Skip to main content
About HEC About HEC
Summer School Summer School
Faculty & Research Faculty & Research
Master’s programs Master’s programs
Bachelor Programs Bachelor Programs
MBA Programs MBA Programs
PhD Program PhD Program
Executive Education Executive Education
HEC Online HEC Online
About HEC
Overview Overview
Who
We Are
Who
We Are
Egalité des chances Egalité des chances
HEC Talents HEC Talents
International International
Sustainability Sustainability
Diversity
& Inclusion
Diversity
& Inclusion
The HEC
Foundation
The HEC
Foundation
Campus life Campus life
Activity Reports Activity Reports
Summer School
Youth Programs Youth Programs
Summer programs Summer programs
Online Programs Online Programs
Faculty & Research
Overview Overview
Faculty Directory Faculty Directory
Departments Departments
Centers Centers
Chairs Chairs
Grants Grants
Knowledge@HEC Knowledge@HEC
Master’s programs
Master in
Management
Master in
Management
Master's
Programs
Master's
Programs
Double Degree
Programs
Double Degree
Programs
Bachelor
Programs
Bachelor
Programs
Summer
Programs
Summer
Programs
Exchange
students
Exchange
students
Student
Life
Student
Life
Our
Difference
Our
Difference
Bachelor Programs
Overview Overview
Course content Course content
Admissions Admissions
Fees and Financing Fees and Financing
MBA Programs
MBA MBA
Executive MBA Executive MBA
TRIUM EMBA TRIUM EMBA
PhD Program
Overview Overview
HEC Difference HEC Difference
Program details Program details
Research areas Research areas
HEC Community HEC Community
Placement Placement
Job Market Job Market
Admissions Admissions
Financing Financing
FAQ FAQ
Executive Education
Home Home
About us About us
Management topics Management topics
Open Programs Open Programs
Custom Programs Custom Programs
Events/News Events/News
Contacts Contacts
HEC Online
Overview Overview
Executive programs Executive programs
MOOCs MOOCs
Summer Programs Summer Programs
Youth programs Youth programs
Article

Inventory Management and Financial Performance

Operations Management
Published on:

Companies like Dell and Toyota are considered masters in the art of minimizing inventory, and this skill has been credited with making them leaders in their respective markets.

warehouse - inventory management

Key Ideas:

• There is a positive correlation between a company’s inventory management and its financial performance.

• This positive relationship becomes apparent when you consider three types of inventory: raw materials, partially manufactured products, and finished products.

• The strongest correlation between inventory levels and financial performance was observed for raw material stock, but this result varies depending on the industry. 

Companies like Dell and Toyota are considered masters in the art of minimizing inventory, and this skill has been credited with making them leaders in their respective markets. However, until now, no study has ever demonstrated a clear link between financial performance and operational speed. Vedran Capkun, Ari-Pekka Hameri, and Lawrence Weiss are the first to provide scientific insight on this topic. Their empirical study of American manufacturing companies shows a correlation between the levels of three types of inventory, gross profits, and operating profits.

Operations Speed and Business Performance

Generally speaking, improving operational performance and, in particular, reducing the time between product manufacturing and market introduction requires improving processes throughout the supply chain. This means boosting total quality management, Just-in Time (JIT) processes, “zero waste” practices, lean management, etc. Many studies have shown that companies that focus on effective operations management win more market share, earn more profit, and produce higher quality products. Toyota’s adherence to this strategy made it a world leader in the automobile market, just ahead of General Motors.1 But does this prove that inventory management is related to financial performance?

Inventory Management and Financial Performance

Capkun, Hameri, and Weiss found a positive correlation between inventory management and operational gains. Even more significantly, they show that effective inventory management also leads to better financial performance, which they measured by considering gross and operating profits. The separation of inventory into categories shows that there are three types of inventory that influence financial performance: raw materials, partially manufactured products, and finished products. Degrees of correlation vary depending on the type of inventory and the financial performance reference.

Different types of inventory, different effects

Three types of inventory were considered to determine the root of the correlation between financial performance and inventory management quality.

• Raw materials: Management of raw material stock is most strongly related to financial performance, no matter how the latter is measured (gross profits or operating profits).

• Partially manufactured products: Strong correlation with gross profits.

• Finished products: Strong correlation with operating profits. The results of this study are consistent with the literature on operational management, which generally says that improvements in inventory management lead to significant value creation.

Industry Segmentation and Various Correlations

The study considers manufacturing companies in a range of industries. Individual analysis of each industry reveals that the impact of improved inventory management on profits varies from one industry to another:

• In assembly industries (i.e. automobiles, machinery, computers, etc.), financial performance is boosted by reductions of any type of inventory. Reducing inventories of partially manufactured products also reduces stocks of finished products, which enables companies to increase their responsiveness. This is especially true in industries that produce goods with short manufacturing cycles (electronics and, to a lesser extent, high tech goods).

• In consumer goods industries, inventories of (generally low-cost) raw materials and partially manufactured products do not have much of an impact on financial results. However, effective manufacturing processes lead to low inventories of finished products and generate high profits. This is also true in the fashion industry, where products that are introduced onto the market should be “consumed” rapidly. 

 

1. In 2007, the Toyota Group manufactured 9.51 million automobiles, replacing General Motors (9.259 million automobiles) as the world leader in this market.

2. Number of companies per year multiplied by the number of years, equaling approximately 2000 companies per year

Applications

Image - Social Networks
For the Workplace: In times of crisis, even small steps toward improving financial performance or cutting costs are worthwhile. Improving inventory management offers three main benefits: • Greater production speed and thus increased sales; • Savings on financing costs (equity capital or debt) that enable investment in new projects; • Greater control over liquidity levels. For the Leadership: This study shows business managers why it is worth taking deliberate steps to reduce inventory. Practically speaking, it shows that the place to start is with raw materials, because inventory reductions in this area have the greatest impact on financial performance. 

Methodology

methodology
The researchers constructed a comprehensive data set of sales of large operating assets that were wholly owned by publicly traded parent firms in the US between 1994 and 2004, with relevant data (including exit sales) obtained from SEC filings, press reports and websites of private equity firms. The final sample, covering a broad range of industries, consists of 146 private equity deals, 287 deals with public strategic buyers and 48 deals with private strategic buyers, all transactions being worth more than $100 million to minimize reporting bias.
Based on an interview with Vedran Capkun and on the article, “On the Relationship between Inventory and Financial Performance in Manufacturing Companies” by Vedran Capkun, Ari-Pekka Hameri (HEC business school, University of Lausanne), and Lawrence A.Weiss (McDonough School of Business, Georgetown University). Forthcoming in the International Journal of Operations and Production Management.

Related content on Operations Management

iStock_mutarusan_management research
Sustainable Development

Bridging Sustainable Supply Chains with AI

By Sam Aflaki

Eloic Peyrache - HEC
Eloïc Peyrache
Professor, Dean
Aishwarya Karunakar
Graduate of the SASI MSc
Sustainable Development
Can ESG Save Life on Earth? Key Lessons
Helene Loning - HEC Paris
Hélène Löning
Associate Professor and Academic Director