Interdependence Among Inventory Types and Firm Performance

Abstract

Extant research on lean manufacturing has focused on the relationship between systemic inventory and performance. However, limited research, if any, has focused on dynamics between three main types of inventory-raw material, work-in-process, and finished goods-and firm performance. Drawing on the interdependence framework and a sample of 1,286 firms representing 41,067 firm-quarter observations from 2000 to 2013, when considering two types of inventory efficiencies jointly, higher efficiency in the subsequent inventory type must be accompanied by lower efficiency in the previous inventory type. In other words, lower raw material inventory efficiency and higher work-in-process inventory efficiency, or lower work-in-process inventory efficiency and higher finished goods inventory efficiency are associated with higher performance. High performance is also realized only when inventory efficiency is increasing across all three inventory types. The findings show that pursuing efficiency in one type of inventory requires lower efficiency in the previous inventory stage, and benefits of lean manufacturing could only be realized when all three inventory efficiencies are simultaneously high.