The Empirical Determinants of Inventory Levels in High-Volume Manufacturing

Abstract

This study uses survey data on several hundred automotive suppliers in North America to evaluate the determinants of inventory levels in high-volume discrete parts manufacturing. We assess the magnitude of raw materials, work-in-process, and finished goods inventories, as well as production lot sizes and through-put times. Results are broadly consistent with the EOQ formula and related models of optimal inventory holding. Inventories are shown to be jointly determined by technological factors and managerial practices. Several categories of managerial practices are found to be important. Low inventories are linked to employee training and problem solving activities and frequent communication with customers. More unexpected findings show the absence of inventory differences between USowned and Japanese-owned plants operating in the United States. This suggests that Japanese transplant parts makers have not been completely successful in adapting Japanese manufacturing methods to the US environment.