IJAMS

INVENTORY MANAGEMENT PERFORMANCE IN

MSMEs: WHAT FACTORS DO INFLUENCE THEM?
Puneet Mangla 1, Ashish Agarwal 2, Pulak M Pandey 3
1
Research Scholar, Department of Mechanical Engineering, SOET, IGNOU, Maidan Garhi, Delhi
1
Department of Mechanical Engineering, Hindustan College of Sc. & Tech., Mathura-282110, INDIA
[email protected]
2
Department of Mechanical Engineering, SOET, IGNOU, Maidan Garhi, Delhi-110068, INDIA
[email protected]
3
Department of Mechanical Engineering, Indian Institute of Technology, Delhi-110016, INDIA
[email protected]
Abstract: Micro, small, medium enterprises (MsSMEs) are important contributors to national economy. Consequently, MSMEs are
considerably vulnerable, exposed to intense competition and lacks commensurate knowledge. In an era of liberalization MSMEs
should be more competitive in context of quality, service and cost. However, MSMEs faces constraints in several key areas such as
SCM, agile manufacturing, technology, and human resources. Therefore, it is felt in inventory intensive manufacturing units,
inventory management practices (IMP) and competencies for agile readiness are perhaps pivotal for attaining competitive advantage.
We focused on medium entrepreneurs and probed inventory related practices. We probed which factors influence IMP and how they
are adapted and applied. Insights perhaps facilitate researchers and practitioners to work-out framework to provoke agile readiness
thereby sustainability. This study is based on MSMEs located in North India. We explored what are the IM practices adopted by
these units? What crucial aspects do influence IMP and the inventory cost? We addressed and audited IMP, and sought parameters
needed to be changed in the context of agile readiness. The paper aims to contribute to knowledge by developing a deeper
understanding into IM practices via articulating influenced factors/activities within the process.
Keywords: Inventory management, Supply chain, Manufacturing enterprises, MSME, ITR, Inventory cost, Agile manufacturing.

1. Introduction
Micro, Small and Medium Enterprises (MSMEs)
plays important role of engine to stimulate the
economic growth. For developing economies,
MSMEs are pivotal, as economic status largely
depends on health of MSMEs. The 4th Census
statistics of Ministry of MSME Sector (2010),
estimated 26.1 million enterprising units exists
that employees 59.7 millions, nearly four times
that of large corporate. In that matter, the Annual
Report 2012-13, Ministry of MSME, Government
of India, figured out numbers of MSMEs to be
approximately 30 million that would in the next
three years perhaps provide employment to
around 12 million people. It is meritorious that
67.10% registered MSME enterprises are engaged

in manufacturing. Henceforth, sustainability of

manufacturing MSMEs is pivotal for economy as
well as for employment. Moreover, in recent
times, developed economies witnessed relative
increase in several MSMEs being a major source
for employment. However, MSMEs are
vulnerable, and their failure rate is higher, as they
are grappled with many problems, such as domain
expertise, technology access, low production
capacity, ineffective manufacturing process,
strategy and poor supply chain management. The
tough competitive scenario because of
globalization has put enormous pressure on
MSMEs never seen and experienced before (Huin,
2004). Researchers argue that MSMEs must
redefine themselves for achieving competitive
advantage over others through optimal use of
limited resources (Ricklavely, 1996). Therefore,

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Puneet Mangla, Ashish Agarwal, Pulak M Pandey

in context of inventory intensive MSME units, it

is felt that inventory management performance
and agile readiness are perhaps keys for
sustainability of MSME and also for reviving sick
units. According to report of Institute of small
enterprises and development (ISED) 2012, key
strategic challenges faced by MSMEs are, lack of
access to global market, methodological approach
to knowledge creation, development trend not
well appreciated, unable to tap benefits of new
economic opportunities and threat from cheaper
substitutes from imports. The lack of sensitivity
and inability to identify strategic business process
is observed as key constraints by ISDE. Therefore,
we strongly emphasize that MSMEs need to assert
through scientific advocacy initiatives. In present
open economic scenario, multinational and large
firm drives the market. MSME are forced to work
as ancillary because protection has been
withdrawn by Government and several MSME
has to face low margin, high working capital, and
delays in payments, etc. Further, ever growing and
changing competitors, dynamic customers
behavior and complex structures implies that
competitive functions are not totally foreseeable.
Thus growing dynamism confronts the field of
supply chain in particular inventory management
with exponentially growing new challenges
(Shnits et.al., 2004).
Dynamics in market is intrinsically coupled with
corresponding information exchange among all
players in the logistics domain: e.g. suppliers,
manufacturers, transport companies and most vital
customers. MSMEs are required to connect with
real world fronts and sources to widen the
relevance of IM performance for enhancing
competitive advantage. In this regard MSMEs
have to evaluate critical links affecting IM
performance and why they often suffer from
longer deliver time, logistics communication and
information exchange problem. However, they are
required to learn new methodologies and market
trends. Therefore to achieve and sustain desired
effects iterative and interactive inventory process
is considerably needed.
IM performance issue is normally concerned with
avoidance of excess inventory and shortage of

