The effect of environmental dynamism on returns to inventory leanness

Abstract

a b s t r a c tThis paper adds to the empirical inventory management literature by examining the moderating effects of environmental dynamism on the relationship between inventory leanness and financial performance. While the financial implications of inventory management practices have been extensively studied in the literature, it is clear that lean inventory strategies may not have the same payoff for all firms in all industries. Grounded in inventory theory, this study explores how firm characteristics and environmental dynamism-measured in terms of innovative intensity, demand uncertainty and competitive intensity-moderate the inventory leanness-performance link. We use hierarchical linear modeling to analyze a data set of 5749 firm-year observations from 123 U.S. manufacturing industries. In line with the hypotheses set forth, the results indicate that innovative intensity in an industry increases the effect of inventory leanness on firm performance while competitive intensity has the opposite effect. The hypothesis with respect to the moderating role of demand uncertainty is not supported. Another interesting and important finding is that inventory leanness accounts for nearly one third of the variation in firm performance after controlling for firm size and growth, thus underlining the importance of efficient and effective inventory management for overall firm success.

An Operational Metric or An Operational Capability? The Role of Growth in Inventory Efficiency Growth

“…Work in recent years has called increasingly for a greater focus on reducing inventory (Chen et al, 2005;Cooper and Maskell, 2008;Eroglu and Hofer, 2014;Hall, 1983), although others have shown that holding excess inventory is essential to buffer the firm against demand fluctuations . Evidence of declining inventory levels in recent decades indicates that while firms have reduced average inventory holdings, sustained improvements in inventory turnover improves firm performance.…”

“…Modi and Mishra (2011), however, found that inventory turnover had decreasing returns to firm performance. Eroglu and Hofer (2011) cautioned that inventory leanness has an inverted-U type relationship with performance; however, their recent work finds that nonlinear effects of inventory leanness are conditional on environmental conditions (Eroglu and Hofer, 2014). Although this body of work has focused on the effects of inventory in a cross-sectional or panel data setting, assessing the effects of inventory turnover over time indicates an important operational capability.…”

Testing Environmental Kuznets Curve Hypothesis at Firm Level in India

“…and could not find evidence of Environmental Kuznets Curve Hypothesis in China. Eroglu and Hofer (2014) investigated the U.S. manufacturing industries about the effect of environmental dynamism on the relationship between inventory leanness and financial performance. The innovative intensity, demand uncertainty and competitive intensity were used as proxy variables to measure the environmental dynamism of the firm.…”

“…Further, to find out the existence of EKC relationship between environmental and financial performance, the magnitude of regression coefficient was used (Al-Mulali, et al, 2015;Eroglu & Hofer, 2014;Ogundipe et al, 2014;Sagala et al, 2013;Brajer et al, 2011;Mythili and Mukherjee, 2011). For the parameters (b1, b2, and b3) of these models, homogeneity was assumed (Song et al, 2008).…”

“…It is very important to understand the nature and relationship between environmental and economic development, before adopting a policy (Coondoo & Dinda, 2002). In the last decades, the core theme of many researches is to examine the relations between the financial performance and environmental performance (Yang et al, 2015;Eroglu & Hofer, 2014;Tiwari et al, 2013). But the study examining the corporate environmental performance is very few.…”