Determinants of Inventory Trends in the Indian Automotive Industry: An Empirical Study

Inventory Management has emerged as one of the important tools to improve operational efficiency over the last 30-40 years across the globe. Japanese companies such as Toyota pioneered lean manufacturing, which emphasizes on the need to maintain low inventory levels across the supply chain through practices like JIT, Kanban and vendor managed inventory etc. Anecdotal evidence suggests that, inventory levels in general have been falling in the Indian manufacturing industries too in the recent past. The Japanese influence on the Indian manufacturing industry began with the entry of Suzuki into the Indian automobile industry in mid eighties. Since then, the principles of lean manufacturing have permeated across many industries, especially the automotive sector in India. However, there is scant empirical research in the literature that documents the inventory trends and the determining factors in India. The current study aims at filling this gap through a comprehensive inventory trend analysis in the Indian automotive industry during the 14 year period 1992-2005 with an objective to determine the inventory trends and identify the influencing factors. We use advanced econometric models to study the impact of various factors, such as the firm’s cluster, tier, export and import intensity on inventory levels. The study finds that average inventory has been steadily declining, with all three inventory components, viz., raw material, work-inprocess and finished goods inventory contributing to this decline. The results suggest that the efficient working capital management and the quality improvement efforts of Tier 1 firms have been one of the major contributions to the decline in average inventory levels in the Indian auto industry.