Relationships Between Inventory, Sales And Service In a Retail Chain Store Operation

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IJPDLM 31,2

96
Received July 1999 Revised January 2000 March 2000 Accepted June 2000

Relationships between inventory, sales and service in a retail chain store operation
Chris DubelaarDepartment of Marketing, Monash University, Australia

Garland Chow
Faculty of Commerce, University of British Columbia, Vancouver, Canada, and

Paul D. Larson
COBA, University of Nevada, Reno, USA
Keywords Inventory, Service levels, Retailing, Sales Abstract Effective inventory management is critical to retailing success. Surprisingly, there is little published empirical researchexamining relationships between retail inventory, sales and customer service. Based on a survey of 101 chain store units, this paper develops and tests a series of hypotheses about retail inventory. Seventy-five percent of the store owners/managers responded to the mail survey. As expected, significant positive relationships were found between inventory, service and sales. Specifically, support was foundfor the theory that inventory is a function of the square root of sales. Also, greater product variety leads to higher inventory, and service level is an exponential function of inventory. Finally, demand uncertainty was found to have no apparent effect on inventory levels.

Introduction Among retail practitioners, there is growing interest in ``inventory management/sales data systems’’, whichhelp stores make the most of merchandise assortments and scarce shelf space (Orenstein, 1999). According to Coopers & Lybrand, major areas of efficient consumer response (ECR) activity in the grocery business include: sales forecasting and statistical management of safety stock (Retail World, 1997). Best practices in retail inventory management call for a proper balance between inventory andservice levels, recognition of the importance of merchandise availability, and accurate store sales/inventory data (Wilson et al., 1995). Thus, it is surprising to find very little empirical research on relationships between inventory, sales and service in the retail and logistics literature. This paper quantifies relationships between inventory, sales and service level (e.g. availability). Interfirmvariations in assortment, retail sector and other characteristics are controlled by analyzing observations from a single chain. Stores in this chain make buying decisions independently and receive stock directly from suppliers, rather than through a corporate distribution
International Journal of Physical Distribution & Logistics Management, Vol. 31 No. 2, 2001, pp. 96-108. # MCB University Press,0960-0035

The authors thank the Social Sciences and Humanities Research Council of Canada (SSHRC) for supporting this study and two anonymous reviewers for their comments that have improved this paper.

center. Still, between-store variation in the variables allows for investigation of hypothesized relationships. Control variables include product variety and demand uncertainty. The paper isorganized as follows. In the second section, relevant literature is reviewed and the research hypotheses are developed. Then, the third section describes data collection procedures and the data set. The fourth section presents statistical results. Finally, the paper closes with conclusions and a discussion on implications of the results. Conceptual development Inventory management is critical toretail financial performance. Nevill et al. (1998) note: ``on nearly every merchant’s balance sheet, inventory tops the list of valuable physical assets.’’ After cost of goods sold, the major costs incurred by retailers involve the resource trinity ± space, labor and stock (Lusch, 1986; Larson and Lusch, 1990). Thus, important measures of retail efficiency are sales per square foot, sales per...