research@hec - Issue #8 - (Page V)

Companies like Dell and Toyota are considered masters in the art of minimizing inventory, and this skill has been credited with making them leaders in their respective markets. However, until now, no study has ever demonstrated a clear link between financial performance and operational speed. Vedran Capkun, Ari-Pekka Hameri, and Lawrence Weiss are the first to provide scientific insight on this topic. Their empirical study of American manufacturing companies shows a correlation between the levels of three types of inventory, gross profits, and operating profits. M OPERATIONS SPEED AND BUSINESS PERFORMANCE Generally speaking, improving operational performance and, in particular, reducing the time between product manufacturing and market introduction requires improving processes throughout the supply chain. This means boosting total quality management, Just-in Time (JIT) processes, “zero waste” practices, lean management, etc. Many studies have shown that companies that focus on effective operations management win more market share, earn more profit, and produce higher quality products. Toyota’s adherence to this strategy made it a world leader in the automobile market, just ahead of General Motors.1 But does this prove that inventory management is related to financial performance? and Financial Performance Key Ideas: its financial performance. •There is a positive correlation between a company’s inventory management and •This positive relationship becomes apparent when you consider three types of observed for raw material stock, but this result varies depending on the industry. inventory: raw materials, partially manufactured products, and finished products. •The strongest correlation between inventory levels and financial performance was Inventory Management INVENTORY MANAGEMENT AND FINANCIAL PERFORMANCE Capkun, Hameri, and Weiss found a positive correlation between inventory management and operational gains. Even more significantly, they show that effective inventory management also leads to better financial performance, which they measured by considering gross and operating profits. The separation of inventory into categories shows that there are three types of inventory that influence financial performance: raw materials, partially manufactured products, and finished products. Degrees of correlation vary depending on the type of inventory and the financial performance reference. DIFFERENT TYPES OF INVENTORY, DIFFERENT EFFECTS Three types of inventory were considered to determine the root of the correlation between financial performance and inventory management quality. •Raw materials: Management of raw material stock is most strongly related to financial performance, no matter how the latter is measured (gross profits or operating profits). • Partially manufactured products: Strong correlation with gross profits. • Finished products: Strong correlation with operating profits. Vedran Capkun BIOGRAPHY Vedran Capkun joined HEC Paris in 2006 and is an assistant professor of accounting and management control. His research interests include financial accounting, operations management, bankruptcy, international financial regulation standards (IFRS), and operational performance. Capkun holds an MS in banking and finance as well as a PhD from the University of Lausanne. April-May 2009 • research@hec V http://www.hec.edu/Faculty/Professors-alphabetical-list/(professor)/Capkun

Table of Contents for the Digital Edition of research@hec - Issue #8

Cover & Contents
Research Update: Financial Crisis
The Upside of Ambivalence
Inventory Management and Financial Performance
Sending Signals: the Meaning of Equity vs. Cash

research@hec - Issue #8