Examining the Link between Retailer Inventory Leanness and Operational Efficiency: Moderating Roles of Firm Size and Demand Uncertainty

Abstract

R etail inventories have been consistently dropping, relative to sales, since the 1990s. Whether these lean inventory developments translate to better retailer operational performance is still an open question. We empirically examine associations between inventory leanness and operational efficiency for a sample of public US retailers from 2000 to 2013. Via a stochastic frontier analysis that accounts for retailer heterogeneity and time parameters, we find support for the hypothesis that operational efficiency has an inverted U-shape relationship with inventory leanness, suggesting an optimal inventory leanness level beyond which retailer operational efficiency degrades. This relationship, however, is heavily moderated by firm size and demand uncertainty. The former reflects a retailer's abilities to exploit economies of scale and scope, whereas the latter reflects the unpredictability in a firm's operating environment. Our evidence suggests that when increasing inventory leanness, small retailers exhibit efficiency degradation, whereas larger retailers are likely to exhibit efficiency improvement, with diminishing returns. We also find that under high demand uncertainty, being less lean is associated with higher operational efficiency, regardless of firm size. The findings show that depending on firm size and demand uncertainty, retail managers should take special care when pursuing inventory leanness. As part of post hoc robustness tests, we assess how different retail categories vary in their operational efficiency scores and conduct interviews with retail executives who further ground our econometric investigation and point to more nuanced moderators for future studies. We conclude by discussing the implications of our industry model estimation for managers and researchers.

Examining the balance between efficiency and resilience in closed-loop supply chains

“…Kannan 1998 ), leanness (e.g. Chuang et al 2019 ), and responsiveness (e.g. Yılmaz and Pardalos 2017 ; Yılmaz 2020 ).…”

Linking industrial agglomeration and manufacturers inventory performance: the moderating role of firm size and enterprise status in the supply chain

“…Such positive externalities within and across clusters are related to the firm's own operations management and other firms in the supply chain (Greenaway and Kneller, 2008;Howell et al, 2016;Zhu et al, 2019). Nevertheless, other negative agglomeration externalities (e.g., pressures on the cost of local inputs) and firm heterogeneity factors (e.g., firm size) are likely to magnify a real threat that excessive inventory reduction limits the flexibility for optimal production lot size, causing different types of chaos and disruptions (Bendig et al, 2017;Chuang et al, 2019) [2]. In consequence, inventory management should fully consider the context of industrial agglomeration.…”

“…In this case, industrial agglomeration can reinforce the localized production linkage along the supply chain, and promote the knowledge sharing and entrepreneurial opportunities (Massimino et al, 2017;Audretsch et al, 2019). Such positive agglomeration externalities integrate with the supply chain to coordinate the whole production and distribution systems, thus improving inventory performance within and across clusters (Ning et al, 2016;Chuang et al, 2019). Furthermore, from the theories of supply chain management, a "multiplier effect" is expected as changes in the inventory level of firms within an industry will presumably influence regional dynamics (Wagner, 2003;Cai and Yang, 2014), which implies the possible spatial dependence [4].…”

“…Driven by the economies of scale, it is not surprising for large firms to reduce the relative levels of inventory. The operations management and industrial economics literature has long focused on the direct effect of firm size on behavior, structure and performance (e.g., inventory leanness), whereas the indirect effect or the moderating role on the linkage between external factors and operational efficiency is not well understood (Knoben et al, 2016;Chuang et al, 2019). On the other hand, as a new hotspot in the role theory and the strategic management studies, enterprise status determines the relative position among firms (e.g., dominance and submission) along the supply chain, which has profound impact on the inter-firm production processes and outcomes (Castellucci and Ertug, 2010;Shen et al, 2014).…”

Mathematical modeling of optimal product supply strategies for manufacturer-to-group customers based on semi-real demand patterns

“…In the relevant literature on the subject, Monden et al 2 stated revenue-sharing contracts in shopping centers based on retailers’ demand uncertainty. Chuang et al 3 stated the relationship between retailer inventory leanness and operational efficiency under uncertain demand. Alvarado-Vargas and Kelley 4 stated the bullwhip effect of regional and global supply chains under uncertain demand.…”