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Inventory Record Inaccuracy: An Empirical Analysis

Nicole DeHoratius, Ananth Raman,

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54(4):627-641. http://dx.doi.org/10.1287/mnsc.1070.0789

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Vol. 54, No. 4, April 2008, pp. 627–641 doi 10.1287/mnsc.1070.0789

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Inventory Record Inaccuracy: An Empirical Analysis

Nicole DeHoratius
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Graduate School of Business, The University of Chicago, Chicago, Illinois 60637, nicole.dehoratius@chicagogsb.edu

Ananth Raman
Harvard Business School, Boston, Massachusetts 02163, araman@hbs.edu

T raditional inventory models, with a few exceptions, do not account for the existence of inventory record
inaccuracy (IRI), and those that do treat IRI as random. This study explores IRI observed both within and
across product categories and retail stores. Examining nearly 370,000 inventory records from 37 stores of one
retailer, we find 65% to be inaccurate. We characterize the distribution of IRI and show, using hierarchical linear
modeling (HLM), that 26.4% of the total variance in IRI lies between product categories and that 2.7% lies
between stores. We identify several factors that mitigate record inaccuracy, such as inventory auditing practices,
and several factors that exacerbate record inaccuracy, such as the complexity of the store environment and
the distribution structure. Collectively, these covariates explain 67.6% and 69.0% of the variance in IRI across
stores and product categories, respectively. Our findings underscore the need to design processes to reduce the
occurrence of IRI and highlight factors that can be incorporated into inventory planning tools developed to
account for its presence.
Key words: execution; information technology; inventory control; record inaccuracy; retail; supply chains
History: Accepted by Wallace J. Hopp, operations and supply chain management; received September 6, 2004.
This paper was with the authors 1 year and 5 months for 3 revisions.

