Retail Inventory Productivity: Analysis and Benchmarking

Retail inventory productivity is of considerable interest to retailers, manufacturers and distributors who service them, and stock market analysts. Inventory turnover is frequently used to measure inventory productivity. We find wide variation in inventory turnover across retailers and over time. The causes of this variation have not been studied systematically to our knowledge. We develop a log-linear empirical model to quantify the impact of net markup, capital intensity and deviation of sales from forecast on the variation in inventory turnover and test it on a panel of data for 311 firms for the years 1985-2000. The model explains 66.7% of the within-firm variation and 97.2% of the total variation in inventory turnover. The average estimates of the coefficients of net markup, capital intensity and sales surprise across all retailing segments are -0.24, 0.25 and 0.14, respectively. We define an alternative metric of inventory productivity, adjusted inventory turnover, which adjusts inventory turnover for changes in net markup, capital intensity and deviation of sales from forecast. We discuss several examples where inventory turnover and adjusted inventory turnover give contradictory results. We also compute time-trends in inventory productivity, and find that it has declined in the retailing industry during 1985-2000.