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Social Science and Humanities Journal

Impact of Inventory Management on Firm’s Efficiency – A

Quantitative Research Study on Departmental Stores Operating in
Karachi
1*
Faraz Khan, 2Dr. Danish Ahmed Siddiqui
1
Research Scholar, 2Associate Professor Karachi University Business School, University of Karachi,
Pakistan
Abstract: - This study investigated the effect of various inventory management factors on firm’s efficiency.
These factors included Capacity Utilization, Inventory Accuracy, Lean Inventory, and Stock Availability.
Data was collected by the use of liker scale questionnaire from 250 individuals from different departmental
stores in Karachi. Data was analysed using Structural Equation Modelling. The results showed Inventory
Accuracy, Lean Inventory, and Stock Availability has positive and significant impact on efficiency. However,
Capacity Utilization doesn’t seem to affect efficiency. Hence, main indicator of inventory control comes out
to be inventory accuracy which allows having an effective control of the outputs of the different goods.
Keywords: - Supply Chain Management, Capacity Utilization, Inventory Accuracy, Lean Inventory, Stock
Availability, and Inventory Management.
1. Introduction storage costs while ensuring the level of service and
uninterrupted operation of the enterprise (Wisner,
1.1 Background of the study
Tan, & Leong, 2014). Inventory management in
Inventory plays a significant role in the survival and logistics - optimization of operations directly related
growth of any business in the sense that inefficient to the processing and clearance of goods and
and ineffective inventory management will imply coordination with the procurement and sales
that the organization loses customers with a decline services, the calculation of the optimal number of
in sales. Inventory control involves the coordination warehouses and their location.
of availability of material, utilization, controlling
Effective inventory management allows an
and procurement of materials. Inventory control is
organization to meet or exceed customer
the combination of activities with the primary goal
expectations by creating stocks of each product that
of getting the right inventory in the right place, at
maximize net income. Corporate policy that
the right time and in the right quantity. Moreover, it
promotes efficient inventory management is the first
is directly associated to organization’s production
component of successful inventory management
function which means that the inventory
(Graves, & Willems, 2000). Other essential
management system will directly or indirectly affect
ingredients are good hardware and software and the
the profitability of an organization.
knowledge necessary to use the software.
Inventories are an asset that represents a relevant
The value of a well-thought-out corporate policy in
amount of short-term investments for the firms, the
effective inventory management is invaluable. All
study of the existence of an optimal level of
employees of the organization must understand the
inventory investments in relation to the firm’s
fundamental basis on which a corporate business
performance and value creation is justified as a
plan is drawn up. Before studying new revolutionary
collaboration to the understanding of whether there
ways of determining when and how many goods to
is an optimal level of inventory or not. Inventory
order, a business need to make sure that the stock is
management is the optimization of stocks of goods
in order; and for this the firm needs to follow certain
produced, work in progress, raw materials and other
corporate policies and procedures and monitor and
objects of activity by enterprises in order to reduce
manage stocks.

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Faraz Khan et al / Impact of Inventory Management on Firm’s Efficiency – A Quantitative Research Study
on Departmental Stores Operating in Karachi
Inventory management is an area of management in products.” In light of this, departmental stores need
which you can greatly benefit from the use of to use the “just-in-time” concept of inventory
effective methods, and this gain is directly measured management in order to get tangible results just like
in monetary terms. These methods are outlined by large companies as such methods are not reserved or
Ballou (2007) in an accessible and complete way. constrained to large businesses.
However, it should be noted that the application of a The need to recognize the costs measures linked
particular approach to inventory management should with effective inventory management in order to
be determined by the strategy of the company and maximize profit remains intense for the retail
the resulting strategy of inventory management. The industry in Pakistan. For this study, departmental
cost of storing raw materials, semi-finished products stores in Karachi were selected because there have
and finished products are often dangerously high. been insufficient studies and knowledge that seek to
Studies conducted by large companies have shown examine the impact of inventory management on
that annual storage costs range from 30 to 45% of firm’s performance.
their value (Ballou, 2007). In other words, each $ 1
million of raw materials and materials requires 1.3 Gap Analysis
another 250-400 thousand dollars a year in the form In the last several years, inventory management has
of storage costs. At first glance, these numbers are become a fundamental component of every
hard to believe. However, if various cost elements organization. Moreover, increasing attention is
are listed, their reality becomes apparent. The cost of devoted to effective inventory management and its
storing inventory and work in progress includes: impact on company’s performance by a number of
 Interest on attracted financial resources; researchers. As stated by Bonney (1994), inventory
 Storage costs, such as rent, local taxes and planning, management and control attempts to level
payment of various services related to the the benefits against the drawbacks of holding stock.
occupied premises; Sahin, & Robinson, (2002) asserts in his study that
in an attempt to discover impact of inventory
 Heating and lighting of the room;
management on firm’s performance, a number of
 Insurance;
decisions are being taken in order to provide a
 Damage and theft of stored property;
strategy and direction for productivity and
 Costs of storage equipment and loading and
competitiveness. For example, Nsiah Asare, &
unloading mechanisms.
Prempeh, (2016) stated that there is a substantial
1.2 Problem Statement relationship between firm’s profitability and
Effective inventory management requires continuous inventory management. Similarly, studies conducted
interaction between marketing, sales, manufacturing by (MwangI, 2016; Etale, & Bringilar, 2016;
and supply departments. Despite the fact that Koumanakos, 2008) also support the direct
companies develop detailed plans for production and association between inventory management and
supply, the actual volume of sales or their structure firm’s performance and profitability.
often differ significantly from those planned. In contrast, the studies conducted by (Bratland, &
Therefore it is necessary that the marketing service Hornbrinck, 2013; Sitienei, & Memba, 2015;
warn other departments in advance about upcoming Mawutor, 2014) showed vice versa. However,
campaigns to promote goods and predicted their almost all the mentioned studies fail to recognize the
impact on sales; and the sales department constantly fact that management of inventory also have an
inform both production and supply divisions about impact on operating cash flows of an organization.
changes in the volume of requests and orders In this context, Gunasekaran, Patel, & Tirtiroglu,
received in order to adjust the plans accordingly. (2001) states that due to inventory’s economic value,
It is necessary to make all possible efforts to reduce capital productivity is improved if level of inventory
the production cycle: “raw materials - finished