materials. On this background our study attempts

to identify factors that influence the inventory
management performance in the context of North
Indian MSMEs. Further, agile manufacturing units
have the proficiency to rapidly respond to changes
in customer demand, i.e. deal with dynamic
components of market to enhance competitiveness
(Goldman et al., 1995). Moreover an agility
component delivers value to customers, remains
prepared for changes, value human knowledge
and skills and develop partnerships. Thus it is
crucial to link IM performance with agility.
Therefore, it is felt that exploratory analysis of
inventory management practices perhaps provides
optimal solution for eliminating few strategic
problems. It is important to understand grounded
IM practices rather theoretical conceptualizations
(Ritchie and Lam, 2005). The literature highlights
the reactions of MSMEs who often intimidated
and prefer to operate in the usual manner and
mindset. If MSMEs keep on doing the same thing
and envisage a different result, then it is never
going to happen. In a scenario of no change
attitude, progressive and different results cannot
be expected.
This study aims to group MSMEs into the
category of lean manufacturing, if positive, then
virtual partnerships component to enhance IM
performances to probably make them agile
manufacturer.
Apparently
literature
lacks
appropriate IM performance solutions. Therefore,
we audited out existing standpoint in North Indian
MSMEs to identify what needs to be changed in
the context of IM, to make MSMEs as agile
manufacturer. Hence we aim to bridge the gap in
IM performance factors in the context of MSMEs.
This paper is organized within six sections. First
section, briefly introduces the significance of
inventory management and concerns in the
context of MSMEs, followed by a literature
review in section two. The objectives, scope and
methodology are covered under section three.
Further, critical analysis is done to evaluate
critical links affecting IM performance in forth
section. Thereafter, Section five enlists set of
recommendations and inferences. Finally in sixth
section conclusions is elaborated in the context of
IM performance and agile readiness.

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Inventory Management Performance in MSMEs: What Factors Do Influence Them?

2. Literature Review
Many organizations value supply chain
improvements as a prime concern, because of low
supply chain efficiency. Scholars have analyzed
several IM practices and performance thereby
literature amassed exhaustive knowledge in
context of IM and IM performance. Inventory acts
as a buffer in the Supply Chain where benefits are
coping with supply-demand time mismatch,
variability (supply, demand, forecast error),
economics (costs, discounts), main trade-off,
service level, keeping inventory cost to a
minimum. IM practice is concerned with leadtime issues, rapidly configure or reconfigure
assets and operations of the manufacturing
systems to react to consumer trends. Literature
clearly mentions that appropriately suitable
Inventory Management (IM) practices provide
path to have competitive advantage. Henceforth,
to survive in dynamic economy, MSMEs must
adopt modern IM practices (Inventory theory and
models) for optimal utilization to achieve
competitive product range. The major functions of
inventory are: (1) provision of required inputs for
production; and (2) prevention against machine
breakdown and to cater the volatile market (Zeng
and Hayya, 1999). We perceive that ordering cost
refereed as inventory cost and inventory turnover
are significant aspects to consummate IM strategy
of particular MSMEs. IM has been a crucial
aspect of the inventory rich manufacturing
industry, as IM enable firm to minimize inventory
cost and also avoid the consequence of material
shortage. The inventory cost is often believed to
be efficacious for making inventory decisions
(Ballou, 2000), where inventory carrying costs
vary within a specified range of inventory costs.
However, proper selection of IM practice is
pivotal to improve inventory affiliated
performance (Palmer and Dean, 2000). The IM
and competitive advantage links has been
previously discussed by few researchers in
relation to large corporate. However, limited study
exists in the context of MSMEs. We perceive that,
by supplementing value addition in relation to
inventory
management
perhaps
enhance
competitiveness. It results in reduced inventory
cost, offer advantages because of limited time in

the system. As a measure of inventory

effectiveness, lead-time is critical (Martin and
Philip, 2003), and important inventory element
(Rugtusanatham and Rabinovitch, 2006). The
longer lead-time and high usage, demands higher
re-order stock levels and vice-versa (Partington
and Sculli, 1993). Therefore, to reduce safety
stock and reduced inventory, replenishment leadtime is required for improved customer service
(Chandra and Grabis, 2005). Small purchase lots
require more efforts by purchase department.
Thus, Toelle and Tersine (1989) is of view that
excess inventory level is expressed as operational
liability and eventually results in increased
inventory costs. The frequency of raw material
ordering is another distinguished measure and an
prime element that contributes towards increased
inventory cost, because of frequent small order.
This is much more relevant to MSMEs, as they
are often restricted to avail benefits of quantity
discounts, as requirements are probably much
less. Flores et al., (2003), developed a scheme for
optimizing inventory costs. A supply chain is
indispensable to all forms of business. However,
supply chain, in particular, inventory management
(IM) is imperative that is often overlooked in the
boardroom. Consequently, businesses with
excellent IM support results in considerable
customer satisfaction. Chase et al. (2000) is of
view that in new global paradigm, organizations
are forced to locate alternative and flexible ways
to satisfy customer demand. Compelling supply
chains improve businesss performance. To
enhance effectiveness of IM performance is
perhaps the optimal solution. It ensures that the
blend of elements in the supply chain is in tune
with the business requirements. IM sensitivities
have been assessed and investigated in context to
changing pattern of the business i.e. future is
getting more uncertain and there is a need for the
flexibility (Gill, 2013). Many organizations have
serious concerns relational to supply chain
improvement, because of low supply chain
efficiency. From the academic and practitioners
viewpoint, it is advantageous to identify gaps in
theory as well as in practice. Often areas of focus
are cost, carbon reduction and delivering savings
to the bottom line. A more important angle is that
excellent IM performance increase sales, through

