Relationships between inventory, sales and service in a retail chain store operation

Effective inventory management is critical to retailing success. Surprisingly, there is
little published empirical research examining relationships between retail inventory, sales and
customer service. Based on a survey of 101 chain store units, this paper develops and tests a
series of hypotheses about retail inventory. Seventy-five percent of the store owners/managers
responded to the mail survey. As expected, significant positive relationships were found between
inventory, service and sales. Specifically, support was found for the theory that inventory is a
function of the square root of sales. Also, greater product variety leads to higher inventory, and
service level is an exponential function of inventory. Finally, demand uncertainty was found to
have no apparent effect on inventory levels.