1. Introduction we collected from 37 of Gamma’s U.S.-based stores.

Accurate inventory records are critical to the perfor-
mance of retail organizations. U.S. retailers spend 1%
of annual sales, approximately $30 billion per year, on
automated decision support tools that use recorded
inventory quantities to forecast demand, plan product
assortments, and replenish store shelves (Steidtmann
1999). Inaccurate inventory records compromise the
value of these tools. Take, for example, an auto-
mated replenishment system designed to trigger an
order when the on-shelf quantity of a particular item
reaches a pre-specified level. If the recorded inven-
tory quantity does not match the quantity present on
the store shelf, this system will either order when an
order is unnecessary or fail to order when it should.
Consequently, despite having implemented a decision
support tool to prevent excess inventory and stock-
outs, retailers with inventory record inaccuracy (IRI)
may find themselves short of some items and over on
others.
We find IRI at a leading retail chain to be both per-
vasive—present across multiple items, product cate-
gories and stores—and substantial in magnitude. This
retail chain, hereafter called Gamma, is a large public
retailer with annual sales of approximately $10 billion.
It has highly modern operations including electronic
point-of-sale scanning and automated replenishment.
Despite its technological sophistication, we observe
inaccuracies in 65% of the 369,567 inventory records
627
The absolute difference between the inventory quan-
tity recorded in Gamma’s automated tracking system
and the actual inventory quantity found on the store
shelf averaged nearly five units per stock keeping unit
(SKU), approximately 35% of the average number of
units per SKU found on the store shelf.
How do such inaccuracies arise? Numerous oppor-
tunities exist for recorded quantities to diverge from
actual quantities as items move physically through
the retail supply chain and recorded quantities are
automatically updated by the inventory tracking
system. Commonly cited problems include selling
and restocking errors, replenishment errors, database
errors, poor or incomplete data synchronization, and
counting errors, as well as customer and employee
theft (Hollinger and Langton 2003, BearingPoint 2002,
Raman et al. 2001, Kurt Salmon Associates 2000).
Inventory records can, for example, become inaccu-
rate if a salesperson mis-scans items during the check-
out process. When faced with a customer buying
multiple, identically priced items, a salesperson might
scan one item multiple times rather than each item
separately (BearingPoint 2002, Raman et al. 2001).
The recorded quantity of each item should have been
depleted by one unit. Instead, the recorded quantity
of one item has been depleted multiple times, result-
ing in a mismatch between the recorded and actual
inventory. Similarly, IRI can result from restocking
 DeHoratius and Raman: Inventory Record Inaccuracy: An Empirical Analysis
628
errors should a salesperson fail to properly process a
returned or exchanged item.
In addition to these selling and restocking errors,
replenishment errors can cause IRI (Bernard 1985,
Raman et al. 2001). Typically, store employees do not
scan each item delivered from the distribution cen-
ter (DC) into store inventory upon receipt. Instead,
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store employees verify whether the expected num-
ber of pallets or cases has been received. Store inven-
tory records are automatically updated based on the
store order with the assumption that the order has
been filled correctly. If a DC employee incorrectly fills
a store order by accidentally picking and shipping
the wrong item or the wrong quantity of the cor-
rect item, the quantity received will not match the
quantity ordered for a given SKU. Consequently, store
inventory records will be inaccurate.
Database errors and poor data synchronization can
also result in IRI. For example, if the retailer’s mas-
ter database file incorrectly states that the case pack
quantity is twelve units when it is actually six units,
every time a case is shipped to a store the automated
inventory tracking system will add twelve units to the
on-hand quantity of that item at that store when, in
reality, only six units have been shipped (Fisher et al.
2000). Discrepancies between recorded and actual
inventory quantities can also be caused by poor data
synchronization or time lags between the flow of
material and information (Iglehart and Morey 1972,
Bernard 1985). If the quantity of inventory found in
the record is compared to the quantity of inventory
actually present in the store before the record has
been properly updated to reflect any receipts that
occurred in a previous period, the recorded quantity
will appear to be inaccurate.
IRI may also result from poor inventory counts
(Woolsey 1977, Iglehardt and Morey 1972, Rinehart
1960). One common mistake made during manual in-
ventory counts includes a “unit of measure” error.
Here the individual conducting the audit mistakenly
counts a set, a product consisting of multiple units
(e.g., one toothbrush and toothpaste tube that are
merchandised together), as two pieces rather than as
a single piece (Bernard 1985).
And, finally, inventory theft is also a source of IRI
in retail organizations. Theft by store employees or
customers leads to a mismatch between recorded and
actual inventory quantities. Theft can also occur at
the DC or when items are in transit to the store. In
such cases, the quantity received does not match the
quantity ordered. Because most retailers update their
store inventory levels based on what is ordered and
not by scanning each item upon its receipt, this theft
can result in IRI.
We provide evidence that, even in a high-per-
forming retail organization, discrepancies between
Management Science 54(4), pp. 627–641, © 2008 INFORMS
recorded and actual inventory quantities do occur
and are substantial in magnitude. Research suggests
that even small discrepancies can result in substan-
tial lost sales, missed service level targets, and sub-
optimal retail performance (DeHoratius et al. 2008,
Kang and Gershwin 2005, Fleisch and Tellkamp 2005).
We estimate the potential lost revenue due to IRI at
one Gamma store to be nearly $1,350 per week (see
e-companion1 Appendix A). Aggregated across each
week of operation and each North American store,
the revenue lost by Gamma to IRI is more than 1% of
its North American retail sales and more than 3% of
its gross profit.
We also identify factors that mitigate as well as con-
tribute to IRI both within and across stores. We find
that IRI, measured as the absolute difference between
the recorded and actual inventory quantity, is asso-
ciated with factors such as an item’s annual sell-
ing quantity, its cost, and the frequency of an audit,
defined as the number of days since the previous
physical audit. While several of these factors have
been identified as drivers of IRI in other contexts (e.g.,
item cost and quantity sold), we extend these findings
to the retail context. IRI is also associated with factors
such as inventory density, defined as the total number
of units found in a store’s selling area, product variety,
defined as the number of different merchandise cate-
gories within a store (Levy and Weitz 2001), and the
distribution structure (whether or not it was shipped
from a Gamma-owned DC). These factors have never
been linked to IRI. The linking of these variables to
IRI reveals it to be not merely an inventory control
problem, but rather a larger organizational problem.
The rest of this paper is organized as follows. We
review the literature in §2 and develop our hypothe-
ses in §3. In §4, we describe our research setting and
the data collected for the empirical analysis presented
in §5. We conclude with a discussion of our results,
study limitations, and future research opportunities
in §6.
2. Related Literature
Rinehart (1960) is the first researcher to identify IRI
as a potential obstacle to operational performance. In
his work with a government supply facility, Rinehart
(1960) documents substantial discrepancies between
recorded and actual inventory quantities. Discrepan-
cies exist in 0–50% of the items audited across differ-
ent inventory classifications. Record inaccuracy has,
he notes, a “deleterious effect” on operations because
it prevents firms from achieving the benefits that
1
An electronic companion to this paper is available as part of the
online version that can be found at http://mansci.journal.informs.
org/.
 DeHoratius and Raman: Inventory Record Inaccuracy: An Empirical Analysis
Management Science 54(4), pp. 627–641, © 2008 INFORMS
result from using “theoretically optimal methods of
inventory control” (p. 543).
Iglehart and Morey (1972) determine the opti-
mal buffer stock and frequency of inventory counts
needed to prevent shortages caused by IRI. They cal-
ibrate their analytical model using data from Emma
(1966), who documents inaccuracies in 25% of a Naval
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supply depot’s audited records. Morey (1985) sug-
gests that firms not only adjust the timing of inven-
tory counts and buffer stock calculations, but also
alter ordering policies, to accommodate IRI.
