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
