Effectiveness of frequent inventory audits in retail stores: an empirical evaluation

Abstract

Purpose The purpose of this paper is to focus on the effectiveness of the inventory audit process to manage operational issues related to inventory errors in retail stores. An evaluation framework is proposed based on developing an error profile of store inventory using product attributes and inventory information. Design/methodology/approach A store inventory error profile is developed using data on price, sales, popularity, replenishment cycle, inventory levels and inventory errors. A simulation model of store inventory management system grounded in empirical data is used to evaluate the effectiveness of the inventory audit process in a high SKU-variety retail store. The framework is tested using a large transaction data set comprised of over 200,000 records for 7,400 SKUs. Findings The results show that store inventory exhibits different inventory error profile groups that would determine the effectiveness of store inventory audits. The results also identify an interaction effect between store inventory policies and replenishment process that moderates the effectiveness of inventory audits. Research limitations/implications The analysis is based on data collected from a single focal firm and does not cover all the different segments of the retail industry. However, the evaluation framework presented in the paper is fully generalizable to different retail settings offering opportunity for additional studies. Practical implications The findings about the role of different error profile groups and the interaction effect of store audits with inventory and store replenishments would help retailers incorporate a more effective inventory audit process in their stores. Originality/value This paper presents a novel approach that uses store inventory profiles to evaluate the effectiveness of inventory audits. Unlike previous papers, it is the first empirical study in this area that is based on inventory error data gathered from multiple audits that identify the interaction effect of inventory policy and replenishments on the inventory audit process.

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