Does inventory management improve profitability? Empirical evidence from Polish manufacturing industries

Abstract

Purpose: The main purpose of this article is to investigate the relationship between inventory management and industrial processing companies' financial performance. In analyzing these relationships, the study took account of total inventories (INV) and their components, i.e., materials and raw materials (RMI), intermediates and work-in-progress (WIP), finished products (FGI), and commodities (GI). Approach/Methodology/Design: Descriptive statistics and dynamic panel regression were used in analyzing the causative links between the efficiency of inventory management and profitability. The analysis was carried out on a 2013–2019 database for the Polish industrial processing sector, taking into account the size classes of enterprises. Findings: The article proves the existence of statistically significant relationships between the efficiency of total inventories and inventory components (except for finished products), on one side, and business profitability, on the other. The estimated panel regression parameters showed that the days in inventory ratios for intermediates and work-in-progress (WIPC) and raw and other materials (RMI) have the strongest correlation with profitability. Increasing the inventory days for these components had the strongest and negative impact on the return on total assets in the population surveyed and in enterprise size classes identified in this study. Practical implications: The study provides evidence for financial benefits derived from inventory performance. Also, it indicates which inventory components have the greatest impact on financial results. Originality/value: The article extends knowledge on causative links between the management of inventories and inventory components and enterprises' financial performance. It also analyzes the results of inventory management by industrial processing sub-sector and by enterprise size. The results confirm that it is advisable to adjust the volume and mix of inventories because rational inventory management practices are also a factor that empowers industrial company owners to add more value.