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The effect of inventory management on firm performance

by Dimitrios P. Koumanakos
International Journal of Productivity and Performance Management ()

Abstract

Lean management is getting more and more attention in today's highly competitive environment. In this context, the aim of this study is to test the hypothesis that efficient (lean) inventory management leads to an improvement in a firm's financial performance. Data for the analysis came from the ICAP database, which contains financial information on all medium to large Greek firms. The sample period extended from 2000 to 2002. For each year all manufacturing firms with the corporate form of societés anonyms operating in any one of the three representative industrial sectors in Greece: food, textiles and chemicals were selected. Preliminary results, obtained by cross-section linear regressions, reveal that the higher the level of inventories preserved (departing from lean operations) by a firm, the lower its rate of returns. Findings are additionally tested by the use of pseudo-likelihood ratio test which constitutes a more reliable tool, thus verifying the robustness of the linearity of the relationship. Given the great number of the possible determinants of performance it is difficult to isolate the effect of inventories even by using large samples and advanced methodologies. Since the results from other empirical studies on the microeconomic determinants and consequences of inventories are somewhat contradictory, this study sheds more light to this issue by employing more sophisticated statistical tests applied to a large and recent sample of Greek manufacturers across different industries.

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