Among the IRI prevention techniques suggested by
Ernst et al. (1993) is the use of control charts. Using
samples from two finished goods warehouses and one
pharmaceutical firm to test their methodology, they
find that recorded inventory quantities fail to agree
with actual inventory quantities anywhere from 83.7%
to 95.5% of the time. Millet (1994) focuses on incentive
design as a means for improving IRI. He recommends
rewarding efforts that produce higher accuracy (e.g.,
more frequent counting of expensive, critical, and
fast-moving items) and reports a 32% improvement
in the percentage of accurate items after implemen-
tation. However, Millet (1994) does not empirically
test plausible alternative hypotheses for the observed
improvements.
Sheppard and Brown (1993) audit a sample of items
within a manufacturing plant on two separate occa-
sions, finding inaccuracies in 26% of the items audited
initially and then 22% of the items audited sub-
sequently. Unlike previous work on IRI, Sheppard
and Brown (1993) actually test empirically several
product-specific factors hypothesized to be associated
with IRI. Like them, we report the magnitude of, and
test several product-specific factors hypothesized to
be associated with, IRI. We turn to existing research
on IRI and inventory auditing in an attempt to under-
stand why levels of IRI might vary for items with
different characteristics. Product characteristics such
as the value of an item, its transaction frequency,
its annual dollar volume, and audit frequency are
often named, but seldom empirically tested, drivers of
IRI (Tallman 1976, Neeley 1983, Flores and Whybark
1986, Young and Nie 1992).
Our work differs from Sheppard and Brown (1993)
in two key ways. First, we document the magni-
tude of IRI in retailing, a context not yet examined
by previous work on this topic. Second, we investi-
gate IRI across multiple sites (e.g., stores) of the same
firm instead of looking only within one site of a sin-
gle firm. Thus, we attempt to explain not only what
accounts for the variability in IRI across items within
an individual site but also what might explain the
variability in IRI across multiple sites.
The variation in IRI across different stores of a sin-
gle retail chain has yet to be examined. Kang and
629
Gershwin (2005) note inaccuracies in 51% of the
records used by one retail firm and claim that the pro-
portion of inaccurate records ranges from 30% to 80%
across stores, but they do not investigate empirically
the source of this variability. Variability in operat-
ing performance of different sites of the same firm
is not uncommon. Existing research in manufacturing
suggests that operational performance (e.g., quality,
flexibility, productivity) differs even across sites that
employ similar technologies and processes and offer
identical employee incentives and training (Krafcik
1988, Garvin 1988, Clark and Hayes 1988, Upton
1997). We draw upon several factors cited by this
stream of research to generate hypotheses about the
variation in IRI that one might expect across different
stores of the same retail chain.
3. Definition of IRI and Hypotheses
3.1. Definition of IRI
Schrady (1970) comprehensively reviews, and high-
lights the advantages and disadvantages of, plausible
IRI measures. Researchers have operationalized the
concept of IRI in a variety of ways. Some studies have
employed a binary measure whereby recorded quan-
tities are either in agreement with actual inventory
quantities or they are not (Raman et al. 2001). Still
others have used a binary measure where accuracy is
defined as within a pre-specified tolerance (Rinehart
1960, Sheppard and Brown 1993). In both Rinehart
(1960) and Sheppard and Brown (1993), a record is
inaccurate if the discrepancy between the recorded
and actual inventory quantity is 1% or more of the
recorded balance.
Binary measures of record inaccuracy are useful for
determining the likelihood of discrepancies, but they
do not provide any information on their magnitude.
Our objective is to identify the determinants of IRI,
and as such we are concerned about the magnitude of
the discrepancy between recorded and actual inven-
tory quantities. We therefore define IRI as the absolute
difference between the recorded and actual inventory
quantity, and the hypotheses generated below focus
on what drives variability in this measure.
Absolute deviation, in addition to being a simple
measure that is used in practice to track IRI, has the
following nice property. It captures the uncertainty of
the inventory management process in a single mea-
sure because it reflects both the mean and the spread
of the discrepancy distribution. Thus, it is akin to the
way in which management scholars and practitioners
evaluate forecasts: mean absolute deviation (MAD).
MAD has long been used in inventory management
(Brown 1967, Nahmias 2001) as a measure of accuracy,
particularly in forecasting. Like our measure of IRI,
MAD is simple, is used by practitioners, and captures
 DeHoratius and Raman: Inventory Record Inaccuracy: An Empirical Analysis
630
in a single measure two key elements: the mean and
the spread (e.g., standard deviation) of the discrep-
ancy distribution. Unlike our measure of IRI, MAD is
the mean of a set of many absolute deviations.
Two advantages exist to using this absolute devia-
tion definition of IRI compared to a normalized mea-
sure of IRI (e.g., sales-weighted absolute deviation).
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One, our measure provides greater flexibility than
a normalized variable. Normalization predetermines
the relationship between the discrepancy between
recorded and actual inventory levels and the variable
used for normalization. Regressing this normalized
variable on other independent variables assumes that
the discrepancy between recorded and actual inven-
tory levels is a linear function of the variable used
for normalization. This is a restrictive assumption and
need not always be true. Two, our measure is eas-
ier to interpret. If we normalize IRI we are unable to
clearly interpret the significance and the direction of
any estimated regression coefficients. Does the inde-
pendent variable impact the numerator of the normal-
ized outcome, the denominator, or possibly both? It is
appropriate therefore to use variables that one might
consider important for normalization as independent
variables to control for such variables and achieve a
similar effect to normalization.
3.2. Theoretical Development
To generate our hypotheses, we draw upon several
streams of research. Research on inventory manage-
ment in general and inventory auditing in particular
suggests that the dollar value of an item, its trans-
action frequency, the dollar volume, and the time
elapsed between audits are potential drivers of IRI.
We use transaction cost economics to evaluate
whether the distribution structure might account for
differences in IRI across items. To account for the vari-
ability in IRI across stores, we draw on factors shown
to explain differences in operating performance across
manufacturing plants such as product variety and
inventory levels. Product variety and inventory lev-
els are analogous to environmental complexity in
information processing theory (Flynn and Flynn 1999,
Vachon and Klassen 2002), specifically the branch of
this theory that addresses human reliability and the
environmental conditions under which individuals
are more or less likely to make mistakes.
3.2.1. Inventory Auditing and Record Inaccuracy.
Maintaining inventory accuracy through periodic
auditing is widely practiced throughout industry and
is an extensively studied topic among operations
researchers (see, for example, Tallman 1976, Neeley
1983, Flores and Whybark 1986, Young and Nie 1992).
These audits can take the form of periodic physical
audits where every item in a pre-specified location is
counted on the same day or the form of cycle counts
Management Science 54(4), pp. 627–641, © 2008 INFORMS
where items are counted on a regularly defined sched-
ule throughout the year. The purpose of these audits
is to identify items where the recorded inventory
quantity is not in agreement with the actual inven-
tory quantity. Discrepancies are then reconciled, and,
where possible, root-cause analysis is conducted to
eliminate the source of these discrepancies.
In this research, two factors are commonly assumed
to impact IRI: the activity of the item (Rinehart 1960,
Tallman 1976, Rout 1976, Johnson et al. 1981, Bernard
1985, Backes 1980, Vollmann et al. 2005) and the
time elapsed since that item was last audited (Neeley
1983, Young and Nie 1992). Moreover, this work often
suggests that efforts to reduce or eliminate record
inaccuracy should not be applied evenly across all
items. Instead, items deemed most important by the
firm (e.g., expensive or high dollar-volume items)
should receive differential treatment such that they
are monitored more frequently or more extensively
(see, for example, Brooks and Wilson 1993, Flores and
Whybark 1986). We discuss each of these factors and
their expected relationship to IRI in detail below.
Transaction Frequency. According to Bernard (1985)
and Arnold and Chapman (2004), the inventory
records of more active items, or items that have
the greatest number of transactions processed against
them, are more likely to diverge from the actual quan-
