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IJPDLM 40,7

Food and grocery supply chains: a reappraisal of ECR performance

Bobby J. Martens
Department of Logistics, Operations, and Management Information Systems, Iowa State University, Ames, Iowa, USA, and

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Received December 2009 Accepted April 2010

Frank J. Dooley
Department of Agricultural Economics, Purdue University, West Lafayette, Indiana, USA
Abstract
Purpose The paper aims to reappraise efcient consumer response (ECR) in the grocery and food industry to determine whether nancial and operating performance improves with ECR adoption. Design/methodology/approach The paper uses a time-series multiple regression model. The methodology overcomes historical shortcomings in ECR and supply chain management research related to small sample size, one-tier investigation, and short-longitudinal focus. Findings ECR adoption has benecial impacts for both nancial and operational performance. Research limitations/implications Two limitations exist. First, determining the actual time of implementation for supply chain management strategies by rms in the food industry is extremely difcult. The method used to classify rms as ECR adopters in this paper is believed to be sound and unbiased, but errors may exist. Second, this analysis does not account for differences in the implementation level for ECR. For simplicity, a binary variable is used to distinguish rms adopting or not adopting supply chain management strategies (ECR). Further study is needed to determine how differences in the level of ECR implementation impacts rm performance. Practical implications The paper overcomes historical shortcomings in ECR performance research. The paper provides academics and practitioners in the food and grocery industry denitive evidence that ECR has benecial impacts for both nancial and operational performance in the food and grocery industry. Originality/value By placing greater attention on overcoming historical shortcomings in supply chain management research related to small sample size, one-tier investigation, and longitudinal study, the paper improves upon previous evaluations of ECR. Keywords Fast moving consumer goods, Supply chain management, Performance monitoring, Demand management Paper type Research paper

International Journal of Physical Distribution & Logistics Management Vol. 40 No. 7, 2010 pp. 534-549 q Emerald Group Publishing Limited 0960-0035 DOI 10.1108/09600031011071993

Introduction Wal-Mart entered the grocery business in late 1980s with a supply chain management strategy of continual replenishment of products based on consumer purchasing habits. This approach allowed Wal-Mart to lower inventory levels, reduce the cost of goods sold, and lower its prices. To counter Wal-Marts entry into the grocery business, large supermarket chains (e.g. Kroger and Safeway) and food manufacturers (e.g. Kraft and General Mills) formed an industry task force that called for an industry-wide commitment to efcient consumer response (ECR) (Kurt Salmon Associates, 1993). The ultimate goal of ECR was for retailers and suppliers to work closely together to reduce costs within the supply chain and to bring better value to the grocery customer.

The four main ECR strategies are efcient store assortment, efcient replenishment, efcient promotion, and efcient product introduction (King and Phumpiu, 1996). The aim of efcient replenishment focuses on cost control while the other initiatives promote demand management. Successful implementation of ECR depends on numerous factors such as the number of processes, demand patterns, product life cycles, and an ability to maintain cooperative relationships with suppliers/vendors (Mejza and Wisner, 2001). Early in the history of ECR, it was estimated that the food industry would realize incredible benets from adoption. Studies estimated that ECR adoption could save $30 billion in cost while reducing inventory by over 40 percent (Kurt Salmon Associates, 1993; Kahn and McAlister, 1997). Suppliers were estimated to capture 70 percent of the savings due to their higher supply chain costs (Adams, 1995). In 1994 and 1995, the Food Marketing Institute projected that the industry would spend $7.5 billion implementing ECR and predicted a payback period of less than three years (Walsh, 1995). However, others question whether ECR investments have been protable for the food industry (Walsh, 1995; Brown and Bukovinsky, 2001). Brown and Bukovinsky (2001) suggested that grocers were dissatised with ECR because it failed to deliver the promised cost savings or increased protability. A related paper by Brown and Buttross (2007) reached a similar conclusion for apparel retailers. However, these ndings seem counterintuitive given the level of investment in supply chain initiatives by rms in the food retailing and manufacturing sector, as well as the continuing reports of new initiatives in the trade press. In contrast, other studies have found that adopting supply chain management systems such as information technology increase gross margin, inventory turnover, market share, return on sales (Dehning et al., 2007). The median increase attributable to investments in supply chain management was 1.78 percent for return on assets (ROA) and 1.44 percent for return on sales (ROS) (Hendricks et al., 2007). In addition, Whipple and Russell (2007) stressed the importance of collaboration in supply chain performance. They argue that rather than being dissatised with supply chain initiatives like ECR, rms involved in supply chains are seeking even greater collaboration through participation in industry initiatives such as the voluntary interindustry commerce solutions (VICS). By implementing ECR strategies, rms in the food supply chain aim to lower inventory levels, thereby decreasing cash conversion cycles (CCCs). In turn, lower CCCs should allow rms to increase liquidity and raise protability. Given the inconsistency of Brown and Bukovinsky (2001) with other work, the rst objective of this paper is to determine whether food retailers and manufacturers that adopted ECR improved their nancial and operating performance compared to rms that did not adopt such a strategy. A second objective of this work is to consider Giunipero et al. (2008) who encourage creating a body of literature that is more heavily inuenced by a deeper analysis of the supply chain on a chain wide or network basis as opposed to the more popular dyadic studies. Specically, the goal of this work is to revisit Brown and Bukovinsky (2001) in light of Giunipero et al.s recommendation to place greater attention on overcoming historical shortcomings in supply chain management research related to: . small sample size; . one-tier investigation; and . longitudinal study.