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Faraz Khan et al / Impact of Inventory Management on Firm’s Efficiency – A Quantitative Research Study
on Departmental Stores Operating in Karachi
is efficiently managed as inventories are vacant and the Pakistan economy in GDP (gross domestic
resources of an organization. product).
The need to recognize the cost measures linked with 1.4 Research Objectives and Significance
inventory management in order to maximize profit The main objective of this research is to examine
and return is indistinct particularly in the retail and understand the impact of Effective inventory
industry in Pakistan (Raheman, Afza, Qayyum, & management on Firms performance and efficiency.
Bodla, 2010). Past studies in their quest to study the The results of this study demonstrate that increased
impact of inventory management on firms’ level of inventory management practice can result in
performance and profitability utilized models like enhanced organizational performance and improved
six-sigma (Hines, Holweg, & Rich, 2004). However, competitive advantage. The study also provides
the question of whether inventory management has evidence that efficient inventory management
been beneficial to firms’ performance has not been practice has a direct and positive impact on firms’
reviewed for the developing countries. For the firm’s performance. Therefore, it is recommended for
in Pakistan, studies involving inventory managers and owners of the small medium
management are exiguous and there is a lack of enterprise to promote effective inventory
research concerning small and medium enterprises
management practice by utilizing different scientific
e.g. departmental stores. tools which will result in increased competitiveness
Retail industry of Pakistan is chosen for this study and firm performance.
because there have been few studies and little Based on the gap identified and discussions made on
knowledge that seek to explore the impact of theoretical and empirical evidences, the following
inventory management on firm performance. Most
general objectives were also formulated:
studies on inventory management and firms’
performance have mostly been carried out in other 1. To determine the role of IT (Lean Inventory) in
countries and very few are available in Pakistan. managing inventory efficiently;
Moreover, those few studies tend to focus only on 2. To find out the relationship between effective
one or few companies (Malik, & Kotabe, 2009). inventory management and improved firm
Therefore, the rationale of this study is on the impact performance;
of inventory management on firms’ performance of 3. To identify the effects of capacity utilization on
different departmental stores in Karachi. effective inventory management;
4. To determine how Stock Availability can lead to
This study have exclusively focused on the impact effective inventory management.
of efficient inventory management on the
performance of a company particularly of retails 2: Literature Review
stores in Karachi. The study presents an argument The study of Nyaoga, Wang, & Magutu, (2015)
that efficient and effective inventory management intended to find out the relation between capacity
will result in profitability and significant operating utilization and supply chain performance of tea
cash flow. This is due to the fact that inventory processing firms in Kenya. The study used data from
management is regarded as all the practices and both primary and secondary sources. This study
procedures that go into keeping the required level of adopted a cross-sectional research design and
inventory at the right time, place and quantity and respondents from 85 tea processing firms in Kenya
includes coordinating, controlling, purchasing, participated in this study. The study also contributed
assembling, and utilization of inventory for the research domain by providing empirical insights
productivity. Therefore, the current study fills an from the tea processing on capacity utilization and
apparent gap in bridging efficient management of supply chain performance. The result of this study
inventory of the contemporary and modern firms in demonstrates a correlation and strong relationship
Karachi and how it contributes to firm performance between capacity utilization and value chain
performance (r = 0.639, p<0.01). According to

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Faraz Khan et al / Impact of Inventory Management on Firm’s Efficiency – A Quantitative Research Study
on Departmental Stores Operating in Karachi
Hausman, (2004) firms have increasingly recognized Without quality attributes, it entails higher costs and
the role of capacity utilization and management in unrealized profit opportunities. If the required
the formation and maintenance of competitive quantity is short, it can lead to insufficient inventory
advantage. Author of this study also states that one (Prajogo, Oke, & Olhager, 2016).
of the key reasons leading to a shift or a breakdown
The study of Oballah, Waiganjo, & Wachiuri,
in the fulfillment of production orders is that many (2015) investigates the effect of inventory
enterprises lack the tools to quickly assess the level management practices on firms’ performance in
of capacity utilization. This is especially true for public health sector in Kenya. This study revealed
enterprises that fulfill large orders within the that inventory accuracy has a positive impact on
framework of inter-plant cooperation networks or organizational performance, while shrinkage of
holding structures. inventory has a negative effect on a firms’
According to Hedrick, Barnes, Davis, Whybark, & performance. This fact is supported by the study of
Krieger (2008) inventories are all materials and Miller (2010), where the author asserts that
goods which are maintained by firms in order to inventory management involves all activities put in
meet future demands. In addition to this definition, place to ensure that customer have the needed
Viloria & Robayo (2016) categorize them as product or service. In addition, this study also
products in process, finished goods, raw materials confirms that inventory accuracy brings in its
and final products that are available physically to the meaning the idea of precision. The accuracy of
organization and is utilized by the company in the inventory can be defined by the measurement (in
prospect of finishing or starting the process of percentage) of the amount of material physically
production or to market the finished products. found by the quantity recorded in the information
Inventory management is one of the most discussed system (Miller, 2010). The results of the study
phenomenon of management-related studies. Wild deduced that accuracy of inventory has a positive
(2017) suggests that firms ought to conform market effect on inventory management with the majority of
seasonal to the cost and procedures of production the respondents strongly approving that up to date
and should arrange products for sale. Another key inventory and proper records have a positive effect
point in Inventory management is to consider how on firms’ performance.
the inventory is moved and stored. If this does not The work done by Rinehart (1960) can be
take place in an appropriate manner then it will considered the initial literature on accuracy of stock.
result in damages to the inventory material and, At present, pioneers in the study of accuracy can be
consequently, inflict additional cost to the firm. considered Pitts (2006) that, in a survey conducted
In accordance with the study of Hugos (2018) at the US Navy depot in Rhode Island, impact of
effective and efficient inventory management can be inactivity on the level of inventory generated by
a great competitive advantage to reduce costs, information insecurity (Pitts, 2006). The lack of
optimize operations and ensure business accuracy is currently the subject of numerous
profitability. In light of this statement, inventory researches.
management if efficiently followed in the According to the study conducted by Nel, &
departmental stores can result as a set of activities Badenhorst-Weiss, (2011) organization using lean
with the purpose of ensuring the supply of materials inventory system should manage their supply chain
necessary for the operation of the firm, in the correct cycle in order to successfully achieve firms’
time, in the quantity required, in the desired quality efficiency. The study used non-probability sampling
and at the best price. Before the right time, it causes to collect data from 13 organizations and the
high stocks, above the company’s need. After the selection was done from Sunday Times top brand
correct time, it causes lack of material to meet the surveys (2008 & 2009). The findings of the study
needs. In addition to the required quantity, it shows that it is necessary for the firms to manage
represents immobilizations in idle inventory. their supply chain drivers according to their selected

