The paper aims to empirically investigate how demand variability impacts product category inventory levels and stockout rates of retail firms. Additionally, the moderating effect of product variety on these performance metrics is explored.
Using data from 78 individual retail stores of a single firm located in China, the authors develop a three stage least squares regression model to examine the simultaneous impact of product variety and demand variability on product inventory levels and stockout rates.
The results indicate that product variety and demand variability both negatively influence product category inventory levels and stockout rates. However, contrary to results for manufacturing or distributor environments, product variety dampens the negative relationship between demand variability and inventory.
For products or categories with a high amount of demand variability, retailers can leverage more product variety to help improve their inventory performance. This is likely due to product substitution behaviors.
The authors show that previously examined relationships between product variety, demand variability, and firm performance are different in the retail environment than in the manufacturing or distributor context.
