Evaluating Inventory Management Performance as Measured by Inventory Management Efficiency

Purpose - To measure inventory management performance, we aim to develop a new indicator from which the random variation factor is eliminated. To this end, we propose inventory management efficiency (IME) as a novel metric to which technical efficiency is applied. Design/Methodology/Approach - To properly define IME,we established an inventory turnover function for which the multiplicative model represents the relationship between inventory turnover and its determinants, such as gross margin, capital intensity, and sales surprise, as suggested by Gaur et al. (2005). In addition, based on empirical results and the form of the inventory turnover function, we examine in detail whether the inventory turnover function is well- defined. We then examined the validity of the research model with the inefficiency term, which is a one-sided error, and investigated whether the inventory management inefficiency term exists statistically. Findings - The inventory turnover function suggested in this study is a well-defined function, and IME is an appropriately defined indicator for measuring inventory management performance. Moreover, the actual inventory turnover is determined on average at a level that is less than the maximum inventory turnover expected from the determinants of inventory turnover. Research Implications - IME can be utilized as a newly applicable indicator for evaluating inventory management.