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Disaggregate and aggregate inventory to sales ratios over time: the case of German corporations 1993–2005

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Logistics Research

Abstract

Although inventory reduction has been a major topic in production and operations management research for many years, there is a lack of empirically confirmed answers for questions such as: Have inventories in fully industrialized economies such as Germany decreased, overall, during the past decades? To the extent, inventory reductions were successfully realized, in which industries did they occur? Are there differences in inventory reduction achievements between raw materials, work-in-process, or finished goods? Are there measurable effects of inventory reductions upon the financial performance? To the best of our knowledge, this empirical study is the first one to investigate long-term inventory development on a firm as well as on industry level in a major European economy. It is based on data from German corporations and provides answers to the research questions stated above. The study’s findings indicate that total inventory to sales ratio decreased in a statistically significant extent in four out of six industry sectors during the time frame investigated. Further results suggest that the overall impact of inventory reductions to the financial performance of companies is only of a small degree.

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Notes

  1. For some applications, the inventory to sales ratio is multiplied by 12 months or 365 days providing a measure of inventory coverage for a given value of sales. A further advantage of the inventory to sales ratio is that it corrects for sector size. Finally, the analysis is only to a minor degree affected by changes in price levels provided that prices of outputs vary according to the prices of inputs.

  2. Hence, there is a deviation from total inventories reported in the balance sheets, which may also contain payments in advance to suppliers, for example.

  3. In order to save space, the intercept parameter estimates obtained are not reported. Only the trend coefficients (slope), together with t-statistics (P value) and coefficients of determination (R2) are reported.

  4. Six cases are rejections due to a trend coefficient of zero. That is, because some firms do not carry work-in-process inventories (e.g., soft drinks or wearing apparel), whereas in the chemical industry work-in-process and finished goods inventories are usually combined into one balance sheet item due to production conditions.

  5. Therefore, we conducted an exhaustive search using “WISO”, the largest German language database for business and economics research articles, and LexisNexis for finding German press articles (newspapers, periodicals, and trade publications). We constrained our search to “JIT”. The first German article on JIT accounted for in the WISO database was published in 1982. A first peak in the distribution can be seen around 1989 with a significant decline until 2007. In contrast, the distribution of press articles according to the LexisNexis database starts with the early 1990s and reached a local maximum in 1999. After a short decline, the number of press articles on JIT took off again until reaching their all time high in 2006.

  6. Most likely affected were firms such as Dürr, Koenig and Bauer, KUKA, Linde MAN, Siemens, and Triumph Adler. Therefore, their WP inventory to sales performance should be interpreted carefully.

  7. Furthermore, we found no significant link between the size of a firm (e.g., measured in sales) and its inventory performance.

  8. To demonstrate the potential extent of this cannibalization effect, we take a closer look at the ROI from 1994 of Sektkellerei Schloss Wachenheim AG: in this particular year, the firm has an ROI of −90.77%. Because the total inventories represent 62.89% of the total capital employed the results of the sensitivity analysis have such a deep impact that all positive effects of the remaining 12 years are eaten up. As a result, there is no recognizable increase in the mean ROI even if total inventory would be reduced by 50%. If we would exclude this specific year, a mean ROI of 15.40% could be achieved and the sensitivity analysis in the case of 50% reduction of total inventories would lift the mean ROI up to 18.87%. In this specific case, the effect can reduced to a minimum using the median.

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Authors and Affiliations

  1. Chair for Controlling and Logistics, Institute for Business Administration, University of Regensburg, Regensburg, Germany

    Robert Obermaier & Andreas Donhauser

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  1. Robert Obermaier
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  2. Andreas Donhauser
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Correspondence to Robert Obermaier.

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Obermaier, R., Donhauser, A. Disaggregate and aggregate inventory to sales ratios over time: the case of German corporations 1993–2005. Logist. Res. 1, 95–111 (2009). https://doi.org/10.1007/s12159-009-0014-9

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