Zero inventory and firm performance: a management paradigm revisited

According to the ‘zero inventory’ paradigm, inventory reflects waste and should be eliminated in order for performance to rise. In this study, we investigate the effect of inventory holding on firm performance, analysing 3057 firm years of data. Interpreting performance as a function of inventory, results show that firms with the lowest inventory have the worst performance (and vice versa). When understanding inventory as a function of performance, results indicate that low-performing firms carry the least inventory, whereas high-performing firms have the highest stocks. Besides questions of causality, our results do not support a paradigm which suggests that firms should move toward zero inventory.