tity found at the time of an audit. We hypothesize
that annual quantity sold, a proxy for transaction fre-
quency, is positively associated with our measure of
IRI. The more units per year an item sells, the greater
its IRI and vice versa. See e-companion Appendix B
for the derivation of this relationship. Note that this
derivation, and therefore this hypothesis, might not
hold with alternative definitions of IRI.
Hypothesis 1. IRI is positively associated with the
annual selling quantity of an item.
Audit Frequency. Backes (1980) and Flores and Why-
bark (1987), in their work on manufacturing inven-
tory, argue that error accumulates in inventory
records until such time as the records are updated by
a physical inventory audit. Neeley (1983) maintains
that, aside from eliminating the source of the error,
increasing the frequency of inventory audits is the
primary means of minimizing IRI in manufacturers’
warehouses. Morey and Dittman (1986), concerned
that the more time that has elapsed between audits
the more likely record inaccuracies will occur, develop
a framework for determining the optimal timing of
audits needed to correct the inaccuracies and attain a
predetermined level of accuracy. We therefore expect
items that have been audited more frequently to have
lower levels of inaccuracy.
Hypothesis 2. IRI decreases with increases in audit
frequency.
 DeHoratius and Raman: Inventory Record Inaccuracy: An Empirical Analysis
Management Science 54(4), pp. 627–641, © 2008 INFORMS
Inventory Classifications. Researchers discussing dif-
ferent auditing procedures often highlight the need
to classify different items based on their relative
importance to the firm such that items that are more
important receive greater attention. Two definitions of
relative importance emerge from this literature: items
of high value (Hanna and Newman 2001, Brooks and
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Wilson 1993, Tallman 1976) and high dollar-volume
items (Arnold and Chapman 2004, Flores and Wybark
1986). Based on these definitions, managers can clas-
sify items into A, B, or C items using the Pareto prin-
cipal. Items classified as A items are then scheduled
to be audited more frequently than B items, B items
more frequently than C items, and so on. Inventory
auditing is labor intensive, and thus a firm must make
choices on how best to allocate this resource. The
implicit belief is that the differential treatment given
to expensive items and/or high dollar-volume items
results in greater record accuracy for these items.
Moreover, items of high value may be monitored
more closely throughout the retail supply chain as
part of a retailer’s theft-prevention efforts. Inventory
theft, or shrinkage, has a direct effect on store oper-
ating profits, and retailers take great care to prevent
such losses (Hollinger and Langton 2003). For exam-
ple, high-value items may be shipped in special car-
tons, placed into locked cages in the backroom prior
to restocking the selling floor, or audited at mul-
tiple stages of the distribution process. Store man-
agers, who are often evaluated in part on their ability
to reduce inventory shrink (DeHoratius and Raman
2007), pay particular attention to reducing the theft
of high-value items because the shrinkage of expen-
sive products affects store profitability more than the
shrinkage of less expensive products. Consequently,
store managers may induce store employees to exert
more effort when checking the shipments of expen-
sive products or while monitoring inventory levels of
these expensive products.
Given these auditing and theft-prevention practices
common among retailers, we expect lower levels of
record inaccuracy among high-value items. We also
posit that inventory records of high dollar-volume
items are more accurate than those of low dollar-
volume items.
Hypothesis 3. IRI is negatively associated with the
cost of the item.
Hypothesis 4. IRI is negatively associated with the
dollar volume of an item.
3.2.2. Distribution Structure. Retailers employ
two different shipping methods when distributing
inventory to stores (Levy and Weitz 2001). Retailers
may receive inventory into their own DCs and then
distribute inventory to stores. Alternatively, retailers
631
can have vendors ship directly to stores. Differences
in the way inventory is handled during this process,
due to differences in governance, may account for dif-
ferences in IRI.
Transaction cost economics suggests that, in the
absence of efficiency distortions related to internal
organization, vertical integration leads to efficient and
effective coordination through a number of mecha-
nisms, including an increased likelihood of physi-
cal proximity, established patterns of communication,
and greater willingness to cooperate with other mem-
bers of the same group (Williamson 1975, Coase 1937,
Alchian and Demsetz 1972). Unlike the retail-owned
DC, the vendor is not owned by the retail chain and
thus agency problems exist. Thus, one might expect
fewer inventory discrepancies among items shipped
through retail-owned DCs.
Yet the presence of internal procurement bias, inter-
nal expansion bias, persistence, or communication
distortion might cause one to expect the opposite
(i.e., more errors among items shipped from retail-
owned DCs). Research by Baker et al. (2002) argues
that under some circumstances an upstream party
will refuse to take any costly action pertaining to qual-
ity control (e.g., invest in the reduction of inventory
errors) when the downstream party is not paying a
bonus for such quality. Because stores are unable to
reward (or penalize) the retail-owned DC for accurate
(or inaccurate) fulfillment of store orders, one might
expect greater inventory discrepancies among items
shipped through retail-owned DCs. Vendors, on the
other hand, are motivated to expend more than the
minimal amount of effort on ensuring quality perfor-
mance (e.g., accurate shipments) given that the store
has alternative sourcing options. Incentives are mis-
aligned when retail stores receive inventory from the
retail-owned DC because the DC does not have an
outside option to sell its goods and thus expends only
the minimum effort to ensure quality. Furthermore,
stores are unable to source from other DCs in the face
of poor quality.
We therefore hypothesize that IRI is correlated with
the way in which an item is shipped to the store.
Hypothesis 5. IRI is associated with the distribution
structure used.
3.2.3. Environmental Complexity and Record
Inaccuracy. The concept of bounded rationality, the
notion that decision makers have limitations on their
capacity for processing information introduced by
Simon (1955), has led to a stream of research known as
information processing theory. Information process-
ing has been studied at the cognitive level (e.g., Payne
et al. 1993, Anderson 2004), within organizations
(e.g., Galbraith 1973, Tushman and Nadler 1978), and
 DeHoratius and Raman: Inventory Record Inaccuracy: An Empirical Analysis
632
across organizations (e.g., Bensaou and Venkatraman
1995).
Information processing theory suggests that when
individuals execute a task they are constantly mak-
ing trade-offs between effort and accuracy (Payne
et al. 1993). Properties of the task, individual, and
task environment influence the likelihood of errors
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for a given level of effort. For example, the more
complex the task, the more errors one would expect.
Such errors are exacerbated (or mitigated), according
to human error analysis or human reliability analysis,
by specific individual characteristics. These individ-
ual characteristics include the individual’s emotional
state, intelligence, motivation, and skill level (see, for
example, Miller and Swain 1987). Familiarity with
a task reduces the number of errors an individual
is likely to make (Newell and Rosenbloom 1981,
Delaney et al. 1998), as does the existence of estab-
lished organizational routines and practices (Regans
et al. 2005).
Environmental complexity, however, makes a task
more difficult to execute (Swain and Guttman 1983).
In retailing, employees perform multiple tasks includ-
ing moving, storing, picking, monitoring, and even-
tually selling store inventory. These employees
determine both how much effort to allocate to each
task and how accurate to be. We assume, all else being
equal, that retail employees prefer more accuracy and
less effort when executing any task. Yet, the effort–
accuracy level required to execute a task depends
on the task environment. Retail employees operating
in stores with more complex task environments are
expected to make more errors for a given level of
effort.
We define environmental complexity in the retail
environment along two dimensions: inventory den-
sity and product variety. Stores with greater inventory
density, defined as the total number of units avail-
able in a store’s selling area, as well as stores with
greater product variety, defined as the number of dif-
ferent merchandise categories within a store, have
more complex task environments than other stores.
We describe each of these dimensions below.
Inventory Density. Retail stores are becoming in-
creasingly crowded as merchandisers stock more
inventory in a fixed amount of square footage
(Ketzenberg et al. 2000). Crowding in a retail store
