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

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  • Howard Hao‐Chun Chuang
  • Rogelio Oliva
  • Gregory R. Heim

Abstract

Retail 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.

Suggested Citation

  • Howard Hao‐Chun Chuang & Rogelio Oliva & Gregory R. Heim, 2019. "Examining the Link between Retailer Inventory Leanness and Operational Efficiency: Moderating Roles of Firm Size and Demand Uncertainty," Production and Operations Management, Production and Operations Management Society, vol. 28(9), pages 2338-2364, September.
  • Handle: RePEc:bla:popmgt:v:28:y:2019:i:9:p:2338-2364
    DOI: 10.1111/poms.13055
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    Cited by:

    1. María Arquer & Borja Ponte & Raúl Pino, 2022. "Examining the balance between efficiency and resilience in closed-loop supply chains," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 30(4), pages 1307-1336, December.
    2. Liu, Fuzhen & He, Chaocheng & Lai, Kee-hung, 2024. "Market reaction to responsible production practices adoption: The role of firm size and financial slack," International Journal of Production Economics, Elsevier, vol. 272(C).
    3. Tsionas, Mike G. & Patel, Pankaj C., 2023. "Accounting for intra-industry technological heterogeneity in the measurement of operations efficiency," International Journal of Production Economics, Elsevier, vol. 260(C).
    4. Rabinovich, Elliot & Chenarides, Lauren & Richards, Timothy J., 2024. "Inventory Competition and the Cost of a Stockout," 2024 Annual Meeting, July 28-30, New Orleans, LA 343649, Agricultural and Applied Economics Association.
    5. Liang, Jing & Yang, Shilei & Xia, Yu, 2023. "The role of financial slack on the relationship between demand uncertainty and operational efficiency," International Journal of Production Economics, Elsevier, vol. 262(C).
    6. Marshall Fisher & Ananth Raman, 2022. "Innovations in retail operations: Thirty years of lessons from Production and Operations Management," Production and Operations Management, Production and Operations Management Society, vol. 31(12), pages 4452-4461, December.
    7. Eroglu, Cuneyt & Hofer, Christian & Hofer, Adriana Rossiter & Hou, Young, 2023. "“Cultural inventories”: How dimensions of national culture moderate the effect of demand unpredictability on firm-level inventories," International Journal of Production Economics, Elsevier, vol. 264(C).
    8. L. M. Daphne Yiu & Hugo K. S. Lam & Andy C. L. Yeung & T. C. E. Cheng, 2020. "Enhancing the Financial Returns of R&D Investments through Operations Management," Production and Operations Management, Production and Operations Management Society, vol. 29(7), pages 1658-1678, July.
    9. Anindita Chakravarty, 2023. "Review of Marketing Relevant Real Activity Manipulation," Customer Needs and Solutions, Springer;Institute for Sustainable Innovation and Growth (iSIG), vol. 10(1), pages 1-16, December.
    10. Ku-Hsieh Chen & Pei-Hwa Chen & Julie Ann Elston & Yingchao Zhang, 2023. "Are family firms more efficient? Revisiting the U-shaped curve of scale and efficiency," Small Business Economics, Springer, vol. 61(3), pages 983-1008, October.

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