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

  • 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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    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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    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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    1. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-38, July.
    2. Marvin B. Lieberman & Shigeru Asaba, 1997. "Inventory Reduction and Productivity Growth: A Comparison of Japanese and US Automotive Sectors," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 18(2), pages 73-85.
    3. David A. Pierce & Larry D. Haugh, 1977. "Causality in temporal systems: characterizations and a survey," Special Studies Papers 87, Board of Governors of the Federal Reserve System (U.S.).
    4. Bishop, Robert V., 1979. "The Construction and Use of Causality Tests," Agricultural Economics Research, United States Department of Agriculture, Economic Research Service, issue 4.
    5. Sako, Mari, 1996. "Suppliers' Associations in the Japanese Automobile Industry: Collective Action for Technology Diffusion," Cambridge Journal of Economics, Oxford University Press, vol. 20(6), pages 651-71, November.
    6. Pierce, David A. & Haugh, Larry D., 1977. "Causality in temporal systems : Characterization and a survey," Journal of Econometrics, Elsevier, vol. 5(3), pages 265-293, May.
    7. Norsworthy, J R & Malmquist, David H, 1983. "Input Measurement and Productivity Growth in Japanese and U.S. Manufacturing," American Economic Review, American Economic Association, vol. 73(5), pages 947-67, December.
    8. Sadao Sakakibara & Barbara B. Flynn & Roger G. Schroeder & William T. Morris, 1997. "The Impact of Just-in-Time Manufacturing and Its Infrastructure on Manufacturing Performance," Management Science, INFORMS, vol. 43(9), pages 1246-1257, September.
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