Interrelationships in Inventory Turnover Performance Between Supplier and Customer Firms

Using inventory turnover to measure the efficiency of corporate inventory management, we perform econometric analyses to verify whether the inventory efficiency of a firm's supply chain partners is a statistically significant driver of the firm's own inventory efficiency. We test two mutually exclusive hypotheses. First, suppliers hold inventory on behalf of customers, effectively displacing inventory up the supply chain and resulting in a negative correlation between supplier and customer inventory turnover. Alternatively, inventory efficiency is integrated along the supply chain, resulting in a positive correlation between supplier and customer inventory turnover. Our bivariate and multivariate analyses of both firm- and industry-level data support the “integration” hypothesis of higher inventory efficiency along the supply chain. Our findings highlight the importance of expanding the research and practice of working capital management beyond the firm-level.