Inventory Types and Firm Performance:

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Inventory Types and Firm Performance:
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. Close the feedbackYou are previewing our new enhanced HTML article. If you can't find a tool you're looking for, please click the link at the top of the page to go "Back to old version". We'll be adding more features regularly and your feedback is important to us, so please let us know if you have comments or ideas for improvement. Introduction

Inventory management is an important part of logistics, given its significant impact on firm and supply chain performance (Shapiro and Wagner 2009). Firms recognize inventory management as an important driver of firm performance and undertake initiatives to improve inventory management efficiency and effectiveness. To this end, they invest in supply chain software (Blankley et al. 2008), implement supply chain collaboration initiatives such as vendor-managed inventory and quick response (Waller et al. 1999), employ postponement strategies (Garcia-Dastugue and Lambert 2007), and adopt just-in-time inventory management practices (Schwarz and Weng 2000), among others. Much has been written about inventory management in the academic literature as well. Empirical studies have documented the positive impact of good inventory management on firm performance (e.g., Capkun et al. 2009; Eroglu and Hofer, 2011). However, most previous research has focused on total inventories and ignored the potentially differential effects of raw material inventories (RMI), work-in-process inventories (WIPI), and finished goods inventories (FGI) on firm performance measures. Yet, there are significant differences among RMI, WIPI, and FGI. First, RMI are lower in unit value as compared with FGI. Moreover, demand for FGI is more uncertain than that for RMI (Stock and Lambert 2001). It is conceivable that such differences among inventory types may lead to differential effects on firm performance. The purpose of this research, therefore, is to theoretically and empirically investigate the effects of RMI, WIPI, and FGI on firm performance. This research contributes to the existing literature in three distinct ways. First, the performance effects of total inventories as well as the individual performance effects of RMI, WIPI, and FGI are estimated using a large data set of U.S. manufacturing firms. The estimation results indicate that different types of inventories differentially impact financial performance. Second, the effect of total inventories on firm performance is decomposed into performance effects of individual inventory types. This analysis suggests that performance effects of RMI, WIPI, and FGI are not equally reflected in the performance effect of total inventories. Rather, RMI emerges as the most important contributor to the positive inventory–performance effect. Third, a post hoc analysis is conducted to further explore potential reasons for these heterogeneous effects. More specifically,...
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