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The next part presents a review of ECR literature and then considers Brown and Bukovinsky (2001) in light of recommendations for supply chain research from Giunipero et al. (2008). Next, variables and an empirical model are presented, followed by the empirical results. The paper ends by providing conclusions, implications, and ideas for future research. Literature ECR strategies have been studied from multiple perspectives including ECR measurement (Aastrup et al., 2008), ECR adoption principles (Phumpiu and King, 1997), knowledge creation (Soret et al., 2008), and retailer-supplier relationships (Corsten and Kumar, 2005; Lusch and Brown, 1996; Heide and John, 1988). Other investigations assessed the impact of specic aspects of ECR on operational performance (Corsten and Kumar, 2005; Dhar et al., 2001; Gruen and Shah, 2000; Stank et al., 1999). Stank et al. (1999) found that information technology solutions associated with ECR has improved inventory management and shortened order cycles, while Corsten and Kumar (2005) found that suppliers perceive positive economic performance from ECR adoption. However, none of these studies directly evaluated the effects of ECR adoption on inventory and nancial performance. A review of literature found only three studies that directly analyzed the effect of ECR adoption on inventory and nancial performance. First, Phumpiu and King (1997) evaluated the effect of ECR initiatives on nancial performance and inventory turnover (INVTURN) for 40 Minnesota grocery stores. By focusing on ve aspects of the stores: (1) store and manager characteristics; (2) inventory management and ordering processes; (3) store layout, shelf-space allocation, and product assortment; (4) product pricing and promotion decisions; and (5) key challenges facing managers and three store productivity measures (sales per labor hour, sales per square foot of selling area, and INVTURN), the stores were compared using organizational form and three ECR readiness groups (low, medium, or high). The ERC readiness groups were based on the number of ECR practices implemented. Stores with a high ECR readiness index exhibited improved performance. When compared to stores with a low ECR readiness index, stores with a high ECR readiness index exhibited 59 percent higher sales per labor hour, 125 percent higher sales per square foot of selling area, and 131 percent higher average INVTURN (Phumpiu and King, 1997). The authors could not determine whether the adoption of ECR practices leads to strong performance or whether strong performance facilitates ECR practices. However, they concluded there was a strong association between the adoption of ECR practices and nancial performance. Their results for organizational form suggest that size is important for achieving a high level of nancial and inventory performance. A second study compared annual data for nine retail grocery chains from 1992 to 1997 (Bowersox et al., 1999). Although ECR was not explicitly identied in this study, the results suggest that improved prot were obtained from procurement practices such as forward buying rather than through improved operating efciency. The study

