Impact of product variety on inventory performance : an empirical analysis of pharmaceutical and medical device industries

Abstract

In this thesis, we construct empirical models to analyze the effect of various financial measures and product variety on inventory performance. We apply multiple regression models and simultaneous equations models using 2010 financial data for 128 U.S. firms in pharmaceutical and medical device industries. Using multiple regression models, we investigate the correlation of inventory turnover with product variety, gross margin, capital intensity and type of the firm. Product variety data are obtained from U.S. Food and Drug Administration. The best multiple regression model explains 38.50% of the total variation in inventory turnover and we observe that inventory turnover is negatively correlated with product variety. Since inventory turnover is the ratio of cost of goods sold (sales) to inventory level, a change in product variety might have an effect both on inventory level and cost of goods sold. In order to investigate the effects of product variety on cost of goods sold and inventory level separately, we employ simultaneous equation models. The best simultaneous equation model explains 96.22% of the variation in inventory level and shows that inventory level is positively associated with product variety.