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Faraz Khan et al / Impact of Inventory Management on Firm’s Efficiency – A Quantitative Research Study
on Departmental Stores Operating in Karachi
supply chain strategy. Moreover, according to the customer related concerns of an organization and
authors of the study, lean inventory management cost effectiveness technique are put into practice in
techniques and principles can be applied order to improve the return on investment in the
successfully in the retail sector as it improves firm.
operational flows. In addition, implementation of
The study conducted by Bawa, Asamoah, & Kissi,
lean inventory management encourages (2018) aims to investigate the impact of inventory
manufacturers to produce standard products in management and stock availability on firm
accordance with the place (created) orders from performance of listed manufacturing firms in Ghana.
retailers in conformance to the consumer demands. This is an observational research study in which
Another study by Rahman, Sharif, & Esa, (2013) sample data included observations from
investigates the implementation of Kanban in 14manufacturing firms in Ghana over a 10-year
Malaysian business environment. The study was period, from 2007 to 2016. The study has used a
carried on selected manufacturing companies in cross sectional secondary data in order to test any
Malaysia that have implemented lean manufacturing relationship between inventory management, stock
system using the Kanban practices. The respondents availability and firm’s performance of listed
of this study were the management staff and manufacturing firms in Ghana. Another study is of
employees from the store, production and logistic John, Etim, & Ime, (2015) which assess the impact
departments. In addition, collection of data was of inventory management and stock availability on
carried out via structured interview and observation. performance improvement of an organization. This
As per the findings of the study it is found that research study focuses on relationship between stock
vendor and supplier participation, quality control, availability and operational and environmental and
inventory management, quality improvement and financial performance of a firm. This research study
commitment of employees were the factors that lead is conducted in flour milling firms in Lagos, Nigeria
to effective implementation of the Kanban system in with the integration of producers of mills and
the company. conducted a survey process for data collection. It is
identified in the results that availability of stock and
The study of Ogbo, & Ukpere, (2014) puts light on
inventory is one of the important strategic options
the relationship between stock or inventory
related to firms’ operational performance.
availability and organization performance in the
seven-up bottling company, Nile Mile Enugu. Conceptual Framework
According to this study, one of the most important
3.1 Efficient Inventory Management
tasks of an efficient inventory management system
is to ensure that the right product is available at the An efficient inventory control system does not deal
right time, in the right place and in the right in the same way with all products, but it applies
quantity. A total of 83 respondents constitute the methods of control and analysis in correspondence
sample for the study with research questions and with the economic importance related to each
hypothesis generated using descriptive statistics and product. Inventory management derives from the
non-parametric test. The result of this study showed importance of stock for the company and, therefore,
that availability of stock is an important approach to the need to manage and control them is essential to
achieving organizational performance. According to maintain a level of inventory that allows, at a
the findings of this study, organizations benefits minimum cost, maximum service to customers. The
from inventory control management by way of basic reasons for inventory management are: protect
improved sales effectiveness, easy retrieval and against uncertainties, allow production and purchase
storage of material, and reduced operational cost. under economically advantageous conditions, cover
The study also found that there is a significant anticipated changes in demand and supply and
relationship between utility of inventory control maintain transit between production and storage
management and operational feasibility in the points.