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Puneet Mangla, Ashish Agarwal, Pulak M Pandey

better shelf availability, improving a products

speed to market and marketplace innovation.
Supply Chain Strategy (SCS) is emerging field,
constitutes approaches that range from strategic to
tactical, where main focus is on operational or
tactical levels of planning and decision making.
For sustaining competitive advantage exhaustive
exploration of IM practices and performance
parameters is perhaps pivotal necessity (Katz et
al., 2003). Inventory management is emerging
research area of SCM, needs consolidation in
context of constructs, characteristics and
application methods. Literature attributes that
alignment of inventory management with business
strategies is essential, ultimately results in
achievement of overall business goals. IM
maintain high degree of delivery reliability and
high delivery flexibility, that is, often hallmark of
business. Organizations often experience major
gaps among business, strategies and supply chain
strategy. Incorporation of appropriate IM models,
results in success of the business. Mitra (2010)
suggested that a highly responsive strategy is
required to address uncertain demand and supply
scenario, whereas efficient strategy is required to
address certain demand and supply scenario. The
following problems have been identified through
literature review and interaction with experts. We
identified common practices adopted in MSME
aligning supply chain in particular inventory
management. To begin with, improper inventory
management and lead-time issues and inability to
rapidly configure or reconfigure assets and
operations of the manufacturing systems to react
to consumer trends were observed. Although,
MSMEs look for structured and methodological
procedure to calculate inventory level, however,
argues that increased investment in inventory in
addition to an increased orders backlog perhaps
results in lost sales thereby minimal profits.
Therefore, we decided to implement a systematic
approach as against extensively used thumb rules
to establish inventory policy parameters in
MSMEs, to optimize inventory cost. For proper
execution of planning and inventory control, we
perceive that understanding of crucial factors
which influence IM is pivotal. It perhaps enables
MSMEs to adopt an appropriate and optimal IM
practices. Of course the role of IM practices, cost

of inventory, quantity to be ordered and inventory

issues are well explained in theory, ironically,
empirical examination is not commonly observed
in the context of MSMEs. On this ground, study is
focused to get insight of pivotal factors that
influence inventory management performance.

3. Objectives, Scope and Methodology

1) To understand IM practices and performance
issues in MSMEs.
2) To identify critical factors that significantly
affects inventory cost.
3) To audit current prominence of IM in MSMEs.
4) To get insight for agile readiness.
The study is confined to MSMEs located in North
India. We have omitted Micro and Small
Enterprises. We focused on enterprises of medium
category, where turnover exceeds fifty million and
is below hundred million. We shortlisted
inventory intensive units having formal or
informal relationship with various large
corporations including multi-nationals (MNCs)
located around North Capital Region (New Delhi).
The quality and cost of engineering products
depend on the performance level of parent
industry and their automation levels. The
development of MSME units is therefore of
paramount importance for a competitive and selfefficacy industrial structure, having the potential
to offer substantial employments. Therefore,
medium sector is perceived as notably
appropriate. Because of non-availability of a
systematic database of MSMEs located in North
India, we decided to focus on a maximum two
hundred profit making MSMEs, thereafter,
confined to eighty owing to resource constraints.
In addition to literature review, several meetings
with managers of MSMEs have been conducted to
study the inventory management practices.
As an outcome of the meetings, a semi structured
questionnaire was developed in consultation with
domain experts. In this matter, feedbacks which
we received were thoroughly analyzed and
thereafter
questionnaire
was
modified
accordingly. Finally thirty-one enterprises
responded well to semi structured questionnaire.

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Inventory Management Performance in MSMEs: What Factors Do Influence Them?

We focused on existing orientation of clustered

MSMEs through interaction with experts and
exhaustive literature review. The critical success
factors are identified through literature survey,
and then tested for their best practicing
effectiveness through questionnaire survey. The
basic features of data collection is grouped in five
sections as IM practices, performance, economic
variables, production details, factors hindering
IM. Regarding each question, MSME managers
were asked to gauge the extent to which all
concerned unanimously agree for the mentioned
statements. The questions were in the form of
short statements and they are required to provide
personal views on a five point Likert scale. The
data collection exercise was carried out by the
authors themselves during June 2012 to
November 2012. Nineteen enterprises were cutoff because of inappropriate information. The
methodologies used for the data analysis are
descriptive analysis, regression analysis and rank
correlation.

