The link between operational leanness and credit ratings

• Date: 01 May 2017
• Author: David Bendig,Malte Brettel,Steffen Strese
• Published date: 01 May 2017
• DOI: http://doi.org/10.1016/j.jom.2016.11.001

The link between operational leanness and credit ratings

David Bendig

*

, Steffen Strese, Malte Brettel

Innovation and Entrepreneurship Group (WIN), TIME Research Area, RWTH Aachen University, Kackertstraße 7, 52072 Aachen, Germany

article info

Article history:

Received 20 June 2015

Received in revised form

9 November 2016

Accepted 25 November 2016

Available online 15 February 2017

Handling Editor: Mikko Ketokivi

Keywords:

Lean manufacturing

Operational slack

Inventory management

Capital intensity

Credit ratings

Finance/operations interface

abstract

Although there is rich literature documenting the positive relationship between operational leanness

and financial performance, recent research indicates that the effects of leanness may be more complex

than is typically assumed. We explore the impact of two kinds of leanness, relative inventory leanness

and relative PPE leanness, on credit ratings. We thus use an alternative lens to explore the financial

implications of leanness. We analyze secondary U.S. data from 1985 to 2012, with 11,197 firm-year ob-

servations of manufacturing firms. Using panel data analysis, we show that inventory leanness is posi-

tively associated with credit ratings in a concave relationship. This is consistent with previous research

that has looked at the impact of relative inventory leanness on equity performance. Conversely, we find

that PPE leanness is negatively related with credit ratings in a concave relationshipdin contrast to prior

studies addressing the impact of PPE leanness on equity performance.

©2016 Elsevier B.V. All rights reserved.

1. Introduction

“Standard &Poor's Ratings Services today raised its issuer credit

ratings on Ford Motor Co. [

…

] We assume automakers competingin

the U.S. market will generally continue a disciplined approach to

production and inventory levels relative to sales, largely avoiding

excess inventories or sharply higher incentives.”

eStandard &Poor's, on Ford (2013).

“The enormous research and development and capital investment

needed to extend manufacturing process capabilities and capacity

[

…

] for next generation products represents a consistent call on

capital but also a significant barrier to entry.”

eMoody's, on Intel (2012).

These statements indicate that managers are not the only ones

who ponder operational leanness. Rating agencies incorporate in-

formation on the topic when formulating their opinion about a

firm's ability to satisfy its financial obligations. As the lean

manufacturing philosophy has become increasingly important both

in academia and in industry, leanness has become synonymous

with excellence (Chen et al., 2005; Eroglu and Hofer, 2011a). In

operations management research, however, two divergent views

have emerged on the relationship between a firm's leanness and its

performance, as Modi and Mishra (2011) summarize. On the one

hand, leanness may improve performance, since it implies lower

costs and superior operational capabilities that promote a firm's

competitive advantage. On the other hand, leanness may be

detrimental to performance, as it restricts flexibility, hampering a

firm's ability to respond to organizational changes and market

shifts.

Recent research indicates that operational leanness is a more

nuanced construct than was previously supposed. The first reason

for this is that the relationship between relative leanness and eq-

uity performance has been shown in several studies to be positive

and concave (Eroglu and Hofer, 2011a,b, 2014; Modi and Mishra,

2011). Financial performance initially increases with leanness, un-

til a certain turning point, beyond which the incremental effects of

leanness on performance become negative. It is likely that rating

analysts are aware of this turning point when evaluating a firm. A

second reason is that inventory and PPE leanness seem to relate

differently to financial performance, depending on whether per-

formance is measured from the perspective of credit or equity.

Anderson and Mansi (2009, p. 704) argue that “corporate bond-

holders differ significantly from equity holders,”since bondholders

*Corresponding author.

E-mail addresses: bendig@time.rwth-aachen.de (D. Bendig), strese@time.rwth-

aachen.de (S. Strese), brettel@time.rwth-aachen.de (M. Brettel).

Contents lists available at ScienceDirect

Journal of Operations Management

journal homepage: www.elsevier.com/locate/jom

http://dx.doi.org/10.1016/j.jom.2016.11.001

0272-6963/©2016 Elsevier B.V. All rights reserved.

Journal of Operations Management 52 (2017) 46e55