Note. This table presents: G2 -probability ratio; df - degrees of freedom; Sig - observed significancelevel; coefficients estimating the linear connection (association) of theranges of each factor with FES, and standard errors (SE).
The evolution of theutilization of finished stock in Russian industry
In the year 2001 the behavior of one of themost important indices characterizing the situation in industry - the finishedstock index - underwent changes that were probably of a decisive nature. Forseveral years previously a sufficiently clear interdependence could be traced:the growing rates of the decrease in the effective demand resulted in thegrowth of surplus finished stock. When this decrease slowed down andlater the sales began to grow the enterprises changed their estimates toopposite values (see Fig. 23). At the same time the “peaks” of surplus finishedstock was becoming lower and lower over time. If the first one registered inSeptember 1992 was +55%, the second (January-February 1994) became +47%, thethird (January 1996) - only +28%, the forth (July 1998), finally, went down tothe negligible +6%. As for the “downfalls” of effective demand, theirdifferences were much smaller. This has made it possible to assume that theRussian enterprises began to control the state of their finished stock and toprevent extreme overstocking from reaching the extreme degree that had beentypical of the first half of the 1990s.
The August 1998 default has cardinallychanged the situation in Russian industry as a whole, and in particular thatregarding finished stock. The basis for this was provided by the growth of theeffective demand for the products of domestic enterprises. Virtually in a fewmonths the balance of changes in the sales for money rose from -47% to +9%. Asa result, industrial enterprises got rid of their surplus finished stocks andby mid-1999 had the highest ever shortage of stock reserves (-24%). Thissituation persisted, despite the fluctuations in effective demand growth rates,until the middle of 2000. Then the enterprises began gradually toincrease their stocks and brought them in 2001 to a sufficient surplus level.This level was higher than the surplus of 1998 when sales of productswere declining very rapidly. In 2001 the effective demand, on the contrary, wasgrowing though not so intensively and persistently as in the two precedingyears. This has provided the grounds for the second assumption: in 2001 theRussian industrial enterprises began to utilize their finished stocks in thesame way as is typical of the manufacturers in the countries with stable marketeconomies, i.e. as a buffer for leveling the leaps in demand and/or supply. Inother words, domestic enterprises have acquired faith in the stability ofnormal (i.e. monetary, effective) growth of the domestic economy. In order tostudy in detail the behavior of Russian industrial enterprises as far as theutilization of their finished stocks is concerned, the models of stockformation developed by the state-of-the art economic theory can be applied.
In Western economics, the finished stocksin the warehouses of industrial enterprises are analyzed from the pointof view of economic cycles. By the present time two theoretical approaches tothe explanation of the movement of finished stocks have emerged. The proponentsof the one believe that the stock cycle is defined by demand shocks, theproponents of the other - by supply shocks7. Shocks are understood assudden (unpredicted) changes in demand and supply.
The demand model of stock movement wasfirst suggested by Metzler8 who assumed that the required(desirable) finished stock level is proportional to the expected salesvolume. This means that companies utilize (keep) finished stocks in orderto lower the probability of a situation when they might be unable to meet asuddenly increased demand. Then the unpredictable though positive demand shockis compensated at once by decreasing finished stock volumes. This in its turnincreases the probability of exhausting finished stocks and makes theenterprises at the next step (the step of decision-making) to increaseproduction in order to restore their stocks. In this case the changes of demandand stock are heterodromal. Stocks are used as a buffer for demand. As a resulta finished stock cycle is formed: the investments in stock are negative at thefirst stage and are positive at the second.
The second model places an emphasis onexpenses. It states that a positive but temporary shock of the productionfunction results in reducing expenses and induces companies to increase theiroutput while the expenditures are low. The additional output accumulates asfinished stock and is sold later when output decreases due to temporarilyincreasing expenses. The company’s sales volume in this case does not change.
An analysis of the stock formation modelsuggested by Flood и Lowe9 had led to the followingconclusions. Firstly, if an economic cycle is regulated by demand shocks andwarehouse stocks act as a buffer there must exist a negative correlationbetween the changes of demand and the changes of stock. Secondly, the influenceof the stock cycle on the economic cycle depends upon the stability(duration, steadiness) of the demand shock, on the company’s desire to smooth the dynamicsof its production, as well as on warehouse costs. If marginal costs areconstant and output smoothing does not matter, the warehouse stock cycleenhances the economic cycle. If, on the contrary, marginal costs grow rapidlywith the rise in production, the stock cycle, most probably, will smoothdown the amplitude of the economic cycle.
In the study by Carlson andDunkelberg10 a wider range of hypotheses is tested as defined by the openingsentences: “The theoretical speculations as to how companies adjust theirstocks, prices and employment in response to the changes in market conditionsallow a large number of predictions. What happens in reality is subject toempirical studies.” The authors on the basis of quarterly surveys involvingsmall-scale enterprises in the USA and conducted by the National Federation ofIndependent Businesses have followed the changes of costs and demand for thenecessary (desirable) volume of finished stock. The growth of current demandmust produce opposite changes of the desirable finished stock volume becausecompanies satisfy some of the demand by the available stock. Similarconsequences must be produced also by the current growth of costs. But if wetake the next period of time the connection must be positive. If theenterprises foresee a growth in demand in the future they must designate higher“target” stock volume by the end of a current period and the beginning of thenext one wherein the sales growth in question is expected. In this case theywill possess higher finished stock volumes by the time when the sales or costsgrowth is expected.
Prices can also depend on planned finishedstock changes. In addition to the prices growing in response to rising demandand costs, their growth might also be contributed by the desire to increasewarehouse stocks because more stock can be accumulated by way of loweringcurrent sales due to increased prices. The dependence of output on demand issimilar: with growing demand, output also grows. As for the growing costs,they, according to the traditional theory, must result in decreasing output.And the planned increase of finished stock must stimulate an output growth.
The survey questionnaire of the IETcontains the number of questions sufficient for studying the behavior offinished stock and the factor it is influenced by. Firstly, since September1992 monthly monitoring of the current estimates of finished stock has beenunder way. As answers to the question “How do you estimate the current physicalvolume of finished stock” the enterprises are asked to choose one of the threefollowing variants: “above the norm”, “normal”, “below the norm”. Secondly,since January 1995 the quarterly questionnaire has been offering the questionabout the actual changes of the physical finished stock volumes, and sinceJanuary 1998 – thequestion about the expected changes. The possible answers are: “growth”, “nochanges”, “lowering”. Thirdly, the actual output changes have been followed ona monthly basis since April 1993, the expected changes – since September 1992. The actualeffective demand changes have been monitored on a quarterly basis since April1993, on a monthly basis since July 1995. The expected changes of the sales formoney have been registered monthly since October 1995. In August 1998, monthlymonitoring of the actual and forecasted changes of barter demand was started,in February 2000 – ofother non-monetary types of demand. The question regarding the actual changesof prices was introduced in the questionnaire in October 1994, that about theexpected changes – inSeptember 1992.
Insofar as the behavior (management) offinished stock in Russian industry has not been studied, and besides, thisindex itself does not enjoy the popularity it deserves either with the analystsor with the enterprises11, we believe that it wouldbe feasible to consider the widest possible range of hypotheses.
We are going to begin this analysis withstudying the influence of current changes in demand and costs as well asexpected (later) changes in demand and costs on the actual changes of finishedstock. A loglinear model that included linear interactions of factors with theactual changes in the finished stock volumes had on the whole a good fittingquality (see Table 7). The observed significance level in all cases (except forone) was above the 5% threshold.
Characteristics of the influence of demandand costs on the changes of finished stock volumes
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