Sales forecast inaccuracy and inventory turnover performance : an empirical analysis of US retail sector

Abstract

We develop an empirical model to investigate the impact of various financial measures on inventory turnover performance. In particular, we used inaccuracy of quarterly sales forecasts as a proxy for demand uncertainty and study its impact on firm level inventory turnover ratios. The model is implemented on a sample financial data for 304 publicly listed U.S. retail firms for the 25-year period 1985-2009. Controlling for the effects of retail sub-segments and year, it is found that inventory turnover is negatively correlated with mean absolute percentage error in sales forecast and gross margin, and positively correlated with capital intensity and sales surprise. In addition to providing managerial insights regarding the determinants of a major operational performance metric, our results can also be used to benchmark a retailer’s inventory performance against its competitors.