Supply Chain Structure, Inventory Turnover, and Financial Performance: Evidence from Manufacturing Companies in China

Abstract

Using data collected by the World Bank, we empirically investigate the relationship between Chinese manufacturers’ supply chain attributes, raw material and finished goods inventory turnover, and return on sales. Our findings indicate that location proximity, relationship continuity, and the relative power of the manufacturer over suppliers and customers have a significant impact on inventory performance, which in turn drives profitability. We especially focus on characteristics unique to China’s business environment. We find that Chinese manufacturing companies have relatively weak operational performance, and better operational performance is associated with closer distance, longer relationship with suppliers and customers, and relative power over suppliers. Unlike their counterparties in some developed countries, Chinese manufacturers’ profitability relies on both downstream and upstream inventory performance, with downstream inventory performance playing a somewhat more important role.