Lean, leaner, too lean? The inventory‐performance link revisited

Abstract While firms increasingly adopt lean inventory practices, there is limited evidence that inventory leanness leads to improved firm performance. This study reexamines this relationship in an attempt to overcome some shortcomings of previous research. To that end, a theory‐based measure of inventory leanness, which takes into account industry‐specific inventory management characteristics, is proposed. The analysis of a large panel data set of U.S. manufacturing companies reveals that the significance and shape of the inventory–performance relationship varies substantially across industries. This relationship is significant in two‐thirds of the 54 industries studied. In most of these instances, the relationship is concave, suggesting that there is an optimum level of inventory leanness beyond which firm performance deteriorates. A post‐hoc analysis is conducted to identify industry‐level characteristics that may determine the nature the inventory–performance relationship. Managerial implications are discussed and several opportunities for future research are outlined.