Inventory Types and Firm Performance: Vector Autoregressive and Vector Error Correction Models

Abstract

The effects of inventory management on firm performance have been well documented. Most previous research, however, has focused on the performance effects of total inventories and has ignored the potentially differential performance effects of raw materials, work‐in‐process, and finished goods inventories. This research investigates the effects of various inventory types on firm performance. The empirical analyses of data from U.S. manufacturing industries reveal that the magnitude of the inventory–performance relationship varies by type of inventory and across industries. Specifically, raw materials inventories have a greater impact on firm performance than work‐in‐process and finished goods inventories. As a possible explanation, intertemporal interactions among these inventory types are explored using vector autoregressive and vector error correction models. The results suggest that raw materials and finished goods inventories asymmetrically affect each other over time. Implications for research and practice as well as future research opportunities are discussed.

Implementation of a System Approach for Enhanced Supply Chain Continuity and Resiliency: A Longitudinal Study

“…There is a rich history of inventory research. However, most previous research focused on total inventories and ignored the fact that different types of inventory may result in different effects on firm performance (Eroglu and Hofer ). In fact, failure to vary approaches to inventory management for different types of inventory may lead to suboptimal supply chain performance (Eroglu and Hofer ).…”

Working Capital Management and Firm Value: The Role of Firm Innovativeness

“…Based on inventory, it is essential for firms to keep inventory for precaution purposes because of imperfections; and level of inventory held has impact on their firm value (Eroglu & Hofer, 2011). Reducing level of inventory held increases firm value since the funds untied through the reduction can be invested elsewhere; and it also avoid seeking short-term credit to finance inventory (Deloof, 2003).…”

The impact of vertical integration on inventory turnover and operating performance

“…Also as indicated by Capkun, Hameri, and Downloaded by [RMIT University] at 07:02 13 August 2015 Weiss (2009) many inventory management initiatives such as JIT and set-up reduction time have focused on reducing FGIT and WIPIT as opposed to RMIT. Eroglu and Hofer (2011b) despite supporting conceptually and hypothesising the greater effect of FGIT on performance do not find supporting evidence to their hypothesis. They characterise their findings as intriguing and attribute it to possible inter-temporal interactions between RMIT and other inventory types.…”

“…It has been recognised, however, that most studies have focused almost exclusively on FGI despite the widely acknowledged significant differences in the behaviours of RMI, WIPI and FGI (Chikan 1996;Eroglu and Hofer 2011a;Holly and Turner 2001;Sensier 2003;Tsoukalas 2006). Humphreys, Maccini, and Schuh (2001) and Eroglu and Hofer (2011b) view the failure to recognise interactions among inventories in different stages of manufacturing (RMI, WIPI, FGI) as a major theoretical and empirical weakness in economic research that attempts to explain the behaviour of profit-maximising firms. Chen, Frank, and Wu (2005) identified that RMI, WIPI and FGI of US companies have changed at different rates during the period of 1981-2005, suggesting that there are differential effects and possible interaction effects between the three types of inventory.…”