makes it difficult for store employees to periodically
monitor store inventory for anomalies such as stock-
outs. Retailers often use stockouts to detect discrepan-
cies between recorded and actual inventories (Raman
and Zotteri 2000). When stockouts are easily visi-
ble, store employees can readily check the recorded
inventory for these items, spot mistakes, and request
an update of the recorded inventory level. Crowd-
ing, however, makes the identification of stocked-
out items more difficult because it is less likely that
Management Science 54(4), pp. 627–641, © 2008 INFORMS
“holes” in the shelf will appear. Identifying stockouts
through visible inspection is therefore more difficult,
less reliable, and more time consuming.
Numerous researchers have addressed the adverse
impact of high levels of inventory in the manufactur-
ing context. Schonberger (1982), in his work on JIT,
noted that process problems are more difficult to iden-
tify in the presence of excess inventory. Krafcik (1988)
identified plants with better operational performance
as ones with lower inventory levels and lean pro-
duction systems. Hayes and Clark (1986) show that
plants with lower work-in-process, and therefore less
operational complexity and confusion, exhibit better
performance. Lieberman and Demeester (1999) find
an inverse relationship between inventory and pro-
ductivity among Japanese automobile manufacturers.
Bertrand and Van Ooijen (2002) argue that high inven-
tory levels create additional employee workload and
hence a high-pressure work environment conducive
to greater levels of human error. As detailed above,
inventory density plays a similar role in the retail con-
text. We therefore hypothesize that inventory density,
as a measure of environmental complexity, is posi-
tively correlated with IRI.
Hypothesis 6. High (low) levels of inventory density
are associated with high (low) levels of IRI.
Product Variety. In contexts other than retailing,
substantial empirical evidence exists suggesting that
variety negatively impacts numerous measures of
operational performance. Srinivasan et al. (1994)
demonstrate that shipment discrepancy rates increase
in the face of increasing variety in manufactur-
ing. MacDuffie et al. (1996) find that plants with
greater product variety have lower labor productiv-
ity, and Anderson (1995) reveals a positive correlation
between product variety and manufacturing overhead
costs. Rommel et al. (1995) identify the best perform-
ing mid-sized manufacturers as ones with a narrow
range of products. Fisher and Ittner (1999) find a posi-
tive relationship between product variety and rework
rates in automobile assembly. They posit that such
rework is caused by the increased likelihood that
workers will choose the wrong parts. Increased prod-
uct variety complicates the parts supply process by
requiring additional coordination and effort to get the
right part to the right place. Hayes and Clark (1986)
and Skinner (1974) find that greater variety leads to
greater complexity and confusion, which, in turn, lead
to lower quality in manufacturing plants.
Employees working in stores with greater prod-
uct variety face additional environmental complex-
ity. Among the problems occasioned by increased
product variety is difficulty differentiating, during the
store checkout, audit, or order fulfillment processes,
items that are nearly identical. The detrimental effects
 DeHoratius and Raman: Inventory Record Inaccuracy: An Empirical Analysis
Management Science 54(4), pp. 627–641, © 2008 INFORMS
of similarity on human error are well known (Reason
1990). Such similarity may increase the likelihood of
mis-scanning at the store because salespeople may
scan one item multiple times without recognizing that
the customer is purchasing multiple products that
differ from each other. It may also increase the like-
lihood of DC mis-shipments to stores because ware-
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house employees may incorrectly pick and ship one
item in lieu of another. Either of these actions can
cause store inventory records to differ from the actual
inventory at the store. Thus, we expect stores with
greater product variety to exhibit greater IRI.
Hypothesis 7. High (low) levels of product variety are
associated with high (low) levels of IRI.
4. Methods and Measures
4.1. Research Setting
We examine IRI at 37 stores owned and operated
by Gamma Corporation, a large public retailer with
annual sales of approximately $10 billion. Gamma is
currently the largest operator of superstores in the
world for its specific retail category. Those familiar
with retail consider Gamma an extremely successful
retailer that excels both operationally and in its use of
technology. Consequently, Gamma not only controls
the largest market share for its particular retail cate-
gory, but its stock growth consistently outperformed
that of the Standard & Poor’s retail index during the
period of our study.
4.2. Data Collection and Measures
The data we collected at Gamma consist of the results
of the 1999 physical inventory audit conducted in 37
randomly selected Gamma stores. Gamma conducts
periodic physical inventory audits at every store.
Audit teams scan each item in the store using hand-
held scanning devices during a period when the store
is closed to customers. Store managers and, at times,
management from the corporate office are present to
ensure timely and accurate counts. Upon completion
of the audit, Gamma records two corresponding unit
quantities, one representing the “system count” (i.e.,
the number of inventory units for each SKU recorded
to be on-hand at a particular store), the other the
“actual count” (i.e., the number of inventory units for
each SKU actually present in the store at the time
of the audit). Our measure of IRI, defined in detail
in §3.1, is the absolute difference between the system
and the actual count recorded during the audit.
We did not collect audit data from every Gamma
store but rather sampled at random from among
those stores that had been opened for at least 2 years
to eliminate any operational complexities that might
exist in the ramp-up of a new store and to ensure that
the store was viable. We selected twelve stores served
633
by each of two DCs operated by Gamma and thirteen
stores served by a third Gamma-operated DC. Collec-
tively, these audit results provide data for each item in
the 37 chosen stores, amounting to a total of 369,567
observations. Note that we sampled stores and col-
lected all observations for each store sampled.
In addition to the data gathered from the physical
inventory audit that provided us with our measure
of IRI, we also obtained data characterizing each item
corresponding with our hypotheses. Specifically, we
gathered the price Gamma paid for an item (ITEM
COST), the annual selling quantity per store during
the year preceding the audit for an item (QUANTITY
SOLD),2 and an indicator variable denoting whether
an item had been shipped to the store from one of
Gamma’s DCs (VENDOR = 0) or directly from the
vendor (VENDOR = 1). Gamma’s distribution struc-
ture is consistent across the retail chain such that each
store receives the same items from vendors and the
same items from Gamma-owned DCs.
To evaluate the variation in IRI across stores, we
first coded each observation so we could identify
the store from which it was taken. We then col-
lected data on each store, specifically its inventory
density, its product variety, and the frequency of
inventory audits. Inventory density, DENSITY, is the
total number of units in a store divided by that
store’s selling area (units per square foot). Product
variety, VARIETY, is the number of different mer-
chandise categories within a store. An alternative
measure of VARIETY in retailing is the number of
SKUs per store (Lindsley et al. 1991). These two
measures of variety are highly correlated with each
other (0.75, p < 00001), and our results, presented in
§5.4, remained unchanged when using this alternative
measure. Audit frequency, DAYS, measures the num-
ber of days between audits for a given store. Audit
frequency decreases with increases in DAYS.
4.3. Controls
We coded each store by the region in which it was
located (e.g., Northeast, Mid-Atlantic, and West). Our
aim is to control for any unmeasured regional differ-
ences that might exist. We propose several regional
2
We acknowledge that our measure of transaction frequency cap-
tures sales during an entire year whereas our measure of IRI cap-
tures errors that have accumulated during varying time periods
(e.g., times since the store was last audited). Observations of quan-
tity sold during the period between audits were not available to us.
Nevertheless, we believe annual quantity sold to be a good proxy
for transaction frequency. We do not expect there to be much vari-
ability in sales across items within a store during different times
of the year. Unlike a department store, which may sell swimsuits
in summer and coats in winter, Gamma’s store assortment is rela-
tively consistent from one season to the next, and thus any changes
in sales during different periods are not likely to impact items
differentially.
 DeHoratius and Raman: Inventory Record Inaccuracy: An Empirical Analysis
634 Management Science 54(4), pp. 627–641, © 2008 INFORMS

