Spread Too Thin: The Impact of Lean Inventories

Abstract

Widespread adoption of just-in-time (JIT) production has reduced inventory holdings. This paper finds that JIT creates a trade-off between firm profitability and vulnerability to large shocks. Empirically, JIT adopters experience higher sales and less volatility while also exhibiting heightened cyclicality and sensitivity to natural disasters. I explain these facts in a structurally estimated general equilibrium model where firms can adopt JIT. Relative to a no-JIT economy, the estimated model implies a 1.3% increase in firm value. At the same time, an unanticipated shock results in a roughly 15% deeper output contraction. This occurs because firms "stock out" or hoard materials.