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Inventory Leanness and the Financial Performance of Firms
College of Management of Technology, Switzerland.
2014 (English)In: Production planning & control (Print), ISSN 0953-7287, E-ISSN 1366-5871, Vol. 25, no 12, 999-1014 p.Article in journal (Refereed) Published
Abstract [en]

This paper examines the financial consequences that inventory leanness has on firm performance. We conduct an econometric analysis using 4324 publicly traded US manufacturing companies for the period 1980–2008. Using an instrumental variable fixed effects estimator we find a nonlinear relationship between inventory leanness and financial performance. However, we note that the maximum point of this inverted U-shaped relationship often lies at the extreme end of the investigated sample – suggesting a decreasing return from leanness rather than an optimal level. We show that the strength of this relationship is highly dependent on both the industry and inventory component (raw materials, work in process and finished goods) studied. The main novelty and direct implication of our findings is that most firms still have much potential to increase profitability by becoming leaner and they are unlikely to cross a threshold where profitability decreases with increased leanness. We display how much the average firm could gain by becoming leaner and show how this sensitivity changes by inventory component and industry. Finally, we highlight several new econometric aspects that we believe must be addressed when empirically investigating the inventory-performance link.

Place, publisher, year, edition, pages
2014. Vol. 25, no 12, 999-1014 p.
Keyword [en]
empirical operations management, inventory management, inventory leanness, firm profitability, compustat data
National Category
Business Administration
Identifiers
URN: urn:nbn:se:su:diva-148619DOI: 10.1080/09537287.2013.797123OAI: oai:DiVA.org:su-148619DiVA: diva2:1154180
Available from: 2017-11-01 Created: 2017-11-01 Last updated: 2017-11-06Bibliographically approved

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