Inventory types and their effects on sales

Inventory's primary role is to buffer against uncertainty. That is, the firm holds inventory to cope with the market demand uncertainty. There is another rather negative aspect of inventory: an excessive inventory reduces firm's responsiveness to the changing market and thus has an adverse effect on the sales. To study whether the inventory's position in the supply chain affects the firm's sales differently, we look into three types of inventory separately, i.e., raw material, work-in-process, and finished goods inventory. We analyse the panel data, which consist of 4,624 firm-year observations for 272 manufacturing firms in twenty-one different industries listed in the Korean stock market indices from 1996 to 2012, and conclude as follows. For each inventory type, there is a positive relationship between current inventory and current sales. On the contrary, controlling the current inventory, the analysis shows the relationship between previous year's inventory and current sales is negative. By showing that the relationship between inventory and sales is valid for each of the three different types of inventory, we are making a contribution to the literature, where most studies focused on the role of finished goods inventory in enhancing the firm's performance.