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Faraz Khan et al / Impact of Inventory Management on Firm’s Efficiency – A Quantitative Research Study
on Departmental Stores Operating in Karachi
According to Hedrick, Barnes, Davis, Whybark, & operating budget. Since they do not add value to
Krieger (2008) inventories are all materials and products, the lower the level of inventory that a
goods which are maintained by firms in order to productive system can manage to work with, the
meet future demands. In addition to this definition, more efficient it will be (Wild, 2017).
Viloria & Robayo (2016) categorize them as
The efficiency of its administration can create the
products in process, finished goods, raw materials difference with competitors, improving quality,
and final products that are available physically to the reducing time, reducing costs among other factors,
organization and is utilized by the company in the thus offering a competitive advantage for the firm
prospect of finishing or starting the process of itself. It is essential that companies minimize the
production or to market the finished products. quantity of stocks in the supply chain in order to
Inventory management is one of the most discussed rationalize storage costs and maintain them.
phenomenon of management-related studies. Wild
(2017) suggests that firms ought to conform market To move in the right direction, it is important to
seasonal to the cost and procedures of production understand that like all other processes in an
and should arrange products for sale. Another key organization, inventory management needs to be
point in Inventory management is to consider how constantly reworked to flow according to the
the inventory is moved and stored. If this does not dynamics of the firm and always bring good results.
take place in an appropriate manner then it will The improvement of the productive quality, the
result in damages to the inventory material and, reduction of operational times, the careful reduction
consequently, inflict additional cost to the firm. of costs, among other aspects, are some of the
benefits obtained through effective inventory
Effective and efficient inventory management can be management.
a great competitive advantage to reduce costs,
optimize operations and ensure business profitability 3.2 Lean Inventory
(Hugos, 2018). Inventory management in the Lean inventory management techniques and
departmental stores is a set of activities with the principles can be applied successfully in the retail
purpose of ensuring the supply of materials sector as it improves operational flows. According
necessary for the operation of the firm, in the correct to Feld (2000), implementation of lean inventory
time, in the quantity required, in the desired quality management encourages manufacturers to produce
and at the best price. Before the right time, it causes standard products in accordance with the place
high stocks, above the company’s need. After the (created) orders from retailers in conformance to the
correct time, it causes lack of material to meet the consumer demands. According to this perspective,
needs. In addition to the required quantity, it the characteristics of a departmental store are shorter
represents immobilizations in idle inventory. product life cycle, strong competition, longer time of
Without quality attributes, it entails higher costs and product development and high demand sensitivity.
unrealized profit opportunities. If the required Implementation of lean inventory management in
quantity is short, it can lead to insufficient inventory departmental stores can be an ideal example of best
(Prajogo, Oke, & Olhager, 2016). practices of thriving operational strategies which
Inventory management is vital and often absorbs a must be accepted by the stores’ management in
substantial part of an organizations operating order to maximize the operating efficiency of the
budget, which means that it must be strictly retail process. Lastly, there is the cost of the deposit.
monitored. Another point of attention is the Having a lean and efficient inventory, an
legislative issue (Ballou, 2007). The firm that organization can rent a smaller space and have fewer
demonstrates inconsistency between the physical employees. The process of packaging and shipping
inventory and the accounting can be assessed by the the products is also much more efficient when there
Treasury. Inventory management is a vital issue and is a smaller quantity of items stocked.
often absorbs a substantial part of an organization’s

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Faraz Khan et al / Impact of Inventory Management on Firm’s Efficiency – A Quantitative Research Study
on Departmental Stores Operating in Karachi
Lean methodology can be adopted to improve firms’ synchronism between the pace of supply and
performance as it helps in integrating suppliers and demand compromises the outcome of the business.
customers, specifying value and aligning methods Therefore, it is essential to establish a stock policy
that prioritize the best choice for the sequence of that addresses the market in a competitive and
actions in the supply chain. For this purpose, value adequately satisfies the requirements of the
maps, Kaizen (slow but steady improvement), cell customers. For Mason-Jones, & Towill, (1997)
production and production leveling are used to supply chain is the flow of materials and
achieve the ultimate goal. Lean methodology is a information through the company, from the
way of integrating suppliers and customers, purchasing activity, through production, to the
specifying value and aligning methods that prioritize clients. Stock availability and supply chain is a
the best choice for the sequence of actions in the complex grouping of institutions which it calls the
supply chain. Value maps, Kaizen (slow but steady distribution channel or channel of marketing. It is
improvement), cell production and production the means by which a free-market system arranges
leveling are used to achieve the ultimate goal. ownership of products and services. It is the
battlefield where success or failure of the company
3.3 Stock Availability
is determined.
One of the most important tasks of an efficient
inventory management system is to ensure that the 3.4 Capacity Utilization
right product is available at the right time, in the According to Hausman, (2004) firms have
right place and in the right quantity. Lean inventory increasingly recognized the role of capacity
management focuses on improving organizational utilization and management in the formation and
responsiveness and speed by managing capacity maintenance of competitive advantage. Author of
constraints (bottlenecks) and reducing work-in- this study also states that one of the key reasons
process (inventory). The capacity and ability to meet leading to a shift or a breakdown in the fulfillment
customer needs in the shortest time possible should of production orders is that many enterprises lack
be a top goal of every world-class organization. The the tools to quickly assess the level of capacity
customer will be dissatisfied when the response time utilization. This is especially true for enterprises that
does not meet the expectation that he has. It must fulfill large orders within the framework of inter-
therefore be ensured that the responsiveness is plant cooperation networks or holding structures.
within the expectations of customers and that this Qrunfleh, & Tarafdar, (2014) in their study states
response is continuously improved. In the course of that by eradicating excess inventory and enhancing
the supply chain, stock management is essential for the quality of parts, the supply chain is able to lessen
the efficient management of organizations, whether the set-up duration, adjust capacity, enhance product
public or private. The lack of materials, high quality and respond quickly to the customer. As a
turnover, or even low are important for the result supply chain performance is enhanced
functioning of the organization, it may result in simultaneously resulting in improved firms’
significant damage to the organizations. Tseng, Wu, performance.
& Nguyen, (2011) argue that the lack of

