Does Adding Inventory Increase Sales?

Any car salesman will tell you the same thing. Put more cars on the lot, and more will sell. But it isn’t that simple.

“Does Adding Inventory Increase Sales? Evidence of a Scarcity Effect in U.S. Automobile Dealerships” (Gérard Cachon, Santiago Gallino and Marcelo Olivares, Management Science, 2019, Vol 65, Issue 4.) develops a more nuanced take on the relationship between inventory and sales. Using a model derived from how weather shocks affect automobile production, the paper finds that simply adding inventory can actually inhibit sales. The sales edge comes only when dealerships carry a greater variety of models, each with some degree of scarcity.

The reason, as it often does in sales, comes down to psychology.

If a dealer has only one version of a car with all of the features that a customer wants, then the customer is taking a risk if she procrastinates the purchase. However, if the dealer stocks several cars with those same options, the customer is more likely to keep shopping, comforted by the fact that if she were to return to the dealer then the dealer is still likely to have the desired vehicle. But a customer that leaves a dealership to shop around or to ponder the purchase may not return. And that is how, counter-intuitively, more inventory can lead to lower sales. Scarcity can increase sales.

Quantifying this “scarcity effect” is not easy with real world data. Dealerships that carry greater inventory do enjoy higher sales.  That doesn’t necessarily mean more inventory causes higher sales. Rather, it could simply mean dealerships in more active markets sell more cars, and thus need more inventory to meet that demand.

To measure the effect of inventory and variety on sales, a mechanism is needed to distinguish inventory fluctuations caused by the dealers—such as ordering more cars in advance of a planned promotion—from external variations in supply. Weather provides that plausible source of external variation.

Severe weather can slow the delivery of inbound parts and cause workers to be absent or late. It also affects worker productivity, and can slow processes inside the plant. For example, when the humidity is high, paint takes longer to dry, forcing plant managers to slow their production lines.

Weather data was collected for 22 General Motors plants in North America, along with the local weather at 1,289 dealerships in seven states over a six-month period in 2006 and 2007.

The data show that if a manufacturer were to manage inventory to maximize the variety of models at each dealership, it could increase sales by about 2.5 percent. If the manufacturer also reduced the aggregate inventory by 2.9 percent, the strategy of maximum variety and minimum duplication would boost sales 5 percent. Remarkably, more sales can occur with fewer cars when the fewer cars are intelligently allocated across the dealer network.

Read the full article at https://doi.org/10.1287/mnsc.2017.3014.

REFERENCE

Cachon G P, Gallino S, Olivares M (2019). Does Adding Inventory Increase Sales? Evidence of a Scarcity Effect in U.S. Automobile Dealerships. Management Science 65(4):1469-1485.

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