The impact of vertical integration on inventory turnover and operating performance

Abstract

This paper investigates how vertical integration may influence inventory turnover and firm operating performance. A causal model is developed to investigate the effects of vertical integration on three types of inventory, namely raw materials inventory (RMI), work in progress inventory (WIPI) and finished goods inventory (FGI). The model tests the interactions between inventory types and the consequences of inventory turnover performance on various aspects of firm performance including costs and profitability. In particular, path analysis supports systematic differences with respect to how vertical integration affects RMI, WIPI and FGI. Vertical integration has a positive effect on RMI and FGI turnover but no significant effect on WIPI turnover. FGI contributes to a reduction in supporting processes costs which causes an improvement in return on sales (ROSs). Vertical integration impacts ROS directly.

Inventory Model Design by Implementing New Parameters into the Deterministic Model Objective Function to Streamline Effectiveness Indicators of the Inventory Management

“…where The calculation for the losses associated with the lack of inventories S ned for the application of the model with modified objective function is as follows (see Equation (10)). For inventories which are consumed continuously or with less fluctuation, Equation 11is applied:…”

“…The modified model of inventory management determines the inventory level H in such a way that minimizes the likelihood of the risk of a lack of inventories to almost zero. The method for the calculation of the losses that would be suffered as a result of the lack of inventories S ned (10), allows other factors relevant to the supply process to be taken into consideration. These factors include the reliability of the supplier of the particular inventory DS, the extent to which the specific inventory participates in the sales of the final product F and the purchase price of the specific inventory C N .…”

Bridging the gap: state-of-the-art on vertical integration

“…Vertical integration is a means of increasing organizational efficiency, so scholars have been trying to integrate this topic to extend agency theory (Pellinen, Teittinen, & Järvenpää, 2016). Vertical integration also has a positive effect on raw material inventory turnover, finished goods inventory and return on sales, but not on volumes of unfinished or in-process inventory (Andreou, Louca, & Panayides, 2016). Although empirical literature has not established in absolute terms the relationship between vertical integration and performance, in TCE view, a higher degree of internal transfers in a vertically integrated firm will reduce transaction costs and improve information exchange.…”

VERTICAL INTEGRATION in AGRO-INDUSTRY: ECO-FRIENDLY GAMBIER PRODUCTS

“…Vertical integration is a company strategy that controls raw materials from the upstream supply chain and downstream supply chain. Vertically integrated industries have raw material availability and control over the entire supply chain [15] [16] [17] [18]. Industries that perform vertical integration are not only to maintain their product chains but to achieve economies of scale and profitability [19] [20] [21].…”