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

This paper examines the differences in the behaviors of high (HIT) and low inventory turnover (LIT) retailers in responding to demand shocks. We identify quantity and price responsiveness as two mediating mechanisms that distinguish how high and low inventory turnover retailers manage demand shocks. Using quarterly firm-level data of 183 U.S. retailers between 1985 and 2012, we find that HIT retailers are able to respond quickly by changing their purchase quantities in response to demand shocks, whereas LIT retailers primarily rely on price changes to manage demand shocks. In addition, we examine the differential implications of these mechanisms on the financial performance of HIT and LIT retailers. We find price responsiveness to be a less effective strategy, compared to quantity responsiveness, in reducing excesses and shortages of inventory. Finally, the negative financial impact of a given amount of excess and shortage of inventory is eight times more severe for LIT retailers compared to HIT retailers.