Role of Production Efficiency: Inventory Leanness and Financial Outcome

Abstract

The connection between inventory leanness and various dimensions of financial return has been explored in many previous research studies. However, there is still a void in the literature regarding the mechanism that is responsible for the consequences of inventory leanness on the firm’s financial outcome. Thus, the purpose of this work is to study how inventory leanness influences financial outcome, with the focus on the mediation effect of production efficiency. The empirical analysis is performed using a fixed-effect model on firm-level data of various US manufacturing industries from 2000-2018. The result on overall data indicates that the association between inventory leanness (IL) and financial outcome(FO) is partially mediated through enhancement in production efficiency. Further, empirical analysis on each industry-specific subsample reveals that the mediation effect of production efficiency varies across industries. Thus, this article contributes to the theory of inventory control in operations management literature by empirically verifying the mediation effect of production efficiency.