4. Analysis of Commonly Used Inventory

Management
Practices
and
Performance
Since majority of MSMEs were inventoryintensive in nature where significant portion of
production cost involves raw material and various
other inventory related cost. It is likely that the
MSMEs recognize its due importance. We have
included objective to correlate different scenario
of practices with Aberdeen report, as more than
60% of firms use relatively simplest form of
inventory management methods. (Aberdeen
Group, 2005). On this background we understand
the present perception of MSMEs about the
importance and convenience of IM practices. Out
of 31 concerned MSMEs, all of them explicitly
stated that IM is substantially important for
performance. Thus obviously statement brings out
that the awareness level of IM practices is
significantly highly distinguished in MSMEs of
North Indian region. In this matter, it is
appropriate to view these MSMEs to ascertain that
how many of them follows IM practices and what
is the kinds of practices they pursue. In this
relation, Table 1 shows how many MSMEs follow

IM practices and others who do not, if yes, which

kind of practice is eventually pursued. The table
clearly indicates that seven MSMEs did not
pursue any kind of IM practice. Thus it is
concluded that although some MSMEs do
consider IM practice as important, however, do
not pursue any kind of IM practices. This is only
because of motivation lack on the part of the
concerned MSMEs. It is also likely that though
they got an explicit feeling that IM is important,
perhaps might have not realized its crucial role by
probing others experiences. It is observed that
raw material purchasing frequencies also vary
from daily basis to monthly basis. How frequently
these units would resort to purchase raw materials
probably depend upon the kind of IM practice
adopted. Therefore, it is pivotal to understand that
how does the raw material ordering frequencies of
MSMEs vary vis--vis the kind of IM practices
pursued. In this regard, Table 2 indicates such a
distribution. Although, it appears that few
MSMEs who did not pursue any kind of IM
practice, and therefore their raw material ordering
frequency is less. Whereas other MSMEs which
do adopted computerized IM/JIT/VMI avoided
more frequent raw material ordering.
Table 1: Common inventory management practices
followed in MSMEs.
Sr.
No.
1
2
3
4
5
6

Common Practices

No practice
Thumb rules
EOQ (Economic Order Quantity)
ABC (Always Better Control)
Computerized IM
Just-in Time (JIT) &
Vendor Managed Inventory (VMI)
Total

Number
of
MSMEs
07
09
04
05
02
04
31

To assure whether there exists any statistically

significant relationship between the two variables,
we performed rank correlation analysis, by
ranking raw material ordering frequencies from
one to five: Quarterly (5), Monthly (4),
Fortnightly (3), Weekly (2) and Daily (1).
Whereas IM practices are ranked from one to six:

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Puneet Mangla, Ashish Agarwal, Pulak M Pandey

No practice (6), Thumb rules (5), EOQ (4), ABC

(3), Computerized IM (2), and JIT/VMI (1). The
rank correlation analysis unearths that there is a
statistically significant positive correlation (0.343)
between raw material ordering frequencies and IM
practices. Therefore, need for purchasing raw
material will also be realized based on stock
verification exercise previously done by these
units. Further, survey results clearly brought out
mere three MSMEs do stock verification
exercise on a daily basis. Only two of them
perform on a fortnightly basis and nine carryout
on monthly basis. The remaining eleven MSMEs
performs stock verification either quarterly or
once a year. Hence, it is perceived that frequency
of stock verification exercise is also important for
raw material purchase on the one hand and IM
practices and IM cost on the other. It appears that
in MSMEs which turned away from any kind of
IM practice, the stock verification frequency is
also quiet less. On the contrary in those MSMEs
that adopted computerized IM/JIT/VMI practice,
the frequency of stock verification is much higher.
To verify whether there exists any statistically
significant relation between the two variables, we
performed rank correlation analysis, by ranking
stock verification frequencies from one to five:
Yearly (5), Quarterly (4), Monthly (3), Fortnightly
(2), and Daily (1). Here also IM practices are
ranked from one to six. The result of rank
correlation analysis reflected that there is a
statistically significant positive correlation (0.480)
between frequencies of stock verification and IM
practices.
Table 2: Common inventory management practices
and raw material ordering frequency.
RM Ordering Frequency
IM Practice
No Practice
Thumb Rules
EOQ
ABC
Com. IM
JIT/ VMI
Total

