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Inventory Reduction and Productivity Growth: Linkages in the Japanese Automotive Industry

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Author Info

  • Marvin B. Lieberman

    (Anderson Graduate School of Management, UCLA, Los Angeles, California 90095-1481)

  • Lieven Demeester

    (PricewaterhouseCoopers LLP, 400 S. Hope St., Suite 2200, Los Angeles, California 90071-2889)

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    Abstract

    The literature on JIT production suggests a causal link between work-in-process inventory and manufacturing productivity. Such a connection has been described in numerous case studies but never tested statistically. This paper uses historical data for 52 Japanese automotive companies to evaluate the inventory-productivity relationship. We find that firms increased their productivity rank during periods of substantial inventory reduction. More detailed tests suggest that inventory reductions stimulated gains in productivity: On average, each 10% reduction in inventory led to about a 1% gain in labor productivity, with a lag of about one year. Such effects were more immediate for Toyota affiliates, but undetectable for close suppliers of Nissan. These findings imply that inventory reduction served as an important driver of process improvement for many Japanese automotive companies, although some firms emphasized other methods.

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    File URL: http://dx.doi.org/10.1287/mnsc.45.4.466
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    Bibliographic Info

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 45 (1999)
    Issue (Month): 4 (April)
    Pages: 466-485

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    Handle: RePEc:inm:ormnsc:v:45:y:1999:i:4:p:466-485

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    Related research

    Keywords: inventory; productivity; just-in-time manufacturing; auto industry; Japan; empirical study;

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    Cited by:
    1. Krishnan, Murugappa (Murgie) & Srinivasan, Ashok, 2007. "How do shop-floor supervisors allocate their time?," International Journal of Production Economics, Elsevier, vol. 105(1), pages 97-115, January.
    2. Cannon, Alan R., 2008. "Inventory improvement and financial performance," International Journal of Production Economics, Elsevier, vol. 115(2), pages 581-593, October.
    3. Li, Han & Li, Zhigang, 2013. "Road investments and inventory reduction: Firm level evidence from China," Journal of Urban Economics, Elsevier, vol. 76(C), pages 43-52.
    4. Elias Sanidas & Hyeri Park, 2011. "Korean Augmented Production Function: The Role Of Services And Other Factors In Korea¡¯S Economic Growth Of Industries," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 36(1), pages 59-85, March.
    5. van Ooijen, H. P. G. & Bertrand, J. W. M., 2003. "The effects of a simple arrival rate control policy on throughput and work-in-process in production systems with workload dependent processing rates," International Journal of Production Economics, Elsevier, vol. 85(1), pages 61-68, July.
    6. Obermaier, Robert, 2012. "German inventory to sales ratios 1971–2005—An empirical analysis of business practice," International Journal of Production Economics, Elsevier, vol. 135(2), pages 964-976.
    7. Kroes, James R. & Manikas, Andrew S., 2014. "Cash flow management and manufacturing firm financial performance: A longitudinal perspective," International Journal of Production Economics, Elsevier, vol. 148(C), pages 37-50.
    8. Sanidas, E., 2001. "The Successful Imitation of the Japanese Lean Production System by American Firms: Impact on American Economic Growth," Economics Working Papers wp01-02, School of Economics, University of Wollongong, NSW, Australia.
    9. Bergenwall, Amy L. & Chen, Chialin & White, Richard E., 2012. "TPS's process design in American automotive plants and its effects on the triple bottom line and sustainability," International Journal of Production Economics, Elsevier, vol. 140(1), pages 374-384.
    10. Kim, Sung Min & Mahoney, Joseph T., 2008. "Resource Co-specialization, Firm Growth, and Organizational Performance: An Empirical Analysis of Organizational Restructuring and IT Implementations," Working Papers 08-0107, University of Illinois at Urbana-Champaign, College of Business.

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