Inventory Types and Firm Performance: Vector Autoregressive and Vector Error Correction Models

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.