Have US manufacturing inventories really decreased? An empirical study

Numerous normative models have been developed to determine optimal inventory levels, and several articles and case studies have been written about the concerted efforts and practices adopted by manufacturing firms in the United States to reduce inventories. But little is known about whether inventories have indeed decreased in U.S. manufacturing and whether such a decrease has been restricted to a few well-publicized firms or is true at an industry level. Using data published by the U.S. Census Bureau, the authors study trends in materials, work-in-process, and finished-goods inventory ratios during the period 1961 to 1994 in 20 manufacturing industry sectors and the total U.S. manufacturing sector to determine whether a significant decrease was seen in these ratios. Further, since a great deal of momentum for inventory reduction began in the early 1980s, the authors investigate whether greater improvement was seen in the post-1980 period as compared with the pre-1980 period. We find that material and work-in-process inventories did decrease in a majority of the two-digit industry sectors from 1961 to 1994 and showed greater improvement in about half the sectors in the post-1980 period relative to the pre-1980 period. Finished-goods inventories did decrease in some industry sectors and increase in a few others but did not show a significant trend in more than half the sectors. Total manufacturing inventory ratios decreased from 1961 to 1994 at all three stages – materials, work-in-process, and finished goods. However, total manufacturing inventory ratios did not improve at a higher rate during the post-1980 period as compared with the pre-1980 period in any of the three stages. Overall, the analysis provides an encouraging but somewhat mixed picture about the results of U.S. manufacturing inventory-reduction efforts.