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Faraz Khan et al / Impact of Inventory Management on Firm’s Efficiency – A Quantitative Research Study
on Departmental Stores Operating in Karachi
Hypothesis (Koumanakos, 2008; Kaynak, 2003; Rai,
Patnayakuni, & Seth, 2006; Kannan, & Tan, 2005).
H1: Capacity Utilization has significant impact on
Firms’ Efficiency In this study, we employed a 5-point Likert scale to
specify the extent of conformity to all items (1-
H2: Inventory Accuracy has significant impact on
Strongly Disagree to 5-Strongly Agree).
Firms’ Efficiency
Questionnaire was distributed to 250 individuals
H3: Lean Inventory has significant impact on Firms’ from different departmental stores in Karachi to
Efficiency determine the impact of inventory management on
H4: Stock Availability has significant impact on store’s efficiency. The performance and
Firms’ Efficiency competitiveness of the firms were also addressed via
questionnaire. The research refined the population
4. Methodology
sample to only those stores that have a considerable
In order to examine the impact of efficient inventory relationship between inventory and income. This
management on firm’s efficiency particularly of approach helped the researcher to get more accurate
departmental stores operating in Karachi, the study results about how efficient management of inventory
used a descriptive research design. The reason of can improve the performance of any firm or
selecting a descriptive research design is because of organization. Furthermore, the measurement scales
its efficacy as it serves as a valuable tool for the were tested separately for their validity and
presentation of cause & effect numerical techniques reliability. The research framework was tested for
such as correlation and regression analysis and hypothesis and structural fit through the method of
involved a significant amount of numeric data. SEM (structural equation modeling) which is a
According to Kothari (2004) this helps in more multivariate statistical analysis technique, and it also
precise description of objects, processes and incorporates factor analysis (Schreiber, Nora, Stage,
activities. Moreover, another motive to make use of Barlow, & King, 2006).
descriptive research was because this research
The analysis of the results of the applied
intended to explore, examine, compare and define
questionnaire were performed using the statistical
how variables such as stock availability, capacity
method of structural equations (PLS - Partial Least
utilization, inventory accuracy and lean inventory
Square). This technique is composed of diagrams
system affects a firm’s efficiency (Demeter, &
causal factors involving three main components:
Matyusz, 2011).
indicators (observed measured variables), variable
Quantitative research is carried out to study the latent (construct, concept, factor); ways (correlation,
inventory management and its impact on a trajectory, or two senses / trajectories), this is
departmental stores operating in Karachi. This appropriate when variables used to represent a
method helped the researcher to first and foremost phenomenon that cannot be measured directly (Hair
describe the hypothesized supply chain determinants Jr, Sarstedt, Hopkins, & Kuppelwieser, 2014).
and performance criteria used by departmental stores McDonald & Ho (2002) describes the steps for the
and, thereafter made an attempt to explain the cause- analysis and use of the technique of structural
effect relationship between independent variables equations: 1) Create a theoretical model, grounded
and firm’s efficiency and performance. in robust bibliographic review; 2) Build a track
For this study, survey questionnaire was designed diagram (path) of causal relations (or influencers);
and distributed in order to collect information from 3) Transform the diagram into a set of structural
selected sample respondents (employees at models using software; 4) Choose the data entry
departmental stores). A set of questions on each matrix appropriate to estimate the model proposed.
aspect of the inventory management practice was
derived from widespread literature review including
but not limited to the following studies

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Faraz Khan et al / Impact of Inventory Management on Firm’s Efficiency – A Quantitative Research Study
on Departmental Stores Operating in Karachi
Demographic Analysis This information results in obtaining diverse
information of the respondents. Among 250
For obtaining information of the respondents
respondents, according to the results it is identified
participating in the research process, questionnaire
that there 178 male respondents and 72 female
included some questions that asked respondents
respondents.
about their gender, education, age and experience.
Gender Count
FEMALE 72
MALE 178
Grand Total 250
Likewise, there were respondents from different age 30, 55 respondents were from the age group of 31-
groups. According to the results it is identified that 35, 54 respondents were from the age group of
28 respondents were from the age group of 18 to 25, above 36 years.
113 respondents were from the age group of 26 to
Age Count
20-25 28
26-30 113
31-35 55
36 or above 54
Grand Total 250
In addition to this, researcher also collected respondents were graduate, and 35 of the
information about education background of the respondents were post graduate and eight
respondents. According to the results, it is identified respondents hold different qualification degrees.
that four respondents were under graduate, 203
EDUCATION Count
GRADUATE 203
OTHER QUALIFICATION DEGREES 8
POST GRADUATE 35
UNDERGRADUATE 4
Grand Total 250
It is identified that 65 respondents have 1-3 years’ years’ experience and 3 respondents have less than a
experience, 69 respondents have 4-7 years’ year experience.
experience, and 113 of the respondents have 8-10
EXPERIENCE Count
1-3 YEARS 65
4-7 YEARS 69
8-10 YEARS 113
Less than a year 3
Grand Total 250

Below table depict describtive analysis of likert scale questions asked about respondent’s perception about
the factors.
Frequency Percent
Agree
Strongly

Agree

Neutral

Disagree
Disagree
Strongly
Total

Agree
Strongly

Agree

Neutral

Disagree

Disagree
Strongly

Total

Questions

Lean inventory system enhances firm’s

efficiency by identifying and eliminating 12 29 56 100 39 250 5.1 12.3 23.7 42.4 16.5 100
waste
Using Lean Inventory system can result in 46 82 57 31 20 250 19.5 34.7 24.2 13.1 8.5 100