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found average inventory turns declined slightly, days in inventory increased, the CCC dropped by 5 percent, net prot margin increased by 22 percent, asset turnover fell 10 percent, and ROA increased 7 percent. Finally, Brown and Bukovinsky (2001) analyzed the impact of ECR strategies on nancial performance for grocery retailers. Their nancial data came from annual company nancial reports for the years 1992, 1997, and when available 1998. Mail surveys to 29 retail grocery companies had the rms self-identify as adopters or non-adopters of ECR. For the 1992 and 1997 year comparisons, responses for 25 companies were used, including 13 adopters and 12 non-adopters. For the 1992 and 1998 year comparisons, 20 companies were used, consisting of 11 adopters and nine non-adopters. Multiple regression analysis was used to estimate six models, testing whether rm size, growth rates, and ECR adoption affected operating or nancial performance. The independent variables used in the six models were TA at year-end, asset growth (AG), sales growth (SG), and ECR. ECR was a binary variable, where one represented a company that was an ECR adopter, while zero represented a non-adopter of ECR. Six DVs were used in their model: CCC, INVTURN, ROS, gross prot margin, inventory as a percent of TA, and inventory as a percent of sales. The results from Brown and Bukovinsky (2001) were clearly not what ECR advocates had anticipated. From 1992 to 1998, CCCs increased 17 percent for adopters of ECR, but decreased 29 percent for non-adopters. INVTURN increased 9 percent for non-adopters, while adopters INVTURN fell 12 percent. Inventory to assets (ItoA) and inventory to sales (ItoS) for non-adopters decreased 44 and 14 percent, respectively, but for adopters, ItoA decreased 8 percent while ItoS increased 6 percent. ROS for non-adopters increased 130 percent, but decreased 47 percent for adopters (Brown and Bukovinsky, 2001). Adopters and non-adopters gross prot margins were similar and increased 3 and 2 percent, respectively. The gross prot margin percentage was positively related to rm size, indicating that prices charged by suppliers were lower for larger customers. This price advantage may encourage mergers and make it difcult for small grocers to compete on the basis of price. ECR was adopted more often by larger rms, reecting the difculties that small rms face in obtaining capital, and giving greater advantages of technology use to the larger rms. Brown and Bukovinsky (2001) reported four limitations to their work. First, the companies could not be randomly classied as either an adopter or a non-adopter of ECR. The lack of random assignment was a weakness since it was possible that rms in one of the groups may have had some attribute other than ECR adoption that determined or affected the outcome. Second, the rms annual nancial reports may aggregate information from several different divisions or business units. Thus, all rms were reviewed to ensure that they were primarily grocery retailers. Third, by using annual report data, the number and size of rms eligible for the study was limited since many food retailers are smaller, privately held rms. Fourth, for simplicity, binary variables were used for all adopters of ECR, even though some rms may have implemented more ECR initiatives than others. The next section discusses the methodology used in this current study, and comparisons with the Brown and Bukovinskys (2001) study are drawn. In consistencies about the value of ECR exist, and a denitive answer to whether or not ECR improves inventory and nancial performance of food rms remain elusive.

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The next section describes the methodology used to denitively determine whether food retailers and manufacturers that adopted ECR improved their nancial and operating performance compared to rms that did not adopt such a strategy. Methodology This work builds on the approach of Brown and Bukovinsky (2001), yet differs in four ways as it strives to address the limitations in supply chain research identied by Giunipero et al. (2008). First, Brown and Bukovinsky (2001) is classied as a one-tier investigation in that it only considers one level of the supply chain, namely grocers (Table I). This is a chain level analysis in that it includes grocers, mass merchandisers, food wholesalers, and manufacturers of food and consumer product goods. The scope of the analysis was expanded to include the entire food industry to reect that ECR is an industry wide supply-chain initiative. Mass merchandisers were added because part of the intent of ECR was to develop strategies to compete with the entry of Wal-Mart. The product categories were also expanded beyond food to consider other consumer products like health and beauty. Thus, the model in this study includes a binary variable distinguishing between the retail/wholesale sector and the food and consumer goods manufacturing sector. Second, Brown and Bukovinskys (2001) regression models apparently were based on one observation for 20 grocers in 1998 or 25 grocers in 1997 (Table I). In contrast, the regression analysis in this work was based on 1,785 observations from 119 rms, with annual observations from 1992 to 2007. Third, the longer time span allows us to consider the effects of ECR from a longitudinal perspective as well, an additional concern of Giunipero et al. (2008). Finally, this analysis adds the variable AQUIRE to capture disruptions in operations that might lead to variations in growth rates. AQUIRE is the expenditures on acquisitions by rm, as indicated by the Thomson One Banker database, divided by the rms TA. This gives the relative impact of acquisition activity. Because this study considers rms operating continuously since 1992, the AQUIRE variable captures expenditures on acquisitions, which includes mergers and consolidations of the surviving rm. Both studies use multiple regression, with a similar set of dependent and independent variables, and both studies use an indicator variable to capture whether a rm adopted ECR. The result is that both studies suffer from the challenge of classifying rms as adopters of ECR. Brown and Bukovinsky (2001) had the rms
Supply chain research limitation criteriaa Tier

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Brown and Bukovinsky One tier: rm level grocers 20-25 grocers Multiple regression 1992-1998 Survey

Current work Multiple tier: chain level food and consumer product manufacturers, wholesalers, grocers and mass merchandisers 1,785 observations from 119 rms Multiple regression 1992-2007 Factiva search

Table I. Contrast of Brown and Bukovinsky with current research, by research limitation

