The effects of overproduction on future firm performance and inventory write‐downs

Abstract

AbstractThis study aims to examine the effects of current overproduction on future operating efficiency and inventory write‐downs. Using electronic manufacturing companies listed on NYSE/AMEX/NASDAQ during the period of 2003–2013, this study: (i) employs the interaction term between relative fixed cost levels and excess quantity of inventory produced to measure overproduction, (ii) utilizes the dynamic slacks based measure model to estimate operating efficiency, and (iii) examines inventory write‐downs. Our findings show that overproducing firms experience improved but unsustainable subsequent operating efficiency, as overproduction is a result of optimistic sales forecasting, which leads to higher subsequent inventory write‐downs. Overall, this paper suggests that production managers should be prudent in anticipating future sales demand, as short product life cycle might cause higher inventory obsolescence on excess production.