Table 1 Descriptive Statistics and Correlations

Variable name Mean (s.d.) Min. Max. (1) (2) (3) (4)

SKU level (level 1), n = 369567

1. IRI 498 (28.54) 000 6988 —
2. ITEM COST 2043 (66.85) 001 3474 −004∗∗∗ —
3. QUANTITY SOLD 7147 (318.60) 000 40229 026∗∗∗ −013∗∗∗ —
4. VENDOR 001 (0.11) 0 1 −002∗∗∗ 008∗∗∗ −002∗∗∗ —
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Store level (level 2), n = 37

1. Avg. store IRI 494 (1.27) 237 7.79 —
2. DENSITY 828 (1.62) 543 11.36 067∗∗∗ —
3. VARIETY 35278 (5.66) 327 360 031∼ −004 —
4. DAYS 34227 (111.23) 10500 523.00 028∼ 030∼ 001 —
Product category level (level 2), n = 68
1. Avg. product category IRI 702 (23.62) 046 19670 —
∼ ∗ ∗∗ ∗∗∗
p < 010, p < 005, p < 001, p < 0001.

differences that may impact IRI in §6. Although we
would have liked to explore some of these regional
differences more thoroughly, we are limited by the
small number of regions, three, in which Gamma
stores are clustered.
We also obtained a “merchandising hierarchy” that
Gamma uses to classify every SKU into sixty-eight
product categories. Each SKU can be described by one
and only one product category. For example, a SKU
representing an IBM T-42 Thinkpad would be classi-
fied as a laptop computer.3 We use this classification
to control for the lack of independence that may exist
within product categories. For example, store or DC
employees may be more likely to confuse items that
are similar (e.g., Coca-Cola and Diet Coke) than they
are to confuse items that are dissimilar. Thus, it is
important to account for this lack of independence
within product categories. We also use this classifica-
tion to control for any unmeasured effect on IRI that is
common to all items in a particular product category.
Because of the nature of our agreement with Gamma,
we cannot identify each product category, nor can
we collect data specific to product categories. Thus,
even though one could hypothesize that certain prod-
uct category differences might impact IRI (see §6), we
were able to include only product category codes in
our analysis.
5. Estimation and Results
5.1. Descriptive Statistics
Table 1 presents our descriptive statistics and within-
level correlations. We find that IRI ranges from zero
to 6,988 units and averages 4.98 units. We also find
variability in IRI across stores and product categories.
3
The definition of product categories differs from our measure of
variety, merchandise categories, in the following way. Product cat-
egories consist of numerous merchandise categories.
The average IRI by store ranges from a minimum of
2.4 units per item to a maximum of 7.8 units per item.
The average IRI within a product category ranges
from a minimum of 0.46 units per item to a maximum
of 197 units per item.
A histogram of IRI reveals that 65% of the inven-
tory records in our sample are inaccurate (Figure 1).
Twenty-two percent of the records have a discrepancy
of one unit, 10% have a discrepancy of two units, and
so on. Approximately 17% of the records we collected
have discrepancies of seven units or more. In other
words, these records have discrepancies that were
50% or more of the average on-hand quantity present
in Gamma stores. We found positive discrepancies in
59% of the inaccurate records observed. Upon aver-
aging the raw difference (as opposed to the absolute
difference) between system and actual inventory lev-
els, we found that items had, on average, a discrep-
ancy of 0.12 units, implying that, on average, more
inventory was recorded in the system than was actu-
ally found on the selling floor. In an effort to illu-
minate as much detail as possible about our chosen
research site, a retail chain whose name we have to
disguise, we supplement the descriptive statistics pre-
sented here in e-companion Appendix C.
5.2. Variable Transformations
Before testing our hypotheses, we transform several
of our variables (i.e., IRI, ITEM COST, and QUAN-
TITY SOLD) into their natural log. The primary rea-
son for transforming our variables in this way was to
linearize the regression model (Kleinbaum et al. 1998).
Analysis of the raw data suggests a nonlinear rela-
tionship between the outcome variable, IRI, and each
of the predictors. We find the log transformation to
be the most effective at inducing linearity. Moreover,
several of the variables in their raw form have stan-
dard deviations that are large relative to their means.
Afifi and Clark (1997) recommend transforming such
 DeHoratius and Raman: Inventory Record Inaccuracy: An Empirical Analysis
Management Science 54(4), pp. 627–641, © 2008 INFORMS
Figure 1 Histogram of the Absolute Difference Between Recorded and Actual Inventory Levels n = 369567
35
35
30
Percentage of
records (%)
25 22
20
15 10
10 6 0
4 20
3 3
5 2 2 1 1 1
0
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10
Units
variables to induce normality prior to model estima-
tion. Because our measure of IRI and quantity sold
can be zero, and the natural log of zero is undefined,
we add one unit to each observed unit of error and
quantity sold. We find no substantial differences in
our results presented in §5.4 when adding numbers
less than one, specifically 0.5 and 0.33.
5.3. Hierarchical Linear Modeling
We employ hierarchical linear modeling (HLM) to
analyze these data (Raudenbush and Bryk 2002). One
advantage of HLM is that it allows for unbalanced
data, an important benefit in our research setting
where the number of observations drawn from each
store differs. The number of observations from each
store ranges from 6,791 to 11,843 (see e-companion
Appendix C, Table C2). However, the primary ben-
efit of HLM is that it takes into account the multi-
level structure of our data (Raudenbush and Bryk
2002) and the lack of independence between observa-
tions at different levels (Seltzer 1994). In our data, nei-
ther the observations drawn from the same store nor
those represented by the same product category can
be assumed to be independent. Thus we use a cross-
classified HLM model that allows observations to be
nested within two higher-level categories, stores and
product categories. Cross-classified HLM differs from
more traditional HLM techniques in that it allows for
observations to be nested within two different higher-
level classifications.
The hierarchical or nested nature of these data
means that SKUs existing within stores, or within
product categories, will tend to be more similar to each
other than SKUs randomly sampled from the entire
population. Thus, observations within these clusters
of stores or product categories are not fully inde-
pendent. Traditional OLS approaches, including hier-
archical regression modeling (HRM) and analysis of
variance (ANOVA), require independence of observa-
tions as a primary assumption for the analysis and
would produce incorrect standard errors (Raudenbush
and Bryk 2002). HLM, on the other hand, assumes a
correlation between the residuals from observations
within the same store or within the same product
category.
635
9
0
01
20
10
04
02
01
00
02
0.0 0.
0.
0.
0.
0.
0.
0.
0.
11–50
51–100
101–150
151–200
201–250
251–300
301–350
351–400
401–450
451–500
501+
5.4. Hypothesis Testing
We test our hypotheses concerning the SKU and
store-level determinants of IRI in several steps. Our
approach was similar to Liao and Chuang (2004) and
Ang et al. (2002), where we first estimate a null model
(Model 1, Table 2) that had no predictors at the SKU
level (Level 1), the store level (Level 2a), or the prod-
uct category level (Level 2b). Equation (1) summarizes
this null model. We then include each of our predic-
tors sequentially, resulting in a full model (Model 10,
Table 2) described by Equation (2) below.
To estimate these HLM models we use Proc Mixed
in SAS v.9.1 and employed a full maximum likeli-
hood (ML) estimation technique. The goodness-of-fit
statistics computed with ML describe the fit of the
entire model and thus can be used to test hypotheses
about any type of parameter (e.g., fixed effect or vari-
ance component). See Singer and Willett (2003) for a
detailed description of the advantages and disadvan-
tages of different estimation techniques when execut-
ing multi-level models.
5.4.1. Null Model. The null model described
below is equivalent to a two-way analysis of variance
with random row and column effects and within-cell
deviation. With this model, we partition the variance
in IRI into three components: the variance in IRI asso-
ciated with differences across stores, the variance in
IRI associated with differences across product cate-
gories, and the variance in IRI within a given store
and product category combination.
IRIijk = 0 + b00j + c00k + eijk  (1)
where IRIijk is the record inaccuracy of item i (i =
1     njk ) in product category j (j = 1     68) and
store k (k = 1     37). 0 is a fixed intercept
parameter. The random main effect of product cate-
gory j is b00j ∼ N (0 b00 ). The random main effect of
store k is c00k ∼ N (0 c00 ). The random item effect is
eijk ∼ N (0  2 ). b00 , c00 , and  2 define the variance
in IRI between product categories, stores, and items,
respectively.
We found that 70.9% of the variance in IRI exists
across items, 26.4% across product categories, and
 DeHoratius and Raman: Inventory Record Inaccuracy: An Empirical Analysis
636 Management Science 54(4), pp. 627–641, © 2008 INFORMS

Table 2 Hierarchical Linear Modeling Results for IRI

Variable Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8 Model 9 Model 10

Fixed effects
Intercept 0961∗∗∗ 0523∗∗∗ 0770∗∗∗ 0677∗∗∗ 0676∗∗∗ 0677∗∗∗ 0770∗∗∗ 0442∗∗ −2638∗ −2811∗
0076 0069 0051 0050 0050 0050 0055 0015 1257 115
QUANTITY 0160∗∗∗ 0150∗∗∗ 0185∗∗∗ 0186∗∗∗ 0185∗∗∗ 0185∗∗∗ 0185∗∗∗ 0185∗∗∗ 0185∗∗∗
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SOLD 0001 0001 0001 0001 0001 0013 0001 0001 0001
ITEM −0108∗∗∗ −0045∗∗∗ −00448∗∗∗ −0045∗∗∗ −0045∗∗∗ −0045∗∗∗ −0045∗∗∗ −0045∗∗∗
COST 0001 0002 0002 0002 0002 0002 0002 0002
DOLLAR −0028∗∗∗ −0028∗∗∗ −0027∗∗∗ −0027∗∗∗ −0027∗∗∗ −0027∗∗∗ −0027∗∗∗
VOLUME 0001 0001 0001 0001 0001 0001 0001
VENDOR −01098∗∗∗ −0292∗∗∗ −0292∗∗∗ −0292∗∗∗ −0292∗∗∗ −0292∗∗∗
0015 0047 0047 0047 0047 0047
VENDOR 0050∗∗∗ 0050∗∗∗ 0050∗∗∗ 0050∗∗∗ 0050∗∗∗
COST 0012 0012 0012 0012 0012
REGION −0265∗∗∗ −0190∗∗ −0156∗∗ −0139∗∗
ONE 0052 0058 0056 0051
REGION 0000 0037 0062 0092∗
TWO 0053 0052 0050 0046
DENSITY 0034∗ 0040∗∗ 0033∗∗
0015 0014 0013
VARIETY 0009∗ 0009∗∗
0003 0003
DAYS 0000∗∗
0000¥
Random effects
Store 0034∗∗∗ 0033∗∗∗ 0032∗∗∗ 0032∗∗∗ 0032∗∗∗ 0032∗∗∗ 0017∗∗∗ 0015∗∗∗ 0013∗∗∗ 0011∗∗∗
0008 0008 0008 0008 0008 0008 0004 0004 0003 0003
Category 0332∗∗∗ 0263∗∗∗ 0110∗∗∗ 0104∗∗∗ 0104∗∗∗ 0103∗∗∗ 0103∗∗∗ 0103∗∗∗ 0103∗∗∗ 0103∗∗∗
0065 0055 0028 0027 0027 0027 0027 0027 0027 0027
Residual 0891∗∗∗ 0839∗∗∗ 0826∗∗∗ 0821∗∗∗ 0821∗∗∗ 0821∗∗∗ 0821∗∗∗ 0821∗∗∗ 0821∗∗∗ 0821∗∗∗
0002 0002 0002 0002 0002 0002 0002 0002 0002 0002
−2 Log 1,006,833.0 984,673.9 978,762.5 976,592.9 976,538.5 976,521.9 976,496.2 976,490.5 976,484.2 976,476.4
likelihood

Notes. Standard errors are shown in parentheses. IRI, QUANTITY SOLD, and ITEM COST are all transformed into their natural log. ¥ DAYS coefficient is
46 × 10−4 , and its standard error is 17 × 10−4 .
∗
p < 005, ∗∗ p < 001, ∗∗∗ p < 0001.

