The relationship between lean manufacturing, environmental damage, and firm performance

Abstract

Prior research has found mixed results of leanness, with a counter idea being that slack allows flexibility to improve firm financial performance. We first seek to confirm empirically that leanness in manufacturing does in fact contribute to both lower environmental damage and to improve firm financial performance. With increased awareness of global environmental issues, we incorporate environmental damage measures from Trucost to assess how they may affect firm performance and are affected by leanness. The measures of leanness are calculated based on publically available financial data from Compustat. Based on a final sample of 406 manufacturing firms representing 3594 firm-year observations from 2002 to 2013, the proposed relationships of leanness to firm outcomes and environmental damaged are investigated. A key finding of this study is that a firm should aim its lean efforts to reducing environmental damage, which in turn has more of an effect on improving financial performance than other lean initiatives.