Total

0
1
0
1
0
1
3

2
2
2
2
2
2
12

3
2
1
1
0
0
7

2
4
1
0
0
1
8

0
0
0
1
0
0
1

7
9
4
5
2
4
31

Nevertheless, an important determinant of IM

practice carried-out by these MSMEs perhaps is
their size itself. Vergin (2008) argues that larger
the MSME size, the greater will be the scope for
multifaceted IM practice adoption and vice versa.
However, size is measured either in terms of
number of workforce or in terms of investment.
The research shows that irrespective of size
MSMEs does not have competent and trendy IM
practices. To further verify, if any, statistically
significant relationship exists between size of
investment or number of employees and IM
practices, we again performed correlation analysis
that clearly shows that there is no link or
correlation between the two variables. Thus we
wonder if or not the type of production might have
suitable relationship with the IM practice.
Considering this aspect, Table 4 presents
distribution between the two parameters.
Although it reflects out indication that MSMEs
who follow job shop/batch production processes,
either do not have any IM practice or simply
follow thumb rule/EOQ/ABC based IM practice.
Whereas MSMEs who opts for mass
production/flow shop production process adopts
computerized IM/ JIT/VMI practices. In this
regard, correlation analysis indicates there is a
statistically significant positive (0.825) correlation
between the two. This implies that production
process has a significant relationship with the kind
of IM practice that MSMEs probably adopts. It is
obvious because production types like mass
production and flow shop production require more
frequent stock verification and raw material
purchases which have better compatibility with
inventory practices. On the contrary, job shop/
batch production systems does not requires either
frequent stock verification or frequent raw
material purchase and confidently managed even
without any IM practice. Table 3 shows stock
verification details.

D-Daily; W-Weekly; F-Fortnight; M-Monthly; Q-Quarterly

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Inventory Management Performance in MSMEs: What Factors Do Influence Them?

Table 3: Common inventory management and stock

verification frequency.
Stock Verification Frequency
IM Practice D
No Practice 0

Total

Thumb Rules 1

EOQ
ABC

0
0

0
0

3
3

0
1

1
1

4
5

Com. IM

JIT/ VMI

1
0

2
0

0
1

0
2

1
4

4
7

Total

D-Daily; W-Weekly; F-Fortnight; M-Monthly; Q-Quarterly

Considering all these aspects, it is felicitous to

know whether or not inventory cost / sales has any
link with either IMP or raw material purchase or
stock verification frequency. To demonstrate this
perception of the relationship between the number
of raw material ordering frequencies and
inventory cost / sales, rank correlation analysis is
again carried-out. The inventory cost per sales is a
ratio between the yearly inventory cost and the
annual sales, in percentage. The inventory costs
were ranked from one to five within different
ranges; 0 -5 %, >5 10%, >10 15%, >15 20%
and more than 20% respectively. Similarly raw
material ordering frequencies were given number
from one to five starting from daily (5), weekly
(4), fortnightly (3), monthly (2) and quarterly (1).
Eventually, statistically significant negative
correlation between the two variables represents
that if the number of raw material ordering
frequency is more than inventory cost per sale is
positively less.

Table 4: Common inventory management practices

and production types.
IM
Practices
No
Practice
Thumb
Type of
Rules
EOQ
IM
Practice
ABC
Com.IM
JIT/ VMI
Total

Job
shop
3
5
1
3
0
0
11

Production Type
Batch Mass
Flow
Shop
4
0
0
3
2
1
0
0
10

1
1
0
0
1
3

0
0
2
2
3
7

Total
7
9
4
5
2
4
31

To obtain further interpretation about what kind of

relations do exists between stock verification
frequency and inventory cost / sales, rank
correlation analysis between number of
frequencies of stock verification and inventory
cost / sales is carried-out. As previously done
inventory costs are ranked from one to five,
whereas number of frequencies of stock
verification are also ranked one to five to
represent the frequencies of stock verification that
range from annual (1), quarterly (2), monthly (3),
fortnightly (4), daily (5). Table 6 results thereby
reflect that there is a statistically negative
correlation between the number of frequencies of
stock verification and inventory cost / sale. This
manifestation indicates MSMEs who practice
stocks verification on daily basis have less
inventory cost / sales as compared to others which
perform it on monthly, quarterly or annual basis.
Consequently, few MSMEs, which constantly
monitor stocks on a daily, are better positioned to
understand purchase requirements and place
orders optimally. Thus a positive correlation exits
between IM practices and raw material ordering
frequency while a negative correlation exits
between raw material ordering frequency and
inventory cost / sales. However, it is expected that
there will be a negative correlation between IM
practices and inventory cost / sales. In this matter,
Table 5 shows distribution of MSMEs in terms of
inventory cost per sales Vs IM practices.

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Puneet Mangla, Ashish Agarwal, Pulak M Pandey

Table 5: Common inventory management practices

and inventory cost / sale.
IM
Practice
s
IM
Practice
s
No
Practice

CC
0.343**

understand the extent and diversity of IM methods

implemented and their relationship with inventory
cost /sales of these MSMEs. This is particularly
distinguished that MSMEs that adopts superior IM
practice are well positioned to achieve lower
inventory cost / sales. In such a backdrop an
understanding of inventory turnover ratio (ITR)
in MSMEs has to be implied. Inventory turnover
ratio is a ratio between the annual sales and the
amount spent for materials required for
production. It is most often used technique to
unearth IM performance of firms (Rabinovich et
al., 2003; Vastag et al., 2005; Koumanakos, 2008;
Rao, 2009). It is an appropriate method for
evaluating management effectiveness (Zeng and
Hayya, 2009). Therefore, it is appropriate to get
insight of the variance of ITR among these
MSMEs by our efforts. The ITR ratios of MSMEs
are presented in Table 8. It is significant to note
that 19 MSMEs had an ITR up to five; 8
MSMEs in the range of above five to 10; and
hardly 4 MSMEs had a ratio of more than 10. It
clearly shows that by and large MSMEs having
lower ITRs imply enough scope to improve their
inventory performance. The regression results are
presented in Table 7.