2.7% across stores (Model 1, Table 2). We observe sig-
nificant variation in IRI across stores after controlling
for variance in IRI across product categories (c00 =
0034, p < 00001). The presence of significant
between-store variance in IRI allows us to test
whether this variance is associated with select store
characteristics, as hypothesized.
5.4.2. Conditional Models. We introduce predic-
tors across columns in Table 2 in a stepwise fashion
introducing the item-level predictors first followed
by store-level predictors. We report the proportion
of variance explained by adding each hypothesized
predictor in Table D1 of the e-companion. We assess
model significance by examining the difference in
negative log-likelihood between two nested models.
First, we specify models in which we add each
item-level variable iteratively (Models 2–5, Table 2)
to test our hypotheses about the relationship between
an item’s value, its annual selling quantity, its dollar-
volume, and the distribution structure. For complete-
ness, we test for other plausible interaction terms
and find that a significant interaction term exists
between the distribution structure and an item’s value
(Model 6, Table 2).
Next, we include store-level predictors (Mod-
els 7–10, Table 2). With these models, we assess the
main effects of the hypothesized store level factors
such as inventory design, product variety, and audit
frequency on IRI. We assume that the effects of our
item characteristics on IRI are fixed across stores and
product categories, rather than randomly varying,
due to insufficient cell size among some store–product
category combinations (Raudenbush and Bryk 2002).
Model 10 (Table 2) is our complete model including
 DeHoratius and Raman: Inventory Record Inaccuracy: An Empirical Analysis
Management Science 54(4), pp. 627–641, © 2008 INFORMS
all predictors and controls. Equation (2) summarizes
our conditional model with every store- and item-
level predictor.
IRIijk = 0 + b00j + c00k + eijk
+ 1 ∗ QUANTITY_SOLDijk 
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+ 2 ∗ ITEM_COSTijk 
+ 3 ∗ DOLLAR_VOLUMEijk 
+ 4 ∗ VENDORi  + 5 ∗ VENDOR_COSTijk 
+ 001 ∗ REGION_ONEk 
+ 002 ∗ REGION_TWOk 
+ 003 ∗ DENSITYk  + 004 ∗ VARIETYk 
+ 005 ∗ DAYSk  (2)
where 1 –5 are the fixed item-level coefficients and
001 –005 are the fixed store-level coefficients.
Because results are generally stable from one model
to the next, we focus on the results from Model 10
(Table 2). With this model, we are able to explain
25.6% of the total variance in IRI. Collectively, our
item- and store-level predictors explain 67.6% of the
variance in IRI across stores and 69.0% of the vari-
ance in IRI across product categories. We find that
IRI is indeed associated with inventory management
policies, distribution structure, and environmental
complexity.4
Inventory Management. Hypotheses 1–4 predict that
inventory auditing policies will be associated with
IRI. Specifically, we posit that four factors pertaining
to inventory auditing (e.g., an item’s cost, its annual
selling quantity, its dollar volume, and the frequency
with which it is audited) are associated with IRI.
Each of these factors is indeed significantly associated
with IRI.
In support of Hypothesis 1, we find a positive
main effect of quantity sold on IRI (1 = 0185,
t = 14258). On average, the record inaccuracy for
fast-moving, defined hereafter as the 90th percentile
of annual selling quantity (or QUANTITY SOLD =
147), Gamma-shipped items is 2.1 times that of slow-
moving, hereafter defined as the 10th percentile of
annual selling quantity (or QUANTITY SOLD = 1),
4
See e-companion Appendix D for additional details on our estima-
tion method, the robustness of our results using other estimation
methods, and our findings pertaining to collinearity and aberrant
data points. We replicate the analysis presented in this section using
alternate measures of IRI in e-companion Appendix E. We also esti-
mate our models using two subsets of the existing data set, namely,
one subset including observations with only positive discrepancies
and one subset with only negative discrepancies, see e-companion
Appendix F.
637
Gamma-shipped items, controlling for all other pre-
dictors at their mean.5
Hypothesis 2 predicts that items contained in stores
that are audited more frequently will exhibit lower
levels of IRI. We find, in support of this hypothe-
sis, that the days lapsed between audits is signifi-
cantly and positively associated with IRI (005 = 46 ×
10−4 , t = 296). Items within stores audited annually
(DAYS = 360) have, on average, 12% greater record
inaccuracy than items within stores audited semi-
annually (DAYS = 180), controlling for all other pre-
dictors at their mean.
Confirming Hypothesis 3, we find that the coeffi-
cient on the main effect of item cost is both significant
and negative (2 = −0045, t = −2344). The IRI of
expensive, hereafter defined as the 90th percentile of
item cost (or ITEM COST = $4184), Gamma-shipped
items is, on average, 57% less than inexpensive, here-
after defined as the 10th percentile of item cost (or
ITEM COST = $098), Gamma-shipped items, control-
ling for all other predictors at their mean.
In support of Hypothesis 4, we find dollar-volume
to be significantly and negatively associated with IRI
(3 = −0027, t = −4638). Because dollar-volume is
calculated by multiplying the cost of an item and
its annual selling quantity, its significance has some
implications for the main effect of quantity sold and
item cost on IRI. We can no longer claim that mag-
nitude of the effect of item cost on IRI or the magni-
tude of the effect of quantity sold on IRI is constant.
Instead, the effect of item cost on IRI depends on
the annual selling quantity of the item, and the effect
of quantity sold on IRI depends on the cost of the
item. Specifically, the effect of quantity sold on IRI
is greater for inexpensive items than for expensive
items. And the effect of item cost on IRI is more
substantial for fast-moving items than it is for slow-
moving ones. We find, on average, the record inaccu-
racy of fast-moving inexpensive items to be more than
double (150% greater) that of fast-moving expensive
items, controlling for all other variables at their mean.
However, the record inaccuracy of slow-moving inex-
pensive items is only 56% greater, on average, than
that of slow-moving expensive ones, controlling for
all other variables at their mean. Similarly, when com-
paring the IRI of inexpensive fast-moving items to
that of inexpensive slow-moving items, we find a
greater difference in IRI than when comparing the IRI
of expensive fast-moving items to that of expensive
slow-moving items. Controlling for all other factors at
their mean, the IRI for inexpensive fast-moving items
5
We have chosen to interpret our findings for “Gamma-shipped”
items (i.e., VENDOR = 0) and for an “average region” (i.e.,
REGION = −0139 + 0092 + 0/3 = −0016. All other independent
variables are controlled at their mean; see Table 1 for these values.
 DeHoratius and Raman: Inventory Record Inaccuracy: An Empirical Analysis
638
is nearly four times greater, on average, than the IRI
for inexpensive slow-moving items and the IRI for
expensive fast-moving items is only two times greater,
on average, than the IRI for expensive slow-moving
items, controlling for all other factors at their mean.
Distribution Structure. The distribution structure is
significantly associated with IRI as posited in Hypoth-
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esis 5 (4 = −0292, t = −62). The coefficient is neg-
ative, suggesting that items shipped direct from the
vendor to Gamma retail stores are more accurate
than those shipped from Gamma-owned DCs. This
supports the proposition of Baker et al. (2002) that
external suppliers have more incentive to invest in
process quality than do retail-owned DCs. The IRI of
a Gamma-shipped item is 25% greater, on average,
than a similar vendor-shipped item, controlling for all
other factors at their mean.
We also test for the presence of interaction terms
between an item’s cost and the distribution structure.
The presence of a significant positive coefficient on
the interaction between an item’s cost and the dis-
tribution structure (5 = 005, t = 407) reveals that
the impact of distribution structure on IRI is not the
same across all items. Instead, the more expensive
