Demand uncertainty and inventory turnover performance

Abstract

Purpose – The purpose of this paper is to investigate the impact of demand uncertainty on inventory turnover performance through empirical modeling. In particular the authors use the inaccuracy of quarterly sales forecasts as a proxy for demand uncertainty and study its impact on firm-level inventory turnover ratios. Design/methodology/approach – The authors use regression analysis to study the effect of various measures on inventory performance. The authors use a sample financial data for 304 publicly listed US retail firms for the 25-year period from 1985 to 2009. Findings – Controlling for the effects of retail segments and year, it is found that inventory turnover is negatively correlated with mean absolute percentage error of quarterly sales forecasts and gross margin and positively correlated with capital intensity and sales surprise. These four variables explain 73.7 percent of the variation across firms and over time and 93.4 percent of the within-firm variation in the data. Practical implications – In addition to conducting an empirical investigation for the sources of variation in a major operational metric, the results in this study can also be used to benchmark a retailer’s inventory performance against its competitors. Originality/value – The authors develop a new proxy to measure the demand uncertainty that a firm faces and show that this measure may help to explain the variation in inventory performance.