Sample size Research method Years of study Classication of ECR adoption Source: aGiunipero et al. (2008)

self-identify based on responses to a survey. In this work, rms were classied as adopters of ECR based on searches of the Dow Jones database, Factiva, by combining the search terms efcient consumer response with each company name. Results from each of 238 searches were then read to identify whether a rm had adopted ECR, and when the action was rst reported. Searching Factiva instead of using a survey asking rms to self-identify their ECR strategy avoids the potential for self-selection bias. If one source was found that indicated a rm had employed some aspect of ECR, the rm was classied as an ECR adopter. In this study, 61 rms were classied as ECR adopters, while there was no indication that the other 58 rms were using ECR. A list of grocers was rst developed from Hoover Company and Industry Reports and Business Week, using SIC 5141 and 5144. The sample was then expanded beyond grocers by identifying suppliers and customers of the grocers in the Mergent (formerly FIS/Moodys) database. This extended the companies to include wholesalers (SIC 5149), mass merchandisers (5331), citrus farms (SIC 017), food manufacturers from SIC group 20, as well as health and beauty manufacturers (SIC group 28), or household goods (SIC groups 30 and 34). The 10-K yearly nancial report led with the Securities and Exchange Commission was obtained for each company from the database Thomson One Banker. The 10-K data included a balance sheet, an income statement, and a cash ow statement for 16 years for each company, beginning in 1992 and ending in 2007. Companies were divided into two sectors, grocers and food manufacturers. There were 33 grocery rms and 86 manufacturers in the dataset. Variables and model An excel spreadsheet model was designed to calculate several inventory, protability, and growth measures (Table II). These measures were then used in the regression analyses. For the multiple regression models, data for all 119 rms for all years (1993-2007) were used to regress each DV on the independent variables. The statistical software STATA was used to estimate the regression equations. The multiple regression model uses eight different DVs with a set of eight independent variables. Four DVs (CCC, INVTURN, ItoA, and ItoS) measure inventory performance and four DVs (ROA, ROS, return on investment (ROI), and Gross margin (GM)) measure nancial performance (Table III). Each of the eight DVs was regressed on seven independent variables. In general, form, the model is:
Variable Cash conversion cycle Inventory turnover Inventory to assets Inventory to sales Return on sales Return on assets Return on investment Gross margin Asset growth Sales growth Acquire Abbreviation CCC INVTURN ItoA ItoS ROS ROA ROI GM AG SG ACQUIRE Formula Days inventory days receivables 2 days payable Cost of goods sold/inventory Inventory/total assets 100 inventory/net sales 100 Net income/net sales 100 {Net income [interest expense (1 2 tax rate)]} /(total assets 100 ROS asset turnover (Net sales 2 COGS)/net sales 100 [Total assetst 2 total assetst2 1]/total assetst2 1 [Net salest 2 net salest2 1]/net salest2 1 Acquisitions/total assets

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Table II. Formulas to calculate inventory, nancial, and growth performance

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Variable ROS (%) ROAa,b (%) ROIa,b (%) GMa,b (%) INVTURNa CCCa,b ItoAa,b (%) ItoSa,b (%) AGa (%) SG (%) TAc,b ACQUIREb
b a,b

Mean values Overall industry 3.34 6.36 4.73 35.49 8.40 62.95 19.15 11.92 5.73 5.87 5.10 129.10 Retail and wholesale 0.76 5.28 3.50 26.44 11.92 27.32 24.63 8.62 7.84 7.22 6.19 85.34 Food manufacturer 4.33 6.77 5.21 38.96 7.05 76.62 17.05 13.19 4.93 5.36 4.68 145.88 ECR adopter 4.76 8.07 6.54 36.60 8.25 42.54 17.11 9.55 6.04 4.93 10.82 274.69 Non-adopter 2.31 5.13 3.43 34.68 8.51 77.67 20.63 13.64 5.51 6.56 0.98 24.08

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Table III. Mean values by overall industry, sector, and ECR adopter/non-adopter

Notes: aStatistical differences in mean values at the 95 percent level of condence for sector; statistical differences in mean values at the 95 percent level of condence for ECR adopter/nonadopter; cmeasured in billions

DV fTA; AG; SG; SECTOR; ECR; ACQUIRE; TREND where: TA AG SG ECR total assets. asset growth. sales growth.

