Inventory agility upon demand shocks: Empirical evidence from the financial crisis

Abstract

The objective of this paper is to identify antecedents of inventory agility (i.e., the capability to quickly adapt inventories to changes in demand) upon demand shocks based on the awareness‐motivation‐capability (AMC) framework and to explore the link between inventory agility and financial performance. We introduce an empirical measure of inventory agility based on the deviation of relative inventories (i.e., inventory days) from their forecasted values. We hypothesize that firms with higher awareness, motivation, and capabilities are associated with higher inventory agility in the presence of demand shocks. We define two empirical measures for each of the three dimensions of the AMC framework in the context of inventory agility: awareness (i.e., market orientation and technology orientation), motivation (i.e., gross margin and liquidity), and capabilities (i.e., inventory management capability and resource availability). In addition, we incorporate the constraining factor model (CFM) into the AMC framework, thus allowing for complementarity among the different measures. In this view, the influence of each of the measures on inventory agility varies according to which of the measures is the constraining factor for a given firm. The 2008 financial crisis may have tested firms' inventory agility more than any other crisis since the Great Depression, as an unprecedented collapse of demand coincided with a reduction in credit availability. Therefore, for our analysis, we use firm‐level empirical data from 1263 public U.S. manufacturing firms for the 2005–2011 period. We find that firms' motivation and capabilities are key factors associated with inventory agility. Through the CFM, we show that identifying the constraining factors leads to a more refined understanding of the moderating effects of the antecedents of inventory agility. In a separate analysis, we find that inventory agility is positively associated with a number of financial performance metrics during crisis periods. We distinguish between inventory underages and overages and find that, during the crisis, they are both associated with lower financial performance. Furthermore, we find evidence that higher underages (overages) magnify the effect of overages (underages). Among other managerial insights, our findings suggest that the use of inventory reductions as a quick way to increase liquidity must be gauged against their potential impact on other aspects of financial performance.

Competitive sustainability and stakeholder engagement: Exploring awareness, motivation, and capability

“…The AMC model is a compilation of decades worth of competitive dynamics research. Simply stated, competitiveness takes place when a firm is aware of an action, is motivated to act, and has the capability to respond (Chen & Miller, 2012; Mitsuhashi & Alcantara, 2019; Udenio et al, 2018). Typically resulting in competition, competitiveness is defined as the degree to which a firm can create a defendable position over its rivals (McGinnis & Vallopra, 1999; Porter, 1985).…”

“…In previous literature, the operationalization of the three elements presented in the AMC model has differed considerably. This is due, in part, to the examination of differing organizational competitive elements including but not limited to innovation and product strategy (i.e., Chen, Tribbitt, Yang, & Li, 2017), inventory performance (i.e., Udenio et al, 2018), engagement with environmental alliances (Stadtler & Lin, 2017), and employee compliance (i.e., Chen, Chen, & Wu, 2018). The cross‐disciplinary nature of the model encourages diversity in the conceptualization of the constructs.…”

“…Awareness refers to organizational alertness of the market as well as the signals it receives (Lamberg, Tikkanen, Nokelainen, & Suur‐Inkeroinen, 2009; Levinthal & Rerup, 2006; Udenio et al, 2018). Awareness impacts the extent to which a firm can foresee the consequences of its actions as well as its rivals' action (Chen, 1996).…”

“…There are various ways that affect how firms sense market developments and are aware of demand changes, thereby prompting motivation toward competitiveness. Two common mechanisms are technology and market orientation (Udenio et al, 2018). Both mechanisms are supported by previous literature as a form of awareness as it relates to organizational alertness of signals (Grawe, Chen, & Daugherty, 2009; Grinstein, 2008; Hamel & Prahalad, 1991; Kohli & Jaworski, 1990; Narver & Slater, 1990).…”

“…What is the impact of not only a focal firms' but also major supplier and customer firms', motivation, capability, and awareness on the focal firm's sustainability competitiveness?To answer this question, we follow the work of Udenio et al (2018), who provided operational dimensional measurements of the AMC model through external data and a constraining factor model (CFM). The findings reflect several key insights into both theory and practice.…”