Inventory leanness and the financial performance of firms

Abstract

This paper examines the financial consequences that inventory leanness has on firm performance. We conduct an econometric analysis using 4,324 publicly traded U.S. 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 Ushaped relationship often lies at the extreme end of the investigated samplesuggesting 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.

Financial Dependence, Lean Inventory Strategy, and Firm Performance

“…The philosophy of lean inventory management has its roots in the auto industry of the early and mid‐1900s and focuses on the reduction of excess inventory as a way to reduce waste in a supply chain (Shah & Ward, ). Scholars have found that lean inventory and production processes yield both operational and financial benefits (Eroglu & Hofer, , ; Isaksson & Seifert, ). Norris, Swanson and Chu () found that firms using lean production processes see improvements in manufacturing costs and production quality.…”

Inventory agility upon demand shocks: Empirical evidence from the financial crisis

“…The objective of numerous empirical operations management papers is to identify the optimal level of inventory that a firm should hold. Research suggests the existence of a ‘sweet spot’ for firm‐level inventory, above or below which performance tends to decrease (Isaksson and Seifert, 2014). Chen et al (2005) apply a portfolio approach to review the link between firm inventories and stock returns.…”

Performance management practices in lean manufacturing organizations: a systematic review of research evidence

“…Difficulties with integrating the wider benefits of lean into accounting-based performance evaluation systems were also evident in inventory management (Meade, Kumar, and Houshyar 2006;Demeter and Matyusz 2011;Eroglu and Hofer 2011;Isaksson and Seifert 2014) and in supply chains (Taylor 2009;Yang, Hong, and Modi 2011). However, organisation-wide lean performance evaluation practices are emerging.…”

“…Historical account of the evolution of the concept of lean production ifandoudas and chapman (2009) case-based (n = 1) identification of the steps for becoming an agile manufacturer isaksson and Seifert (2014) Secondary data (n = 4324) testing the effects of lean inventory practices on financial performance Jayaram, Vickery, and droge (2008) Survey (n = 57) Examining the strategic effects of lean design and manufacturing and the related effects of supplier relationship building Jayaram, das, and nicolae (2010) Secondary data (n = 1700) Examining the effect of lean practices on organisational performance Jeffers (2010) Survey (n = 64) Examining the competitiveness and sustainability in lean organisations in relation with the use of it infrastructure Kennedy and Widener (2008) case-based (n = 1) developing a control framework for lean organisations Klingenberg et al (2013) Secondary data (n = 1700) testing whether financial ratios are suitable indicators to determine the effects of production innovation -including lean manufacturing -on firm performance Krishnamurthy and Yauch (2007) case-based (n = 1) conceptualising leagile (lean + agile) Kristensen and israelsen (2014) case-based (n = 1) Exploring the balanced and complementary effects of control practices on firm's performance Kumar et al (2006) case-based (n = 1) assessing the impact of a lean Six Sigma framework on operational performance (Continued)…”