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Faraz Khan et al / Impact of Inventory Management on Firm’s Efficiency – A Quantitative Research Study
on Departmental Stores Operating in Karachi
waste minimization.
Lean Inventory System can improve Flow
Management (by reducing the management or 9 27 52 109 39 250 3.8 11.4 22 46.2 16.5 100
coordination costs).
Lean practice is useful in reducing the lead
time in work in process inventories and flow 61 78 44 41 12 250 25.8 33.1 18.6 17.4 5.1 100
of production.
Is accuracy of stock level and values necessary
14 26 38 108 50 250 5.9 11 16.1 45.8 21.2 100
for an organization’s accounting practices.
To enhance firm’s efficiency, the stock
availability should be systematically checked 10 20 59 95 52 250 4.2 8.5 25 40.3 22 100
through a regular audit (stocktaking).
Availability of stock is crucial for the growth
14 17 68 87 50 250 5.9 7.2 28.8 36.9 21.2 100
and survival of an organization.
Stock control allows an organization to have
the right amount of stock at the right time to
ensure that capital is not tied up unnecessarily, 17 13 48 91 67 250 7.2 5.5 20.3 38.6 28.4 100
and protects production if problems arise with
the supply chain.
Capacity utilization and management plays a
significant role in the creation and
36 79 68 41 12 250 15.3 33.5 28.8 17.4 5.1 100
maintenance of competitive advantage
increasing firm’s efficiency.
Organizations should enhance the capacity
utilization of limited resources in order to
12 51 65 82 26 250 5.1 21.6 27.5 34.7 11 100
improve firm’s performance and create
competitive advantage.
Capacity utilization has a strong positive
7 30 56 106 37 250 3 12.7 23.7 44.9 15.7 100
effect on firm’s value chain performance.
Reduced inventory as eliminating bottlenecks
6 26 59 105 40 250 2.5 11 25 44.5 16.9 100
means there will be less work-in-process.
Improved capacity as optimizing the constraint
5 27 44 100 60 250 2.1 11.4 18.6 42.4 25.4 100
enables more product to be manufactured.
Inventory accuracy is necessary for easy
storage and retrieval of material, improved
6 24 45 114 47 250 2.5 10.2 19.1 48.3 19.9 100
sales effectiveness and reduced operational
cost.
Accurate inventory management possess the
capability of positively influencing firm’s 7 24 55 119 31 250 3 10.2 23.3 50.4 13.1 100
performance.
Poor stock management, particularly related to
warehousing and distribution, significantly
7 22 54 101 52 250 3 9.3 22.9 42.8 22 100
increases the rate of inefficiency and poor
productivity.
Model Measurement equation model has been observed to be a foremost
procedure that has been used below different
To test the study hypothesis we have used the
regression models and methods (Barron & Kenny,
structural equation model (SEM) whereas the testing
1986). Moreover, the equation of regression in study
has been gone through Smart PLS software.
targets at explaining each construct to assess the
Structural equation modeling used to evaluate the
cause and effect relationship while all of the factors
structural relationship between exogenous and
in the causal model could demonstrate their cause
endogenous variables. The structural equation
and effect at exact time. Likewise, the idea of using
modeling includes factor analysis and multivariate
this model ensures to apply technique of
analysis of the model. Firstly we evaluate the model
bootstrapping which has been viewed as reasonable
fitness and measure whether the paths showing the
for both small and large sample size and does not
relationship between measured and latent variables
require any kind of indirect effect (Hayes, 2013).
are significant or not. Moreover, to evaluate the
indirect and direct effects of all the constructs the The PLS model includes two different models,
testing was done. The use of (SEM) structural which include a structural model and a measurement

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Faraz Khan et al / Impact of Inventory Management on Firm’s Efficiency – A Quantitative Research Study
on Departmental Stores Operating in Karachi
model. This section includes an analysis of the Reliability measurements include reflective
measurement model. The measurement model structure, Cronbach alpha, composite reliability and
implies the representation of the external average variance extraction (AVE). Cronbach’s
connections existing between the various structures alpha is used to assess the reliability of consistency
included in the study, with their indicator variable. and requires a minimum of 0.7 to be considered
On the other hand, the structural model implies the acceptable. However, Cronbach’s alpha has
representation of internal associations that exist limitations because it often underrates internal
between the various constructs included in the study. consistency reliability. Another method of
measuring internal consistency reliability is
Measurement of Outer Model
composite reliability. A composite reliability value
The goal of measure of fit in the measurement between 0.7 and 0.9 can be accepted. This is the
model is to study about the reliability and validity of accepted reliabity value range. Estimation of
the instrument and to check its reliabity and validity reliability can be done by degree of constancy that
we perform test of convergent validity and lies amongst various variables (Hair, 2010). Below
discriminant validity in software naming Smart PLS. is the table of composite reliability.
Composite Reliability
Variables Composite Reliability
CAPAITY UTILIZATION 0.898
FIRMS’ EFFICIENCY 0.861
INVENTORY ACCURACY 0.910
LEAN INVENTORY SYESTEM 0.877
STOCK AVAILABILITY 0.931
Factor loadings significant loading of .5 are consider as strong loading variables
whereas the constructs with the loading of below .5
Below is the mentioned table of (CFA) confirmatory
are considered as less are better to be removed from
factor analysis with the loadings. Construct with the
the table.
Variable Constructs Item loading
CU1 0.869
CU2 0.878
Capaity Utilization
CU3 0.733
CU4 0.830
Firms’ FE1 0.873
Efficiency FE2 0.865
IA1 0.833
Inventory Accuracy
IA3 0.920
IA4 0.879
Lean Inventory Syestem LI1 0.934
LI3 0.831
SA1 0.866
SA2 0.876
Stock Availability
SA3 0.875
SA4 0.897
Convergent Validity or more according to the variation of the indicator.
Indicators and outer loadings must be higher than
On the other hand, convergent validity emphasizes
0.708, but if the removal does not have any effect on
on including outer loadings and assess whether
the composite reliability, then the indicator should
indicators are positively correlated with other
be considered between 0.4 and 0.7 and maintained.
indicators of the same structure. AVE is used to
These overall values indicate that constructs used in
measure the effectiveness of convergence to a
the research model are fit to the reliability ad
particular level. The value of AVE greater than 0.5
validity requirement by above mentioned statistical
indicates that the composition is interpreted as 50%
tests.

