The Impact of Contract Manufacturing on Inventory Performance: An Examination of U.S. Manufacturing Industries

  1. Liang-Chieh (Victor) Cheng1,
  2. David E. Cantor2,*,
  3. Martin Dresner3,
  4. Curtis M. Grimm4

Article first published online: 20 SEP 2012

DOI: 10.1111/j.1540-5915.2012.00373.x

Issue

Decision Sciences

Decision Sciences

Volume 43, Issue 5, pages 889–928, October 2012

Additional Information

How to Cite

Cheng, L.-C., Cantor, D. E., Dresner, M. and Grimm, C. M. (2012), The Impact of Contract Manufacturing on Inventory Performance: An Examination of U.S. Manufacturing Industries. Decision Sciences, 43: 889–928. doi: 10.1111/j.1540-5915.2012.00373.x

Author Information

  1. 1

    College of Technology, 230 Technology Building, University of Houston, Houston, TX 77204, e-mail: lcheng6@central.uh.edu

  2. 2

    College of Business, 2340 Gerdin Business Building, Iowa State University, Ames, IA 50011, e-mail: dcantor@iastate.edu

  3. 3

    Robert H. Smith School of Business, 3433 Van Munching Hall, University of Maryland, College Park, MD 20742-1815, e-mail: mdresner@rhsmith.umd.edu

  4. 4

    Robert H. Smith School of Business, 3437 Van Munching Hall, University of Maryland, College Park, MD 20742-1815, e-mail: cgrimm@rhsmith.umd.edu

* Corresponding author.

Publication History

  1. Issue published online: 20 SEP 2012
  2. Article first published online: 20 SEP 2012
  3. [Submitted: May 10, 2011. Revised: November 9, 2011; March 20, 2012; March 30, 2012. Accepted: April 15, 2012.]

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Keywords:

  • Contract Manufacturing;
  • Inventory Performance;
  • Outsourcing

ABSTRACT

In recent years, a growing number of original equipment manufacturers (OEMs) have transferred their manufacturing processes to specialized firms, known as contract manufacturers. In so doing, contract manufacturers can reduce an OEM's production costs and provide OEMs with flexibility in the production process. We examine another potential reason for the use of contract manufacturing—the potential for efficiency gains from inventory reductions. Employing econometric models and data representing manufacturing industries in the USA, we provide statistical evidence that contract manufacturing can lead to lower industry-wide inventory levels, after controlling for other relevant factors. Key managerial implications are derived from the analysis.

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