SECTOR rm is in retail/wholesale sector 1, Otherwise 0. adopted supply chain management strategies 1, Otherwise 0. AQUIRE ratio of rm expenditures on acquisitions to TA. TREND the time period 1993-2007 1-15. Regression results for the inventory performance DVs (CCC, INVTURN, ItoA, and ItoS) are expected to generally be the same for CCC, ItoA, and ItoS and opposite for INVTURN. Since larger rms typically have greater access to capital than smaller rms, TA is expected to have negative signs with CCC, ItoA, and ItoSales, while a positive sign is expected with INVTRUN. In turn, larger rms are expected to be more efcient, thus leading to shorter CCCs and greater INVTURN. Firms can shorten the CCC in one of three different ways: (1) reduce the inventory conversion period; (2) reduce the receivables conversion period; and/or (3) increase the payables deferral period (Moss and Stine, 1993). ItoA and ItoS ratios should also be lower for larger rms because of these efciencies. AG and SG measure the annual change in magnitude as measured by assets and sales. AG is expected to have positive signs with CCC, ItoA, and ItoA and a negative

sign with INVTURN if the AG is caused by an increase in inventories, but opposite signs are expected if the increase in AG is brought on by expansion of plants and equipment. Thus, the outcome of AG is indeterminate. SG is also difcult to anticipate because SG might lead to an inventory increase. The rm change variable (ACQUIRE) is expected to have mixed sign for the inventory DVs. As rms spend relatively more on acquisitions a short-term decrease in efciency may result, causing CCCs to increase, INVTURN to fall, and ItoA and ItoS ratios to increase. SECTOR is expected to have negative signs for CCC and ItoS. Retail and wholesale rms should have shorter lag times on CCCs than food manufacturers, as well as lower ItoS ratios. This occurs in large part because retail and wholesale rms receive payment for products as soon as they are sold. SECTOR is expected to be positive for INVTURN and ItoA because retail and wholesale rms turn over average inventory balances faster and have less capital tied up in assets than manufacturers. The ECR variable is expected to have negative signs for the regressions CCC, ItoA, and ItoS and a positive sign for INVTURN, since adopting supply chain management strategies should lower inventory levels. A trend variable (TREND) was included for the time period 1993-2007 to determine whether systematic changes occurred in inventory and nancial measures over the past decade. The sign for TREND is indeterminate. Sign directions are expected to generally be the same for the independent variables in the protability DV regressions (ROA, ROS, ROI, and GM). TA is expected to have positive signs because larger rms have the pecuniary advantage of purchasing products at lower prices than smaller rms, and thus, are expected to operate more protably. The expected sign for the independent variable AG is once again hard to predict. AG will have a negative sign if AG is caused by an increase in inventories, but will be positive if the increase in AG is attributable to the expansion of plants and equipment. The addition of new plants and equipment should lead to increases in efciency, and thus, improved nancial performance measures. SG is expected to have positive signs for all dependent nancial variables. As sales increase, protability performance measures should increase. For the protability DVs, the independent variable AQUIRE is expected to have a negative sign. Similar to the inventory DVs, rms involved in acquisitions may experience large operational disruptions causing wide deviations in assets and sales from year to year, which in turn may lead to temporary losses in efciency causing performance measures like ROS, GM, ROA, and ROI to decrease. In the long-run, acquisitions seek the advantage of economies of scale, leading to bargaining power with manufacturers, more efcient use of transportation, and the ability to utilize information technology to manage inventory throughout the food supply-chain, thereby leading to improved protability (Kinsey and Ashman, 2000). The expected sign for SECTOR is indeterminate for four protability DVs. Neither food retail/wholesale nor manufacturing rms have an advantage over the other in terms of improving nancial performance. Thus, protability performance measures for the retail/wholesale sector should be similar to the manufacturing sector. The ECR variable should have positive signs for the regressions ROA, ROS, ROI, and GM, meaning supply chain initiatives should increase nancial performance.

