Lawrence A. Weiss

On the relationship between inventory and financial performance in manufacturing companies

Purpose – The purpose of this paper is to study the relationship between inventory performance, both total inventory (INV) and its discrete components (raw material (RMI), work‐in‐process (WIP), and finished goods (FGI)), and financial performance in manufacturing companies.Design/methodology/approach – Statistical analysis is applied to the financial information of US‐based manufacturing firms over the 26‐year period from 1980 to 2005.Findings – The paper finds a significant positive correlation between inventory performance (total as well as the discrete components of inventory) and measures of financial performance (at both the gross and operating levels) for firms in manufacturing industries. The correlation between the performance of discrete types of inventory and financial performance varies significantly across inventory types. RMI performance has the highest correlation with all financial performance measures. Between WIP inventory and FGI performance, the former is more highly correlated with gr...

The Impact of Incorporating the Cost of Errors into Bankruptcy Prediction Models

The current methodology to evaluate default and bankruptcy prediction models is to determine their precision - the percentage of firms predicted correctly. In this study we develop a framework for incorporating Type I (the amount lost from lending to a firm which goes bankrupt) and Type II (the opportunity cost of not lending to a firm which does not go bankrupt) error costs into the evaluation of prediction models. We then test this new framework by comparing the prediction model with a naive model of lending to all firms in the population based on the net profit each would generate. Our results indicate that prediction models can outperform naive models or other models only under certain conditions. This supports our hypothesis that the usefulness of prediction models cannot be fully assessed independently of the costs of forecast errors.

The Impact of Acquisitions on Inventory Performance

Purpose - The purpose of this paper is to examine the relationship between acquisitions and inventory performance. Specifically, it analyzes the inventory performance (inventory level) of acquirers and their targets pre- and post-acquisition. Design/methodology/approach - Using several business databases, a sample of 270 horizontal acquisitions by US firms between 1996 and 2004 is subject to multivariate analysis. Various robustness tests are applied to validate the results. Findings - Three main results are found. First, the acquirer’s inventory performance is normally better than its target’s prior to the acquisition, consistent with acquirers taking over less efficient firms rather than cherry picking the more efficient ones. Second, inventory performance improves over time in the post-acquisition period in those cases where the acquirer is more efficient than the target. Third, inventory performance deteriorates over time in the post-acquisition period in those cases where the acquirer is less efficient than the target. The results are consistent with acquisitions being associated with both efficiency gains and efficiency losses due to (in)efficiency transfers from acquirers to targets. Practical implications - From the management point of view, the study delivers the strongest message to companies that have substantial inventories and for whom efficient inventory management is vital to overall performance. Managers who are unaware of the potential consequences of acquisitions on inventory performance destroy value. Originality/value - This research complements past research by showing that in spite of their synergetic potential, reducing inventory receives only limited attention in acquisitions.