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Faraz Khan et al / Impact of Inventory Management on Firm’s Efficiency – A Quantitative Research Study
on Departmental Stores Operating in Karachi
Cronbach’s Alpha rho_A Composite Average Variance
Reliability Extracted (AVE)
CAPAITY UTILIZATION 0.847 0.849 0.898 0.688
FIRMS’ EFFICIENCY 0.676 0.676 0.861 0.755
INVENTORY ACCURACY 0.851 0.863 0.910 0.771
LEAN INVENTORY SYESTEM 0.732 0.833 0.877 0.782
STOCK AVAILABILITY 0.901 0.903 0.931 0.771
Discriminent Validity study also tests discriminant validity through
Heterotrait-monotrait (HTMT) ratio. Following
.Discriminant validity can be determined in PLS by
tables identify the results of collected data with
the three different tests which includes Heterotrait-
respect to discriminant validity.
Monotrait (HTMT) ratio of correlation and Fornell
& Larcker criterion and cross loading of indicators. Fornell & Larcker Criterion
Along with these two specific tests, this research
CAPAITY FIRMS’ INVENTORY LEAN INVENTORY STOCK
UTILIZATION EFFICIENCY ACCURACY SYESTEM AVAILABILI
TY
CAPAITY 0.829
UTILIZATION
FIRMS 0.538 0.869
EFFICIENCY
INVENTORY 0.821 0.594 0.878
ACCURACY
LEAN INVENTORY 0.676 0.350 0.653 0.884
SYESTEM
STOCK 0.760 0.453 0.752 0.788 0.878
AVAILABILITY
From the above table, it is identified that as related model should exceed the value obtained after
to discriminant validity, it is require to have proper correlation of that construct with another construct.
Average Variance Extracted analysis. This test aims Moreover, it is also important that value of that
to identify that each square root of each AVE for construct should at least 0.50. According to the
each individual construct exceeds any other results, all values are greater than 0.5 and also
correlation exist between pair of latent construct. As addressing the rule of thumb for discriminant
according to the rule of thumb, it is identified that validity.
square root of each of the construct integrated in the

Cross Loadings
CAPAITY FIRMS’ INVENTORY LEAN INVENTORY STOCK
UTILIZATION EFFICIENCY ACCURACY SYESTEM AVAILABILIT
Y
CU1 0.869
CU2 0.878
CU3 0.733
CU4 0.830
FE1 0.873
FE2 0.865
IA1 0.833
IA3 0.920
IA4 0.879
LI1 0.934
LI3 0.831
SA1 0.866
SA2 0.876
SA3 0.875
SA4 0.897

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Faraz Khan et al / Impact of Inventory Management on Firm’s Efficiency – A Quantitative Research Study
on Departmental Stores Operating in Karachi
Cross loading method is also executed for some of the constructs, values of all other constructs
discriminant validity of the construct included in the in the model are greater than 0.70. This test also
model. As according to the rule of thumb, it is confirms the requirement for cross loading for each
identified that cross loading value of each construct construct included in the model.
should exceed 0.70. Results indicate that except

Heterotrait-Monotrait (Htmt) Ratio

CAPAITY FIRMS’ INVENTORY LEAN STOCK
UTILIZATION EFFICIENCY ACCURACY INVENTORY AVAILABILIT
SYESTEM Y
CAPAITY
UTILIZATION
FIRMS’ 0.710
EFFICIENCY
INVENTORY 0.969 0.779
ACCURACY
LEAN 0.855 0.479 0.826
INVENTORY
SYESTEM
STOCK 0.867 0.580 0.856 0.976
AVAILABILITY
Heterotrait-Monotrait (HTMT) correlation ratio is structural model was designed through using
also used for measuring discriminant validity. specific guidelines of SmartPLS. Moreover, thumb
According to the rule of thumb for this specific test, of rule was emphasized that indicate that a t
it is suggested that HTMT values should be less than statistics values should exceed 2 and R square value
1. should be greater than 50%. For testing the
hypothesis, P value is emphasized through
Structural Model
considering rule that P value less than 0.05 will be
In Partial Least Squares (PLS) method, structural considered as attainment of adequate evidence to
model is used for testing the hypothesis through accept the hypothesis.
identifying different path coefficients. A structural
According to the results, it is identified that there
model can be used by researcher for identifying the
exist statistically significant association between
linear regression analysis of the dependent variable
inventory accuracy and firms’ efficiency (t-
included in the model. This specific model in
statistics=5.054, P value=0.000, between lean
SMART PLS enables researchers to identify the
inventory and firms’ efficiency (t-statistics =2.430,
pattern of the association that exist among the
P value=0.015) and between stock availability and
constructs included in the research. Therefore,
firms’ efficiency (t-statistics=2.856, P value=0.004)
structural model is one of the evolving areas and is
as the p-values of the inventory accuracy, lean
emphasized by the researcher to execute direct
inventory and stock availability are less than the
testing of the hypothesis in the research. For this
level of significance which means that they support
research, entire model was assessed through using
the alternate hypothesis. Where there is insignificant
three different criteria including path coefficients, p
difference between capacity utilization and firms’
value and t-statistics value. The validity of the
efficiency as the p-value=0.520 is greater than level
structural model was executed through using
of significance=0.05 which means that the alternate
SMART PLS as identified prior. Moreover, entire
hypothesis is rejected.

