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Spread Too Thin: The Impact of Lean Inventories

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Abstract

Widespread adoption of just-in-time (JIT) production has reduced inventory holdings. This paper finds that JIT creates a trade-off between firm profitability and vulnerability to large shocks. Empirically, JIT adopters experience higher sales and less volatility while also exhibiting heightened cyclicality and sensitivity to natural disasters. I explain these facts in a structurally estimated general equilibrium model where firms can adopt JIT. Relative to a no-JIT economy, the estimated model implies a 1.3% increase in firm value. At the same time, an unanticipated shock results in a roughly 15% deeper output contraction. This occurs because firms "stock out" or hoard materials.

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  • Julio L. Ortiz, 2022. "Spread Too Thin: The Impact of Lean Inventories," International Finance Discussion Papers 1342, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgif:1342
    DOI: 10.17016/IFDP.2022.1342
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    Cited by:

    1. Cavallo, Alberto & Kryvtsov, Oleksiy, 2023. "What can stockouts tell us about inflation? Evidence from online micro data," Journal of International Economics, Elsevier, vol. 146(C).

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    More about this item

    Keywords

    Inventory investment; Firm dynamics; Just-in-time production;
    All these keywords.

    JEL classification:

    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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