An Analysis of Inventory Turnover in the Belgian Manufacturing Industry, Wholesale and Retail and the Financial Impact on Inventory Reduction

Abstract

Various inventory studies have been published in the last decades. Some studies emphasize the importance of low inventories, other examine the evolution of inventories over time and especially focus on the impact of the just-in-time (JIT) revolution. The aim of this paper is to investigate the level of inventories held by Belgian companies at one moment in time, namely May 2004. First we examine differences in inventory ratios between manufacturing industry sectors as well as between wholesale and retail. We find empirical evidence that the type of production process is the most important driver for work in process inventory. The finished goods inventory ratio also differs significantly among industry sectors, but here the reasons for the difference are harder to distinguish. Finally we find the inventory ratio to be significantly higher in retail than in wholesale. Furthermore, we examine the financial impact of inventories in the manufacturing industry. We find that companies with very high inventory ratios have more chance to be bad financial performers. Regression analyses partially support the hypothesis of a negative relationship between inventory ratio and financial performance but significant results could not be obtained for all sectors.