the item, the less difference in IRI exists between
Gamma-shipped and vendor-shipped items. We find
the IRI for expensive Gamma-shipped items to be 19%
greater, on average, than for similar vendor-shipped
items, controlling for all other factors at their mean.
This gap increases to 47%, on average, for inexpensive
items, holding other factors at their mean.
Environmental Complexity. Hypotheses 6 and 7 posit
that stores will differ in their record accuracy depend-
ing on the degree of complexity of the work envi-
ronment. The two measures of complexity we use
are inventory density and product variety. We find
both inventory density and product variety to be
significant and positively associated with IRI (003 =
0033, t = 280; 004 = 0009, t = 298; respectively).
Items within stores that have high levels of inventory
density (DENSITY = 11, the 90th percentile) exhibit
record inaccuracy levels 25% greater, on average, than
items within stores with low levels of inventory den-
sity (DENSITY = 65, the 10th percentile), control-
ling for all other factors at their mean. Similarly,
items within stores that have high levels of product
variety (VARIETY = 358, the 90th percentile) exhibit
record inaccuracy levels 13% greater, on average, than
items within stores with low levels or product variety
(VARIETY = 349, the 10th percentile), controlling for
all other factors at their mean.
6. Discussion
We provide evidence that the problem of record inac-
curacy is substantial in magnitude in the retail con-
text. And the resulting lost sales can amount to a
Management Science 54(4), pp. 627–641, © 2008 INFORMS
considerable portion of firm profit. The extent of
the IRI problem at Gamma, a well run retailer, sug-
gests that IRI exists in other retail contexts. The
adverse effect of IRI is not limited to the operational
performance of the retail chain. It may also impact the
performance of upstream supply chain partners. Inac-
curate retail sales and inventory data can confound
manufacturers’ efforts to manage retail inventory lev-
els under vendor-managed inventory programs and
render ineffective collaborative planning, forecasting,
and replenishment programs. Such efforts, whereby
retailers and manufacturers share sales and inventory
data to optimize the supply chain, are often touted
as a solution to the bullwhip effect (Lee et al. 1997).
Many manufacturers even incorporate retailer sales
and inventory data into their production planning
process.
Thus, IRI is an operational problem that war-
rants greater attention from management scholars and
managers. Innovative solutions to this problem are
needed. Such solutions may include novel IRI preven-
tion or correction techniques, changes in the design
of store operating environments to make it more dif-
ficult for such discrepancies to arise, or recommenda-
tions for attaining error-free compliance among store
and DC workers executing replenishment tasks. Retail
managers can benchmark across stores to determine
the practices that lead to low levels of inaccuracy or
across vendors to identify quality control techniques
employed in the order fulfillment process.
Management scholars may also be able to design
robust decision support tools to account for the exis-
tence of IRI. Traditional inventory and assortment
planning models assume that inventory positions are
known with certainty and only account for the uncer-
tainty in lead times or demand. Our research, by pro-
viding a detailed, empirical characterization of IRI in
the retail context, can inform researchers wishing to
incorporate error characteristics into robust planning
models (see, for example, DeHoratius et al. 2008, Kök
and Shang 2007).
Several limitations to our study exist. First, we
study several stores of the same firm. Advantages of
field research within one organization include the use
of detailed, firm-specific data and a deep understand-
ing of the study context gained through observations
and interview. Moreover, in testing our hypotheses,
we could control for firm-specific factors that influ-
ence IRI such as firm ownership, information technol-
ogy, and incentive design. However, we are unable
to claim statistically that our results will hold beyond
Gamma. Our choice of a random effects model does
allow us to generalize to the entire population of
Gamma stores, but we would require data from sev-
eral firms to make any claims beyond Gamma. That
said, we do have anecdotal evidence that leads us to
 DeHoratius and Raman: Inventory Record Inaccuracy: An Empirical Analysis
Management Science 54(4), pp. 627–641, © 2008 INFORMS
believe that the observed level of IRI is not unusual
and that our hypothesized relationships will hold
beyond Gamma. Specifically, results from this study
have been presented to retail executives on numerous
occasions, and they have consistently acknowledged
our findings. Nevertheless, future research should
provide additional evidence from other firms regard-
Downloaded from informs.org by [128.122.253.212] on 20 May 2015, at 03:21 . For personal use only, all rights reserved.
ing the incidence, magnitude, and drivers of IRI in
other retailing contexts.
In addition to concerns over the external valid-
ity of our study, we also recognize several threats
to its internal validity. We are unable to control for
all factors that might impact the variation in IRI
across stores and product categories. It is plausible,
for example, that employee tenure and training, store
manager practices, as well as other unmeasured fac-
tors may influence store-level IRI. Variation in IRI
across items and across product categories may be
influenced by the cubic volume of the item because
bulky items are more difficult to steal and/or lose
than compact items, by their case pack size (sin-
gle item shipment vs. multiple item shipment), or
other unmeasured factors. Future research opportuni-
ties include exploring the impact of these additional
factors while controlling for the variables included in
this study.
Crime, regional management, and DC practices are
other factors that may impact IRI. Crime in the form
of theft influences store error in that it generates
a discrepancy between recorded and actual inven-
tory quantities for the stolen item. Similarly, regional
management may influence IRI by enforcing different
inventory management practices (e.g., management
of one region could monitor store activities such as
checking of stocked-out items differently than another
region). Finally, the capability of each of the man-
agement teams running the DCs affiliated with each
region may differ. Perhaps one DC developed its own
unique polices and practices that prevent common
errors in store order fulfillment that led to lower IRI
among the stores it served. To what extent do DC pro-
cesses play a significant role in ensuring the accuracy
of store records? Future research on these factors may
offer valuable insights into the practical problem of
IRI in the retail context.
Further research opportunities include linking IRI
to financial or non-financial performance measures.
Do stores with higher levels of IRI exhibit better or
worse performance (e.g., store profit, customer satis-
faction)? What actions can a retailer take to reduce
IRI, how much will those actions cost, and will the
gains from improved IRI offset these costs? Several of
these questions have been explored through simula-
tion (DeHoratius et al. 2008, Kang and Gershwin 2005,
Kök and Shang 2007, Fleisch and Tellkamp 2005) but
have yet to be addressed empirically. Field research
639
that could identify the drivers of improved IRI over
time would be of immense interest to academics and
practitioners alike.
7. Electronic Companion
An electronic companion to this paper is available as
part of the online version that can be found at http://
mansci.journal.informs.org/.
Acknowledgments
The authors thank the many Gamma employees who partic-
ipated in this study. This paper benefited from discussions
with Carliss Baldwin, Jim Bettman, Vishal Gaur, Saravanan
Kesavan, Laura Kornish, Richard Lai, Adam Mersereau,
Steve Miller, Chris Nachtsheim, Terri Pigott, Linus Schrage,
Bill Simpson, Judy Singer, and Sarah Woolverton. The
authors also acknowledge the substantial contributions of
the associate editor and three anonymous referees.
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