Inventory Reduction and Productivity Growth: Evidence from the Japanese Automotive Sector

Abstract

The literature on JIT production suggests a causal link between work-in-process inventory and manufacturing productivity. Such a connection has been described in numerous case studies but never tested statistically. This paper uses historical data for 52 Japanese automotive companies to evaluate the inventory-productivity relationship. We find that inventory reductions stimulated gains in productivity, rather than vice versa. On average, each 10% reduction in inventory led to about a 1% gain in labor productivity, with a lag of about one year. Significant differences are found among company groups: Toyota affiliates had a shorter lag; while Nissan affiliates demonstrated no productivity effect. Firms that made inventory reductions typically saw an increase in their productivity rank.