An Empirical Test Of The View Of Inventory As A Liability In Explaining Financial Distress: A Comment

Abstract

In a recent article appearing in this journal, Foster, Sullivan, and Ward (FSW) examined the assertion of the theory of constraints (TOC) and just in time that holding inventory is harmful or a liability to a firms operations. In this comment we demonstrate that inventory is not inherently a liability but rather is a symptom of more fundamental problems within many firms operations. Therefore, addressing these problems rather than inventory per se is the primary means of relieving a firms financial distress. In this comment we also examine the FSW assertion that more detailed inventory information should be reported to enable financial statement users to construct the performance measures of the TOC. The performance metrics of the TOC are short-term measures of economic performance and represent a small subset of the information used to guide managerial decisions. Consequently, external financial statement users who have a longer decision horizon and who do not have access to the firm specific information with which the TOC is used would derive limited benefit from TOC performance measures.