0.480**

Table 7: Regression analysis results.

Inventory Cost / Sale

0 5 >5 - 10 >10 >15 - 20 > 20 Total

15
0

Thumb
Rules
EOQ

ABC

Com.IM

JIT/
VMI
Total

13

31

Table 6: Rank correlation.

Variables
Raw Material Ordering Frequency and
IM Practice
Stock Verification Frequency and IM
Practice
Inventory Cost per Sales and IM
Practice
Capital Investment and IM Practice
Labour and IM Practice
Inventory Cost per Sales and RM
Ordering Frequency
Inventory Cost per Sales and Stock
Verification Frequency
Inventory Cost per Sales and
Production Type
(CC- Correlation Coefficient)

-0.522**
0.104
0.127
-0.260*
-0.297**
-0.201

Correlation is significant at the 0.05 level (2tailed).

** Correlation is significant at the 0.01 level (2tailed).
Above analysis enables us to identify factors such
as raw material ordering frequency, stock
verification frequency that positively influence
inventory cost / sales. Thus analytical description
with multifaceted dimensions encouraged us to

MSMEs
INV c/s
D1M1
D1M2
DRF
DPT
Constant
Adjusted R2
F
N

ITR (Inventory Turnover Ratio)

-0.62 (-5.91)
{0.000}
-0.52 (-3.55)
{0.001}
- 0.023 (-0.26) {0.795}
{0.486}
-0.093 (-0.70)
0.044 (0.485) {0.629}
13.58 (12.92) {0.00}
0.327
9.75 (0.00)
31

Table 8: ITR distribution.

No
1
2
3
4
5

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ITR
0 to 2.5
>2.5 to 5
>5 to 7.5
>7.5 to 10
Above 10
Total

Number of MSMEs
5
14
5
3
4
31

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Inventory Management Performance in MSMEs: What Factors Do Influence Them?

If however, the ITRs of MSMEs vary, it is

fundamental to know how they vary among
different IM practices. The variance of ITR of
MSMEs between different IM practices is shown
in Table 9. It is consequential to observe that
MSMEs who avoided or not availed any IM
practice had a lower ITR whereas those MSMEs
who did pursue methodological IM practices have
higher ITRs. This itself highlight the importance
and necessity to adopt IM practices as it
substantially improves ITRs. To further actualize
the relationship between ITRs and IM practices,
rank correlation analysis is again performed,
where IMP are ranked from one to six as in the
previous case. The ITRs are ranked from 0 2.5
(5), >2.5 5 (4), >5 7.5 (3), >7.5 10 (2), and >
10 (1). The statistically significant positive
correlation between the two variables actualizes
inference that better the IM practice adopted,
higher is ITR. For a given the relationship
between IM practice and ITR we were
impassioned to know how ITR varies with raw
material ordering frequency. In this regard,
relationship in terms of distribution of MSMEs
between raw material ordering frequencies and
ITRs is presented in Table 10. It is obvious that
MSMEs which resorted to less frequent raw
material ordering had a lower ITR. On the other
hand a significant proportion of MSMEs which
resorted to more frequent raw material ordering
(daily basis and on a weekly basis) had ITRs
ranging from 7.5 and above. Our correlation
analysis
further
actualizes
the
positive
relationship. The rank correlation coefficient is
found to be 0.401.
The next connected issue is whether ITR varies
between production types of MSMEs. Table 11
shows the distribution of MSMEs in terms of
production type and ITRs. The table clearly infers
that MSMEs with job shop production and batch
production have lower ITRs whereas mass
production and flow shop production system have
relatively much higher ITRs. The rank correlation
between production type is taken as job shop (1),
batch production (2), mass production (3), flow
shop (4)) and ITRs as 0 - 2.5 (1), >2.5 - 5 (2), >5
7.5 (3), >7.5 10 (4), >10 (5)), this brings out that
there exists statistically significant, although a

lower, positive correlation (0.294) between two

variables.
Table 9: Common inventory management practices
and inventory turnover ratio.
Inventory Turnover Ratio
IM

Practices 0 2.5 >2.5 - 5 >5 7.5 >7.5 10 > 10 Total

No practice
Thumb rule
EOQ
ABC
Com.IM
JIT/ VMI
Total

4
2
0
0
0
0

2
5
1
2
02
2

1
1
2
1
1
1

0
1
1
1
0
1

0
0
0
1
1
0

7
9
4
5
2
4

12

31

Looking at state of above situation we were

interested to know whether the size of MSMEs
has anything to do with the ITRs. Our analysis
between enterprise size (in terms of capital) and
ITRs bring out that size has nothing to do with
ITRs. Thus it is important to know relationship
between ITR and inventory cost/sales. Other
things remaining constant, there should be a
negative relationship between the two variables
implying that MSMEs which have lower
inventory cost / sales are have higher ITRs and
vice versa. Table 12 presents the distribution of
MSMEs in terms of inventory cost / sales and
ITRs. The table shows MSMEs with lower
inventory cost / sales tend to have high ITRs. The
higher value of statistically significant negative
correlation (-0.6) supports stated inference.
Table 10: Inventory turnover ratio and raw material
ordering frequencies.

