Do High- and Low-Inventory Turnover Retailers Respond Differently to Demand Shocks?

Abstract

This paper shows the benefits of high inventory turnover in responding to demand shocks. We identify quantity- and price-responsiveness as two mediating mechanisms that distinguish how high- and low-inventory-turnover retailers (HIT and LIT retailers, respectively) can manage demand shocks. Using quarterly firm-level data of 460 U.S. retailers between 1985 and 2009, we find that HIT retailers are able to respond quickly by changing their purchase quantities in response to demand shocks, while LIT retailers primarily rely on price changes to manage demand shocks. We demonstrate the responsiveness of HIT retailers by showing that they can postpone ordering to a later time period compared to LIT retailers, who react to older demand signals. In addition, we examine the differential implications of these mechanisms on the financial performance of HIT and LIT retailers. On average, HIT and LIT retailers appear to be adept at using quantity- and price-responsiveness to avoid excesses and shortages during demand shocks. However, the negative financial impact of excesses and shortages, when they occur, can be 20 times more severe for LIT retailers compared to HIT retailers.

Keywords: Inventory Turnover, Price Responses, Quantity Response, Demand Shock, Firm Performance, U.S. Retail Industry, Econometric Analyses