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The TREND variable is again used to measure trend effects for the period 1993-2007, and the sign of this variable is indeterminate. Empirical results Mean values were computed for inventory, nancial, growth, and size measures and compared for the overall industry, by sector, and for ECR adopters versus non-adopters (Table III). A paired t-test found statistical differences by sector for the INVTURN, CCC, ItoA, ItoS, and AG variables. Mean values for ItoA were lower for the manufacturing sector than for retailers due to structural differences between the two industries. Manufacturing rms generally have larger amounts of capital invested in plants and equipment, whereas retail and wholesale rms mainly invest in stores and inventories. For CCC and ItoS, the mean values for the retail/wholesale sector were lower than the manufacturing sector. The structure of the retail/wholesale sector focuses more on turnover than the manufacturing sector, which focuses upon efcient production. A paired t-test for the mean value of the nancial measures ROS, ROA, ROI, and GM found statistical differences by sector, and in all cases this measure was lower for the retail/wholesale sector than for the food manufacturing sector (Table III). These results reect differences in pricing and markup for rms in the manufacturing sector versus rms in the retail/wholesale sector. A paired t-test found the nancial measures ROS, ROA, and ROI have statistical differences for adoption or non-adoption of ECR (Table III). These results suggest that rms adopting ECR initiatives have higher protability levels than non-adopters. ECR adopters also have statistically lower levels of inventory and shorter CCCs. The ECR adopters are also more than ten times larger, as measured by TA, than non-adopters on an average. Tables IV and V report the results for the eight inventory and nancial DVs, respectively. F-tests for each of the eight regression models exceed the critical value 2.41 at the 1 percent signicance level, indicating that the independent variables used in the regressions are jointly statistically signicant at the 99th percentile. R 2s were used to test the goodness of t. The results, R 2s ranging from 0.10 to 0.22, are good for time-series panel data and on an average similar to the results of Brown and Bukovinsky (2001). Variance ination factors (VIF) were used to test for multicollinearity. For variables that are unrelated to each other, VIF will approach one, but for related variables VIF will become large (SAS, 2000). Results of the VIF tests suggest the absence of multicollinearity. Whites test was used to test for heteroskedasticity. Results from the White test (signicant at the 1 percent level) rejected homoskedasticity in all models, suggesting the presence of heteroskedasticity. Heteroskedasticity is the result of unequal variance between random variables. When heteroskedasticity is present, ordinary least square coefcients are accurate, but the error variance is biased, which may result in inaccurate conclusions about the signicance of parameter estimates (Breusch and Pagan, 1979). To correct the potentially biased error variance, a robust variance estimator developed by White, was used for each regression (White, 1980; MacKinnon and White, 1985). Tables IV and V are results reported using robust standard errors. Table IV reports the ordinary least squares estimation results for the four inventory DV models (CCC, INVTURN, ItoA, and ItoS). The t-tests for TA, SG, ACQUIRE,

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CCC (23.80) * * * (2 3.98) * * * (7.01) * * * (2 2.08) * * (2 2.07) * * (2 9.73) * * * (2 20.60) * * * (0.88) 7.2150 20.00004 20.0445 20.0680 0.007 21.033 5.368 7.2150 0.1804 30.52 20.4280 2 0.00007 2 0.0355 0.0457 0.0058 2 3.6048 8.3834 2 0.2249 0.1276 30.19 (11.43) * * * (2 5.22) * * * (2 1.40) (2 1.28) (0.37) (2 2.55) * * (10.98) * * * (2.27) * * (30.24) * * * (24.26) * * * (21.86) * (2.86) * * * (0.17) (26.06) * * * (11.71) * * * (23.26) * * *

DVs Parameter estimates for the independent variables (t-value) INVTURN ItoA 14.7631 20.00000 0.0259 0.0019 20.0076 23.3169 24.0228 20.0550 0.1045 32.65

ItoS (30.45) * * * (2 0.78) (2.23) * * (0.2) (2 0.41) (2 9.15) * * * (2 11.65) * * * (2 1.19)

INTERCEPT TA AG SG ACQUIRE ECR SECTOR TREND R2 F-value

84.8770 2 0.00023 0.3741 2 0.13188 2 0.2876 2 26.7226 2 44.9193 0.2857 0.1880 79.43

Note: Statistical signicance at: *90, * * 95, * * * 99 percent levels

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Table IV. Empirical results for inventory models

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Independent variables 4.6774 0.00002 0.1137 0.1569 20.0687 3.4542 22.8173 20.0644 0.1917 7.99 2.7053 0.00003 0.1476 0.1488 2 0.0971 3.5585 2 3.1488 2 0.3334 0.2200 8.61 (4.27) * * * (1.76) * (1.06) (1.67) * (21.59) (5.81) * * * (24.09) * * * (20.89) 2.1860 0.00005 0.0532 0.1353 20.0463 2.9073 24.6046 20.0024 0.1661 20.97 (2.71) * * (1.95) * * (1.39) (1.63) * (2 1.74) * (5.83) * * * (2 4.55) * * * (2 0.45)

INTERCEPT TA AG SG ACQUIRE ECR SECTOR TREND Adjusted R 2 F-value

Note: Statistical signicance at: *90, * *95, * * *99 percent levels

Table V. Empirical results for the protability models ROA DVs Parameter estimates for the independent variables (t-value) ROI ROS (2.67) * * * (4.65) * * * (1.73) * (2.72) * * * (21.88) * (6.48) * * * (28.79) * * * (20.03) 38.5069 0.00009 0.02114 0.0113 2 0.0376 3.3943 2 13.3805 2 0.1608 0.1402 52.98 GM (45.76) * * * (3.74) * * * (1.90) * (0.65) (2 1.28) (4.30) * * * (2 18.47) * * * (2 1.80) *

