Economic Impact of Inventory Decisions on Firm Performance: A Comprehensive Review of Theory, Empirical Evidence, and Future

Abstract

Inventory decisions lie at the intersection of operational management and economic performance. Inventory levels influence cost structures, working capital requirements, service quality, and ultimately a firm’s competitiveness and profitability. While traditional operational research focuses on optimizing inventory from a cost standpoint, economic analysis emphasizes the firm level implications of inventory policies on revenue, investment, and market positioning. This review synthesizes the interdisciplinary literature on the economic impact of inventory decisions on firm performance. It examines theoretical frameworks linking inventory to economic outcomes, empirical studies across industries and countries, macro level perspectives on inventory dynamics, and the role of market structure, demand uncertainty, and financial constraints. The review identifies key mechanisms through which inventory decisions affect economic metrics, highlights methodological approaches used in the literature, and discusses policy and managerial implications. Finally, it proposes a research agenda for future studies that integrate economic theory with emerging data driven inventory practices, sustainability objectives, and global supply chain risk.