What happened to inventory and cost after a vertical integration? A longitudinal analysis considering demand uncertainty

Abstract

This study provides empirical analyses on the changes in inventory and cost of goods sold (COGS) after vertical integration. Theoretical studies suggest contradictory influences of vertical integration on operations due to operational conflicts and coordination improvement: (1) operational conflicts that raise inventory level and COGS and (2) coordination improvement that lowers inventory level and cost. Hence, the changes in inventory and COGS associated with vertical integration become an empirical question. This study applied Econometrics models to analyse proprietary data associated with a vertical integration. The results suggest non-monotonic patterns of changes in inventory level and cost of goods sold. Specifically, when various fixed effects are controlled, inventory and COGS increase first then decrease after vertical integration. Furthermore, increases are amplified while decreases are weakened by higher demand uncertainty. These findings provide managers with a comprehensive understanding of the operational consequences of vertical integration decisions and some implications to managing the benefits associated with vertical integration.