Spread Too Thin: The Impact of Lean Inventories


Widespread adoption of just-in-time (JIT) production, a strategy that minimizes time between orders, has reduced inventory holdings. This paper finds that JIT creates a tradeoff between firm profitability and vulnerability to large unexpected shocks. Empirically, JIT adopters experience higher sales and less volatility while also exhibiting greater cyclicality and heightened sensitivity to natural disasters. I explain these facts in a structurally estimated general equilibrium model where heterogeneous 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 some firms ‘‘stock out’’ while others hoard materials.

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