Abstract
Past research shows that inventory turnover varies substantially across firms as well as over time. A significant portion of this variation can be explained by gross margin, capital intensity, and sales surprise (the ratio of actual sales to expected sales for the year). We extend econometric models of inventory turnover by investigating the effects of firm size and sales growth rate on inventory turnover using data for 353 public listed US retailers for the period 1985–2003. With respect to size, we find strong evidence of diminishing returns to scale. With respect to sales growth rate, we find that inventory turnover increases with sales growth rate, but its rate of increase depends on firm size and on whether sales growth rate is positive or negative. Our results are useful in (1) helping managers make aggregate-level inventory decisions by showing how inventory turnover changes with size and sales growth, (2) employing inventory turnover in performance analysis, benchmarking and working capital management, and (3) identifying the causes of performance differences among firms and over time.
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Notes
- 1.
The data set consists of a large cross-section of US public listed retailers for the time-period 1985–2003. The data set is summarized in Sect. 3.
- 2.
This section of Silver et al. (1998) focuses on estimation of demand uncertainty. It does not refer to this relationship as economies of scale.
- 3.
A counter argument is that as a retailer increases in size, it might have better forecasting tools and thus, might be better able to get the right product to the right place (and therefore, increase turns). Retailers’ ability to forecast may even vary non-linearly in size: they may be really good at forecasting when they are very small (not listed publicly, and hence, omitted from our data set), have difficulty as they grow and until they have reached a size such that they have good systems in place and are incorporating sophisticated decision support tools. We incorporate such differences in systems in our model by using capital intensity as a control variable.
- 4.
Relative size, Sales(i,t − 1)/Sales(i,0), yields identical results in an intra-firm model.
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Acknowledgement
The authors are thankful to the series editors, Naren Agrawal and Stephen Smith, and anonymous reviewers for many helpful comments on this manuscript. The questions of the effects of firm size and sales growth rate on inventory turnover were suggested to the first author by Marshall Fisher and Ananth Raman.
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Gaur, V., Kesavan, S. (2015). The Effects of Firm Size and Sales Growth Rate on Inventory Turnover Performance in the U.S. Retail Sector. In: Agrawal, N., Smith, S. (eds) Retail Supply Chain Management. International Series in Operations Research & Management Science, vol 223. Springer, Boston, MA. https://doi.org/10.1007/978-1-4899-7562-1_3
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