Abstract
Abstract This paper investigates the role of vertical integration in the inventory management of a supply chain. Taking Chinese listed companies from 2001 to 2010 as our sample, we find that vertically integrated firms have lower inventory holdings and volatility, indicating that vertical integration improves firms’ inventory management efficiency. Further analyses show that this effect is more pronounced for firms located in regions with a lower level of marketisation and for firms facing higher demand volatility and business growth. In addition, the more thoroughly firms have accomplished vertical integration, the more greatly vertical integration increases inventory management efficiency. Finally, we find that the positive impact of vertical integration on inventory management is more significant in industries with no overcapacity, for diversified firms, and during non-crisis periods.
Highlights
With the advancement of information technology, management methods such as just in time (JIT) and lean production have been developed, and these methods determine the competitive strength of modern enterprises (Womack and Jones, 2010)
The other variables in the regression include gross margin (GM), defined as / sales; firm size (SIZE), which is equal to the natural logarithm of sales; sales growth (GROW), defined as the annual sales growth rate; lead time (LTM), which is equal to firm costs divided by accounts payable; the ratio of fixed assets to sales (FAST); and the sum of marketing and administration expenses divided by sales (FEE)
The industry classification follows the standard issued by the China Securities Regulatory Commission (CSRC)
Summary
With the advancement of information technology, management methods such as just in time (JIT) and lean production have been developed, and these methods determine the competitive strength of modern enterprises (Womack and Jones, 2010). Even the most advanced enterprise resource planning (ERP) system cannot eliminate excess inventories in the supply chain This is because firms in the supply chain have incentives to hide information, giving rise to the double marginal effect and the bullwhip effect (Christopher and Towill, 2001). Improvement in inventory management efficiency through vertical integration is mainly found in industries with no overcapacity and diversified enterprises and during non-crisis periods Overall, these results confirm the positive effect of vertical integration on inventory management. As shown by the development of the ABC inventory model, the economic order quantity (EOQ) model, and the inventory management of the supply chain, research on firm inventory management has made great progress in terms of both breadth and depth (Silver et al, 1998; Zipkin, 2000; Porteus, 2002; Cachon and Lariviere, 2005). The rest of paper proceeds as follows: Section II reviews the related literature; Section III develops our hypotheses on the basis of theoretical argument; Section IV presents the research design, introducing the sample, variables, and models, and describes the descriptive statistics; Section V reports the empirical results; and Section VI concludes the paper
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