In search of the negative relationship between product variety and inventory turnover

Abstract

Inventory management literature suggests that product variety may negatively affect inventory turnover. However, little empirical evidence exists to support such a relationship. Inventory turnover is the ratio of sales to inventory, thus, the impact of product variety on both sales and inventory should be considered. Marketing literature indicates that increased product variety helps to increase sales, whereas operations management literature proposes that increased product variety leads to higher inventory levels due to a loss of risk pooling. Given that increased product variety leads to higher sales and higher inventory levels, the change in the ratio of sales to inventory (inventory turnover) in response to increased product variety is unclear theoretically and therefore more of an empirical question. In this study, we explore the impact of product variety on inventory turnover using a balanced panel data set. We find that, in general, product variety negatively affects inventory turnover, but this negative impact may disappear when demand variability is low. Our findings provide an explanation for the lack of conclusive empirical evidence supporting the negative influence of product variety on inventory turnover. Product variety may be found not to negatively affect inventory turnover as it may have a similar influence on sales and inventory levels when demand variability is low. The study also offers managerial suggestions on product variety decisions and inventory management.