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Faraz Khan et al / Impact of Inventory Management on Firm’s Efficiency – A Quantitative Research Study
on Departmental Stores Operating in Karachi
Model

Path Analysis

ORIGINAL SAMPLE STANDARD T STATISTICS P

SAMPLE (O) MEAN (M) DEVIATION (|O/STDEV|) VALUES
(STDEV)
CAPACITY 0.047 0.045 0.072 0.644 0.520
UTILIZATION -> FIRMS’
EFFICIENCY
INVENTORY 0.450 0.451 0.089 5.054 0.000
ACCURACY -> FIRMS’
EFFICIENCY
LEAN INVENTORY -> 0.165 0.167 0.066 2.430 0.015
FIRMS’ EFFICIENCY
STOCK AVAILABILITY- 0.210 0.209 0.073 2.856 0.004
> FIRMS’ EFFICIENCY
Discussion values for each path coefficient. Moreover,
significant t values also indicate the support of
With executing comprehensive statistical tests
hypothesis. The rule of thumb used for testing
through using Smart PLS, this chapter reach towards
hypothesis was a t value greater than 2 and an alpha
the final testing of hypothesis. Results attained lead
value of 0.05 for p value.
towards the support and reject of the hypothesis
stated in the research. The evaluation criteria that Following table summarizes the testing of
was used for testing each hypothesis was use of p hypothesis:
Hypothesis Accepted or Rejected
H1: Capacity Utilization have significant impact on Firms’ Efficiency Rejected
H2: Inventory Accuracy have significant impact on Firms’ Efficiency Accepted
H3: Lean Inventory have significant impact on Firms’ Efficiency Accepted
H4: Stock Availability have significant impact on Firms’ Efficiency Accepted
H1 suggests that capacity utilization affects the for firms’ efficiency. Firm needs to improved
firms’ efficiency. This hypothesis according to the capacity as optimizing the constraint enables more
results is rejected with (T Statistics=0.644, P product to be manufactured. It is crucial for OCS to
value=0.520). This result of the study indicates that emphasize on the delivery of services with accurate
capacity utilization is one of the important elements reliable and appropriate manner according to the

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Faraz Khan et al / Impact of Inventory Management on Firm’s Efficiency – A Quantitative Research Study
on Departmental Stores Operating in Karachi
expectation of the customers. Organizations should 5. Conclusion
enhance the capacity utilization of limited resources This research studied the impact of inventory
in order to improve firm’s performance and create management on firms’ performance of departmental
competitive advantage. Capacity utilization has a stores operating in Karachi. Inventory control
strong positive effect on firm’s value chain
management have a strong impact on the firm’s
performance. performance and profitability as they allow
H2 suggests that inventory accuracy affects the quantitative and qualitative measure of the
firm’s efficiency. According to the results this movement of inventory, which allows strategic
hypothesis is accepted with T Statistics=5.054, P decisions to be made that increase efficiency in the
value=0.000. This result of the study indicates that process of the supply chain and lower costs. The
accurate inventory management possess the main indicator of inventory control comes out to be
capability of positively influencing firm’s inventory accuracy which allows having an effective
performance. More over inventory accuracy is control of the outputs of the different goods. The
necessary for easy storage and retrieval of material, accuracy indicator is intended to be controlling how
improved sales effectiveness and reduced reliable is the inventory and the indicator of duration
operational cost. of the inventory allows to know how long a certain
H3 suggests that lean inventory also influence the commodity remains in the organization. Based on
the results of this study, inventory control indicators
firm’s efficiency. According to the results this
allow the firm to organize, manage and utilize the
hypothesis is accepted with T Statistics=2.430, P
best inventory control model in order to improve the
value=0.015. This means that lean inventory system
flow of inventory. With the results of the
enhances firm’s efficiency by identifying and
investigation it can be concluded that the most used
eliminating waste. It can improve the flow
inventory control indicators, is the Lean Inventory
management by reducing the management or
system, which handles the most important variables:
coordination costs. Moreover lean practice is useful
the cost quantity and rotation. Furthermore,
in reducing the lead time in work in progress
Inventory control indicators can also allow the firm
inventories and flow of production. Waste can be
to measure and qualify how the inventory process
minimized if firms uses lean management system.
works, and shows the strengths and weaknesses of
H4 suggests that stock availability effects the firm’s the inventory control system currently used in an
efficiency. According to the results this hypothesis organization.
is accepted with T Statistics=2.856, P value=0.004.
Managing inventories in a departmental store is key
This means that stock availability is the important
to reducing costs. High and precariously managed
factor for evaluating firms’ efficiency. The stock
stocks are factors that affect the final price of the
availability should be systematically checked
products, as well as an improper application of the
through a regular interval time in order to enhance
firms’ working capital. The competitiveness of
efficiency of firm. The inventory management
firms’ in the globalized world requires a correct
techniques has a positive influence on the
maintenance of this asset, and it is essential to keep
performance of a company. These techniques of
only the quantity that comes parallel with demand.
managing inventories help in proper planning of the
Correct and efficient inventory management in the
materials needed by identifying the gap between the
supply chain cannot be done in isolation, some
desired and the actual level of materials, allocation
production control measures should also be
of resources, purchasing, sales and employment of
implemented by the firm. However, it is essential
staff and everything concerned to human resources
that the supply chain is at the same level of
management all of which reduces on the costs
evolution and the customer-supplier relationship is
incurred by the organization in the production
totally synchronized. The results of this study
departments for improved performance of the
stipulate that adequate and efficient inventory
company.

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Faraz Khan et al / Impact of Inventory Management on Firm’s Efficiency – A Quantitative Research Study
on Departmental Stores Operating in Karachi
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