material inventory, work-in-process inventory and finished-goods inventory using aggregate industry-
level time-series data from the U.S Census Bureau for 20 industrial sectors for the period 1961-1994.
They find that raw material and work-in-process inventories decreased in a majority of industry sectors.
However they do not find any overall trends in finished good inventories. Chen atal. (2005) use firm-
level inventory data from publicly traded manufacturing firms for the period 1981-2000 to study trends
in inventory levels for each of raw material inventory, work-in-process inventory and finished-good
inventory. They find that raw-material and work-in-process inventories have declined significantly while
finished-goods inventory remained steady during this period. These results are consistent with
Rajagopalan and Malhotra (2001) although, notably, the two papers use data with different granularity.
Chen et al. also investigate whether abnormal inventory predicts future stock returns. Using the three-
factor time-series regression model of stock returns (Fama and French 1993), they find that abnormally
high and abnormally low inventories are associated with abnormally poor longterm stock returns.

3. Gaur et al. (1999) relate inventory turnover performance with stock returns of US retailers using a
long-term contemporaneous analysis. They show that for time periods varying in length from 5 to 20
years, the cross-section of average stock returns is significantly positively correlated with average annual
inventory turnover over the same period (controlling for gross margin). They also show that the
crosssection of inventory turnover is negatively correlated with gross margin. Gaur et al. (2005) use
financial data for retail firms to investigate the correlation of inventory turnover with gross margin,
capital intensity and sales surprise in a longitudinal study. They state that 6 changes in inventory
turnover cannot be directly interpreted as performance improvement or deterioration because they
may be caused by changes in product portfolio, pricing, demand uncertainty, and many other firm-
specific and environmental characteristics. They propose a benchmarking methodology that combines
inventory turnover, gross margin, capital intensity and sales surprise to provide a metric of inventory
productivity, which they term as adjusted inventory turnover.
4. Roumiantsev and Netessine (2007) use quarterly data from over 700 public US companies to test
some of the theoretical insights derived from classical inventory models developed at the SKU level.
They use proxies for demand uncertainty and lead time, and use a longitudinal study to show that
inventory levels are positively correlated with demand uncertainty, lead times, and gross margins. The
authors also find evidence for economies of scale as larger firms carry relatively lower levels of inventory
compared to smaller firms. Several researchers have studied the effects of specific operational decisions
on firm performance. For example, Balakrishnan et al. (1996) study the effect of adoption of just-in-time
(JIT) processes on return on assets (ROA). They compare a sample of 46 firms that adopted JIT processes
against a matched sample of 46 control firms that did not. They do not find any significant ROA response
to JIT adoption. Billesbach and Hayen (1994), Chang and Lee (1995), and Huson and Nanda (1995) study
the impact of adopting JIT processes on inventory turns.

5.Lieberman and Demeester (1999) study the impact of JIT processes on manufacturing productivity in
the Japanese automotive industry. Their study suggests that reduction in inventory brought about by JIT
practices enabled the firms to improve their productivity. Our paper contributes to this research stream
by extending Gaur et al. (2005) and Roumiantsev and Netessine (2007). We discuss various factors that
could cause positive or negative correlations of size and sales growth rate with inventory turnover, and
provide evidence regarding the existence of economies of scale and scope in retailing as well as the
effect of growth rate of firms on their inventory turnover performance. Our results are useful to retailers
to assess their performance changes over time.
Problems:

Focus on optimizing the product range. A narrow inventory leads to improved stock
management, lower warehouse costs and also removes the possibility of good expiring or
becoming harder to sell. . Although creating a lean inventory is ideal, this may be a hard task to
achieve. With increased competition in the retail market, discount battles, retailer are rethinking
and realigning their product lines to be more relevant and appealing to buyers. This often
involves, diversifying the products families as it is believed to increase revenues. Do keep in
mind that introduction of newer products often kills the older products on shelves. Optimize
before you diversify. Build a computerized inventory management system with most repetitive
tasks being automated. A digital inventory management system will allow retailers to keep a tab
on ordering, shipping, delivery information, finances and costs involved. The system will help
predict demand based on inventory status, historical data and user inputs .Failure to track
demand can lead to a lower than expected product turnover due to low demand. Low turnover
results in excess inventory that ends up wasting space in your warehouse and tying up capital,
which is costly for business. Excess inventory occurs when a business inaccurately orders
inventory and is left with more than needed. This leads to storage problems and prevents you
from offering better products that could lead to higher revenue. Changing demand can be one of
the biggest challenges for SMBs, especially with ever-increasing and changing product
portfolios. For example, within the electronic industry, there are shorter product life cycles and
high demand which increases uncertainty. Tracking and analyzing demand changes and trends
help companies accurately forecast for future orders

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