ECR, and SECTOR were statistically signicant in the CCC model and exhibited negative signs, while AG was signicant with a positive sign (Table IV). As expected, rms adopting ECR are able to lower CCCs. The negative sign on TA suggests larger rms have shorter CCCs, while the positive sign for AG suggests that increases in AG rates (as opposed to asset size) are related to longer CCCs. AG can be difcult to manage. SG and ACQUIRE also decrease CCCs as days of receivables fall with SG while ACQUIRE is driven by an increase in days payable or a delay in payment to vendors. The negative sign on SECTOR was as expected, suggesting retail/wholesale rms experience lower CCCs due to immediate customer payment. In the INVTURN model, TA and ECR were negative and signicant, while SECTOR and TREND were positive and signicant. ECR adopters actually lower their INVTURN, a surprising result (Table IV). Furthermore, the negative sign on TA suggests that larger rms have lower inventory turns, contrary to expectations. These surprising ECR and TA results are discussed in the conclusions and implications section of this paper. The positive sign for SECTOR suggests higher inventory turns among retailers than manufacturers, while the positive sign for TREND suggests an underlying increase in inventory turns. For the DV ItoA model, all independent variables had signicant signs, except ACQUIRE (Table IV). TA, AG, ECR, and TREND were negative, and these signs were all as expected. SG was positive, suggesting that as rms increase sales, inventory levels rise. As expected, SECTOR exhibited a positive sign, likely because the retail sector generally has fewer assets than the food-manufacturing sector. The negative ECR sign shows that ECR adopters are able to decrease their ItoA ratios. The independent variables AG, ECR, and SECTOR were statistically signicant in the ItoS model. The sign for AG was positive, and as expected, the signs were negative for ECR and SECTOR. Once again, ECR adopters are able to lower their ItoS ratios. Table V shows the results for the protability DV models (ROA, ROI, ROS, and GM). In the ROA model, the signs of the independent variables TA, SG, and ECR were statistically signicant and positive as expected, while the sign for SECTOR was negative (Table V). Hence, it appears that rms who adopt ECR supply chain management strategies are likely to improve returns on assets. The positive sign for TA reinforces the sense that larger food industry rms are able to enjoy economies of size. The independent variables TA, SG, ACQUIRE, ECR, and SECTOR were statistically signicant in the ROI model (Table V). The signs for TA, SG, and ECR were positive as expected, and ACQUIRE and SECTOR exhibited negative signs. As anticipated, acquisitions may have an immediate negative effect on ROI due to the large capital investment. Results for the ROS model indicate all independent variables were statistically signicant (Table V). TA, AG, SG, and ECR signs were positive; suggesting that AG can increases ROS. Once again, ACQUIRE decreases ROS, suggesting that rms struggle incorporating newly acquired business into their operations. TA and SG exhibited expected signs. In the GM model, the independent variables TA, AG, ECR, SECTOR, and TREND were signicant (Table V). The positive signs on TA and ECR suggest that larger rms and rms with ECR supply chain management strategies are able to increase margins. The negative sign for SECTOR in all four protability models suggests a difference in pricing power between retailers and manufacturers.

