Inventory leanness and the financial performance of firms

Olov H.D. Isaksson · Ralf W. Seifert

100 citations0/0 files storedProduction Planning & Control

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Quality and Supply Management Supply Chain and Inventory Management Working Capital and Financial Performance

Abstract

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.

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References

1997Industry costs of equity 2003Does Working Capital Management Affect Profitability of Belgian Firms?2018Fundamentals of Corporate Finance 2003The effect of supply chain glitches on shareholder wealth 2010Lean, leaner, too lean? The inventory‐performance link revisited 2003An examination of the relationships between JIT and financial performance 2005What Actually Happened to the Inventories of American Companies Between 1981 and 2000?1994Inventory Investment, Internal-Finance Fluctuations, and the Business Cycle

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