ECR and grocery retailing: An exploratory financial statement analysis

Journal of Business Logistics, 2001 by Brown, Terence A, Bukovinsky, David M

The study divided participating firms into two categories: adopters (firms reporting adopting ECR prior to 1995) and non-adopters (all others). This procedure can be criticized since it treats all adopters the same although they might differ. For example, some early adopters may be more experienced at ECR than later adopters. Also, some firms may have implemented more ECR principles (efficient replenishment, efficient assortment, etc.) than others. Undoubtedly, including more of this information would be interesting and may enhance accuracy, yet there is no reliable way to quantify these factors. In sum, treating all adopters the same is a simplification of reality, a measurement problem that should be eliminated when better information becomes available.

FINDINGS

For the 1992-1997 period, twenty-five firms were included in the study (13 adopters, 12 nonadopters); for the 1992-1998 period, twenty firms were included (11 adopters, 9 non-adopters). Annual report data were collected on inventory levels, sales, cash cycle, asset productivity, and profits. Analysis of the data indicates that adopters are different from non-adopters in two ways: they are generally larger and they grew faster during the 1992-1997 and 1998 time periods. (This finding will be discussed in greater detail later.)

Inventory

One major impact ECR should have is to reduce inventory in relation to sales. To gauge this effect, three inventory ratios (inventory turnover, days inventory, and inventory to sales) were calculated for each firm and for both groups for 1992, 1997, and-when possible-1998. (Formulas used are shown in Appendix A.) Comparing the two groups during 1992 showed no statistically significant differences in the three ratios (see Table 1, Panel 1). However, by 1997 adopters had statistically significantly worse ratios than non-adopters. In fact, during this period, adopters' average inventory turnover ratio fell from 10.2 to 9.7 while non-adopters rose from 11.9 to 12.3 (Table 1, Panel 2). These results continued for 1998. Not surprisingly, the results for days inventory and inventory to sales followed approximately the same pattern. They were not significantly different in 1992, but were significantly different in 1997. In both cases, adopters' ratios were worse than non-adopters, particularly in 1997 (see Table 1, Panels I and 2). To be accurate, from 1992-1997, adopters' days inventory and inventory to sales did improve very slightly in absolute terms, but their comparative position worsened.

Cash Cycle

The cash cycle should improve under ECR when inventory falls in relation to sales. Long cycle times are believed to hide waste and inefficiency much as excess inventory can hide operating problems and low quality in supply and manufacturing. Although it would be interesting to include analysis of other cycles, annual report data do not allow it. From 1992-1997 adopters' cash cycle on average worsened (from 19.1 to 20.9) while non-adopters improved from 18.3 to 11.9. These results (which are statistically significant) continued during 1998 (Table 1, Panels 1, 2, and 3).