The effect of inventory performance on product quality: The mediating effect of financial performance

The purpose of this paper is to empirically investigate the relationship among inventory performance, financial performance (FP) and product quality.

The empirical analysis is based on two-stage least squares analysis of detailed firm-transaction data from Chinese manufacturing export firms for the period between 2001 and 2013.

Results show that inventory performance has a positive impact on product quality while using inventory efficiency, inventory productivity and inventory leanness to measure inventory performance. Furthermore, the effect of inventory performance on product quality is found to be partially mediated by FP.

The research provides mangers evidence of the benefits of inventory performance as an antecedent of product quality. Managers without sufficient liquidity or cost advantage to get better FP can achieve product quality improvement through enhancing inventory management performance.

This study first empirically investigates the relationship between inventory performance and product quality, and examines the mediating effect of FP on this relationship.