Operations Payoff

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Is Inventory Growth a Good Measure of GDP?

I find it interesting that the government uses inventory growth as a sign the economy is getting better while Lean efforts consider it a waste. GDP (gross domestic product) is a measure of economic growth that uses consumption, investment, government purchases and net exports to indicate whether the economy is expanding. Investment includes growth in wholesale inventories. So in other words, if companies are building up stock, it’s considered a good thing in economic forecasting.

In reading the government guidelines for the numbers, it appears they think that increases in inventory indicate an increase in demand and increased “economic activity.” So, if you convert $10,000 in raw materials to $20,000 in finished goods (including the value added), it helps the economy. However, if those goods are never sold, it doesn’t show up. Just the conversion is tracked. The later sale of that inventory is only reported at the level of profit or value added in the sales process. Companies may increase inventory in anticipation of future sales, but if those sales don’t occur, the companies sit on inventory that has already been counted in GDP.

Perhaps the government should recognize that many companies are getting lean and are trying to hold down inventories as a means to free up cash, reduce costs and improving profitability. To me, the real measure of GDP is the consumption of goods and services by the final customer. If they don’t buy, the economy is not healthy.

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