Article | California Management Review | Winter 2014

Retail Inventory: Managing the Canary in the Coal Mine!

by Vishal Gaur, Saravanan Kesavan and Ananth Raman

Abstract

Retail inventory is a statistic that is closely watched by retailers as well as their investors, lenders, and suppliers. Retailers not only benefit from inventory, but also bear the cost of excess inventory. Investors, lenders, and suppliers interpret this statistic for signs of the retailer's health, future sales prospects, and impending costs. While prior research on inventory has typically focused primarily on the retailer's profit and cash flow, this paper synthesizes the perspectives of investors, lenders, and suppliers and shows that inventory turns, a commonly used metric to identify excess inventory, has limitations that reduce its utility for all these stakeholders. This paper presents a new metric, adjusted inventory turns, which overcomes the drawbacks of inventory turns and can be uniformly utilized by all stakeholders to assess whether a retailer is carrying too much or too little inventory. We explain applications of the metric with examples and lay out prescriptions for retailers.

Keywords: Financial Condition; Retail Industry;

Citation:

Gaur, Vishal, Saravanan Kesavan, and Ananth Raman. "Retail Inventory: Managing the Canary in the Coal Mine!" California Management Review 56, no. 2 (Winter 2014): 55–76.