ITR
0 2.5
> 2.5 5
> 5 7.5
> 7.5 10
> 10
Total

D
1
1
0
1
2
5

RM Ordering Frequency
W
F
M
Q
2
2
0
0
4
4
5
0
2
1
2
0
0
1
0
1
2
0
0
0
10
8
7
1

Total
5
14
5
3
4
31

D-Daily; W-Weekly; F-Fortnight; M-Monthly; Q-Quarterly

With reference to above it is important to establish

what factors determine the level of ITR in MSME.

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Puneet Mangla, Ashish Agarwal, Pulak M Pandey

The possible factors are (1) the appropriateness of

IMP, (2) frequency of ordering, (3)
implementation level of modern manufacturing,
and (4) inventory cost / sales. To confirm whether
these factors really have significant influence on
ITR, again regression analysis is put to use, as
follows:
ITR = b0 + b1 INV c/s + b2 D IM1 + b3 D IM2 +
b4 DRF + b5 DPT
Where, ITR = Inventory Turnover Ratio, b0, b1,
b2, b3 , b4, b5 are beta coefficients of the variables,
DIM1 and DIM2 are dummy variables for IM
practices, DRF is the dummy variable for raw
material purchase frequency, DPT is the dummy
variable for the production type respectively, as
explained in the previous analysis. Regression
analysis of ITR with Inventory cost / sale, IMP
and raw material results are shown in Table 7, that
clearly indicates that model is statistically
significant, thereby eventually explains almost
32.7% of the variation are in ITR.
Table 11: Production type and inventory turnover
ratio.
Type of Production
ITR

Job
shop
3

Batch

Mass

Total

Flow
Shop
0

> 2.5 5

14

> 5 7.5

> 7.5 10

>10

11

10

31

0 2.5

Total

However, IMP that is based on thumb rule, EOQ,

and ABC did not make any difference at all
compared to MSMEs which does not follow any
IMP. Although, MSMEs which practice modern
IM practice such as computerized IM/JIT/VMI
seems to achieve higher ITR as reflected in the
positive coefficient of the variable (though it is
significant only at the 20% level). In addition,

both raw material ordering frequencies and

production types have statistically significant
positive influence on ITR.
Table 12: Inventory turnover ratio and inventory cost/
sale.
Inventory cost / sales
ITR
0 2.5

0 5 >5 - 10 >10 15 >15 20

> 20

Total

> 2.5 5

14

> 5 7.5

> 7.5 10

> 10

Total

14

31

4.1 Ordering Frequency and Production

Type: Dependent Variable Inventory
Turnover Ratio
We were more particular about how IMP and
inventory cost / sales make influence on ITR.
Therefore, separate regression analysis is done.
ITR = e0 + e1 INV c/s + e2 DIM1 + e3 DIM2 , where
e0, e1, e2, and e3 are beta coefficients of the
variables, DIM1 and DIM2 are dummy variables for
sophistication of IM practices respectively.
Table 13: Correlation between inventory turnover ratio
and other factors.
Variables
ITR and IM Practice
ITR and Capital Investment
ITR and Labour
ITR and RM Frequency

CC
0.692**
0.076
0.123
0.401**

ITR and Production Type

0.294**
ITR and Inventory Cost per
-0.638**
Sales
** Correlation Coefficient is significant at the 0.01
level (2-tailed).

The dummy variable representing MSMEs which

practice thumb rules, EOQ, ABC based IM
practices were not statistically significant. But the

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Inventory Management Performance in MSMEs: What Factors Do Influence Them?

dummy variable representing MSMEs with

computerized IM/JIT/VMI practices were
statistically significant reflecting its positive
influence on ITR. Inventory cost / sales have a
statistically significant negative influence. The
results of regression analysis of ITR with
inventory cost / sale and IM Practices are shown
below in Table 14.

process or simplistic inventory management

methods. While modern IM practices are only
confined to a fraction of MSMEs being inventory
intensive units.
The recommendations are made for these MSMEs
to initiate with following measures to get close to
being agile by implementing these modern IM
practices.

Table 14: Regression results

Machine Tool
INV c/s
-0.38 (-3.63) {0.00}
D1M1
0.01 (0.15) {0.87}
D1M2
0.37 (1.27) {0.20}
Constant
7.62 (4.13) {0.00}
Adjusted R2
0.34
F
15.65 (0.00)
N
31
(Values within the parentheses and brackets aret
values and significance level)

In spite of decreasing explanatory power, the

model is substantially significant. The overall
analysis clearly directs that by adopting superior
IMP we can certainly reduce inventory cost / sales
and thereby increase ITRs.