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Conclusions and implications Before discussing the conclusions, it is important to acknowledge two limitations to this study. First, it is virtually impossible to determine the actual time of implementation for supply chain management strategies by rms in the food industry. The method used to classify rms as ECR adopters is believed to be sound and unbiased, but errors may exist. Second, this analysis does not account for differences in the implementation level for ECR. For simplicity, a binary variable is used to distinguish rms adopting or not adopting supply chain management strategies (ECR). With these limitations in mind, ve conclusions for inventory measures and six conclusions for nancial performance measures can be drawn from this study. First, for inventory performance measures, three models (CCC, ItoA, and ItoS) exhibited highly signicant and benecial results for adopters of ECR supply chain management strategies, implying that ECR adopters do have a distinct advantage in managing CCCs and inventory over non-adopters (Table IV). The regression results suggest that ECR adopters reduce their CCC by 26.7 days, while reducing their ItoA and ItoS ratios by over three points each. The results for the INVTURN model suggest that ECR adopters actually have a lower rate of INVTURN. On the surface this result is surprising, but an explanation is available. INVTURN is dened as cost of goods sold divided by inventory. ECR adopters realize a lower cost of goods sold than non-adopters, decreasing INVTURN. Additionally, cost of goods sold are likely lower for ECR adopters because of pecuniary economies of scale. The INVTURN result is similar to the ndings of Brown and Bukovinsky (2001). Second, larger rms in terms of TA have lower CCCs and lower ItoA ratios compared to smaller rms. Once again, however, larger rms have a lower level of INVTURN. Like ECR adopters, larger rms may enjoy purchasing power, resulting in decreased cost of goods sold, and effectively increasing the INVTURN. Third, as AG occurs, CCCs become longer, implying that growth is difcult to manage. The ItoA ratio decreases with AG, suggesting that rms are adding physical assets such as plants and buildings as opposed to inventory. Fourth, as SG increases, the ItoA ratio increases, implying rms are adding inventory to meet growing sales. SG also results in a lower CCC, as rms must be demanding payment or managing days payable more diligently. Fifth, inventory performance is different between the retail/wholesale sector and the food-manufacturing sector. Operating in the retail/wholesale sector results in lower CCCs, higher INVTURN ratios, and lower ItoS ratios, all expected advantages for the retail sector. Because rms in the retail/wholesale sector normally have less capital tied up in plants and equipment than food manufacturers, ItoA ratios are higher. For the nancial performance measures, the results rst suggest that ECR adopters exhibited positive results for all four protability nancial measures (ROA, ROI, ROS, and GM), as anticipated by its proponents. These results imply that ECR adopters enjoy superior nancial performance over non-adopters, which differs starkly from the ndings of Brown and Bukovinsky (2001). ECR adopters had an average of 4.76 percent for ROS compared to 2.31 percent for non-adopters. Adopters also had higher average ROA and ROI (8.07 and 6.54 percent) than non-adopters (5.13 and 3.34 percent). Thus, protability is nearly double for ECR adopters. Second, TA (rm size) increase all four performance measures (ROA, ROI, ROS, and GM). Larger rms have the advantage economies of size. Third, increases in ROS and GM

accompany AG, suggesting that the AG is related to new plants or buildings rather than inventory. Fourth, SG is important for the nancial measures of ROA, ROI, and ROS. Fifth, rms involved in acquisitions (AQUIRE) have a negative impact on their ROI and ROS. This is not to say that acquisitions in the food industry have a long-term negative impact on protability measures. Acquisitions may lead to economies of scale and increased protability over time. Furthermore, it might be that the rms in the sample are more stable than others given that only rms with data for all 15 years were used in the analysis. Finally, rms in the retail/wholesale sector exhibited negative signs for all four performance measures (ROA, ROI, ROS, and GM), implying that retail and wholesale rms margins are less than food manufacturers. The results of this study are important because they suggest, contrary to the results of Brown and Bukovinsky (2001) that the adoption of ECR has led to growth in prot. The growth in prot appears to come from improved performance for inventory measures (ItoA and ItoS ratios), but the driving force behind these improved nancial measures may be attributed to the CCCs. By shortening CCCs, rms in the food industry can improve prots. Longer CCCs create a need for costly external nancing (Moss and Stine, 1993). The difference in the nancial performance results in this study from those found by Brown and Bukovinsky (2001) may arise from two sources. First, some improvement might be attributed to having a larger sample size, by including food manufacturers as well as grocers, along with lengthening the time period involved to 1992-2007. Giunipero et al. (2008) suggest that the advantages from supply chain strategies were more prevalent in more recent years. Second, the inclusion of the variable AQUIRE was an attempt to capture deviations in variability in growth for assets and sales in the model. The variable might allow disruptions from acquisition and merger activity in the industry to explain the difference in ndings, but were typically statistically insignicant. The results of this analysis strongly support the proposition that the adoption of an ECR strategy pays off. Thus, the time spent in developing close relationships with buyers or suppliers and the investments in information technology for rms in the food industry has led to shorter CCCs and lower ItoA and ItoS ratios, thereby improving nancial performance. The use of information technologies, such as electronic data interchange, changes the traditional processes for purchase orders, invoices, shipping notices, and funds transfer. Thus, the need for clerical, mailing, and other costs associated with paper-based information can be eliminated, while time delays and errors can be reduced. Size matters; ECR is more effective due to economies of scale and information technology. However, this may lead to more consolidations because all rms do not have the capital to invest in these initiatives. In short, to remain competitive ECR strategies should strongly be considered by rms that are lagging in implementation. Several areas of future research should be considered. First, developing improved methods to measure the effects of merger, acquisition, and closure activities would be useful. This could help to determine whether ECR activities decrease the likelihood of a closure or increase the likelihood of a merger or acquisition. Second, a more detailed study could evaluate the level of ECR adoption. This study limited the ECR adoption to a binary variable, but, in reality, ECR supply chain practices may be adopted slowly or quickly, and at various levels of detail. Capturing these implementation differences would enhance the current model. Finally, ECR is one of several supply chain strategies adopted in the food industry. Future work could evaluate the effects of collaborative planning, forecasting, and replenishment or VICS.

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