An Empirical Investigation of Dynamic Ordering Policies

Management Science (Forthcoming)

32 Pages Posted: 18 Feb 2011 Last revised: 24 Mar 2015

See all articles by Chad R. Larson

Chad R. Larson

University of Houston - Department of Accountancy & Taxation

Danko Turcic

Washington University, St. Louis - John M. Olin School of Business

Fuqiang Zhang

Washington University in St. Louis - John M. Olin Business School

Date Written: October 3, 2014

Abstract

Adaptive base stock policy is a well-known tool for managing inventories in non-stationary demand environments. This paper presents empirical tests of this policy using aggregate, firm-level data. First, we extend a single-item adaptive base stock policy in previous literature to a multi-item case. Second, we transform the policy derived for the multi-item case to a regression model that relates firm-level inventory purchases to firm-level sales and changes in sales forecasts. We focus on two research questions: Can the adaptive base stock policy explain cross-sectional ordering behaviors under sales growth? To the extent that the adaptive base stock policy fails to explain ordering behaviors under sales growth, are there frictions that explain such a finding? Our empirical results demonstrate disparities in ordering behaviors between firms experiencing high and moderate sales growth. Contrary to theoretical prediction, this implies inventory purchases are a function of not only current sales and changes in sales forecasts, but also past sales growth. As potential explanations for this departure from theoretical prediction, we show that both future demand dynamics and inventory holding risks depend on past sales growth. In addition, we find that firms' inventory holding risks may also be affected by purchasing constraints imposed by supply chain contracts. Our results provide managerial implications for practitioners and inform future theoretical research.

Keywords: inventory, write-downs, obsolescence, sales growth, ordering policy

Suggested Citation

Larson, Chad Russell and Turcic, Danko and Zhang, Fuqiang, An Empirical Investigation of Dynamic Ordering Policies (October 3, 2014). Management Science (Forthcoming). Available at SSRN: https://ssrn.com/abstract=1762892 or http://dx.doi.org/10.2139/ssrn.1762892

Chad Russell Larson

University of Houston - Department of Accountancy & Taxation ( email )

Bauer College of Business
4800 Calhoun Road
Houston, TX 77204
United States

Danko Turcic

Washington University, St. Louis - John M. Olin School of Business ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Fuqiang Zhang (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

HOME PAGE: http://www.olin.wustl.edu/faculty/zhang/

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