5. Inferences and Recommendation

Inventory is buffer in the Supply Chain, while
there is no 'one size fits all' concept in SCM.
Moreover IM Models are not used exactly as we
learned them, thus its essential to get insight
about, what is 'IM Theory/Model' and what is not
IM Theory/Model' is important and matters.
Although today technology matters, however,
business processes matter even more. Inventory
intensive manufacturing MSMEs were expected to
be aware of the need and importance of IM
practices. On the contrary our study found that
although they are aware of IM practices, however,
when it comes to practice, almost one fourth of
them did not pursue/implemented any kind of IM
practice, if pursue, then in simplistic inventory
management models. This is primarily due lack
of perception of benefits and competitive
advantage. It has been found that majority were
adopting self-defined inventory management

1. Look out for economical logistics operator to

provide delivery just before manufacturing,
which facilitates Zero Inventory.
2. For in-house inventory operations, implement
functional inventory classifications in terms of
scycle stock, safety stock, pipeline inventory,
anticipation Inventory, ABC analysis etc.
3. Decide whether to stock or not to stock? i.e.
decide among Buy-to-order versus Buy-tostock.
4. Supply Chain Decisions (strategic) - What are
the potential alternatives to inventory?
5. Deployment Decisions (strategic) - What
items should be carried as inventory? In what
form should they be maintained? How much
of each should be held and where?
6. Replenishment
Decisions
(tactical/operational) how often should
inventory status be determined? When should
a replenishment decision be made? How large
should the replenishment be?
7. Decide among continuous or periodic review
of inventories. In Periodic Review, review
periods are usually scheduled and consistent /
ordering occurs at review, while in
Continuous review ensures transactions
reporting / collecting information and making
decision.
8. Decide approach among Cost Minimization
Approach, requires costing of shortages /
finding trade-off between relevant costs and
Customer Service Approach. Overpower
constraints on customer service / minimize
costs with respect to customer services.
9. Involve multiple-flows for flow of physical
goods (raw materials, WIP, finished goods).
10. Determine required trade-offs, across different
entities and across metrics: Cost, Service,
Time, Risk, Flexibility, etc.

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Puneet Mangla, Ashish Agarwal, Pulak M Pandey

11. Deal with uncertainty - Uncertainty in supply,

process, and demand and consider both
flexibility and robustness.
12. Portfolio of approaches are usually needed.
There is no one size fits all concept
applicable in SCM, therefore, get insights and
know when to apply appropriate approach is
critical to success.
13. Apply generic Reorder Point calculation.

6. Conclusions
Our subsequent analysis indicated that those
MSMEs which pursued better IM practices
reflected frequent stock verification as well as raw
material ordering. Our study unearths two
important dimensions, inventory cost / sales and
ITR where IM have a positive influence while
inventory cost / sales has a negative influence on
ITR. Now it is being evident that better IM
practices or modern inventory practices achieve
lower inventory cost / sales as well as higher ITR.
Our study brought out that this has indeed been
the case in the context of MSMEs which we
covered in our study. Our final analysis enables us
to infer that academicians and consultants could
encourage MSMEs to adopt better IM practices.
Implementation of modern IM practices enable
them to achieve lower inventory cost per sales and
higher ITRs thus enables them to step closer to be
a agile manufacturer just by incorporating virtual

partnerships in their business process, to enhance

competitive advantage and organizational value.

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Puneet Mangla, Ashish Agarwal, Pulak M Pandey

Biography
Puneet Mangla is working as Associate Professor
and Head of Department of
Mechanical Engineering at
Hindustan College of Science
and
Technology,
Farah,
Mathura, India. He earned his
M.Tech. from Dayalbagh
Educational Institute (Deemed
University), Agra and is
pursuing his Ph.D from SOET, IGNOU, New
Delhi (INDIA) . His research areas include
Industrial Engineering, Finite Element Analysis,
Artificial Neural Networks, Non Conventional
Manufacturing Techniques. He has been awarded
prestigious Production Engineering Division
Medal by Institution of Engineers (India) for his
research paper. He has number of papers
published in journals and conferences.
Ashish Agarwal is working as Associate
Professor, Department of Mechanical Engineering
at SOET, Indira Gandhi National Open University
New Delhi India. He earned his PhD from IIT
Delhi in the area of Supply Chain Management.
He has published several papers in International
Journals like European Journal of Operations
Research, Supply Chain Management: An
International Journal, Industrial Marketing
Management, Work Study etc.,. His areas of
interest are Supply Chain Management, Total
Quality Management, Operations Management,
Knowledge Management, System Dynamics,
Multi Criteria Decision Making etc.
Pulak M Pandey is working as Associate
Professor, Department of Mechanical Engineering
at Indian Institute of Technology Delhi. He earned
his M.Tech and Ph.D. from Indian Institute of
Technology Kanpur. His areas of interest are
Rapid Prototyping and Tooling, CAD/CAM, FEA
and Optimization of manufacturing processes,
Non Conventional Manufacturing Techniques and
Industrial Engineering.

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