It’s no secret that one of the main reasons Japanese automakers have triumphed over their American competition is productivity superiority. In other words, the average worker at a Japanese automaker can make more cars in a year in the same amount of time as a worker at an American automaker. When combined with the much publicized labour cost differences between the firms, a huge advantage emerges for the likes of Toyota and Honda.

What is the source of this productivity advantage? According to a paper by UCLA professors Lieberman and Demeester, a great source of the productivity advantage comes from forced reductions in work in progress inventory. When buffer inventories between manufacturing stations are kept high to ensure manufacturing disruptions are kept low, manufacturing inefficiencies are masked. With Just-In-Time inventory programs, historically implemented by Japanese companies to reduce inventory requirements because of high storage costs, firms are forced to improve manufacturing processes. The paper asserts that each 10% reduction in work in progress inventory results in a 1% gain in productivity after one year. The full text of the paper is available here.

In a related post, we’ve discussed how to determine if a company is managing its inventories well. We also saw that GM and Ford were both value traps back in 2004.bMSEpBbC0mU