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

Production and Operations Management (Forthcoming)

58 Pages Posted: 23 May 2019

See all articles by Howard Hao-Chun Chuang

Howard Hao-Chun Chuang

National Chengchi University - College of Commerce

Rogelio Oliva

Mays Business School, Texas A&M University

Gregory R. Heim

Texas A&M University - Department of Information & Operations Management

Date Written: March 28, 2019

Abstract

Lean retailing philosophy appears to be manifested in retail industry patterns showing decreasing and historically low retailer inventories. 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 U.S. 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 to 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, which are reflective of retailers’ internal resources and external dynamics. 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.

Keywords: efficiency, inventory, lean, retailing, stochastic frontier analysis

Suggested Citation

Chuang, Howard Hao-Chun and Oliva, Rogelio and Heim, Gregory R., Examining the Link Between Retailer Inventory Leanness and Operational Efficiency: Moderating Roles of Firm Size and Demand Uncertainty (March 28, 2019). Production and Operations Management (Forthcoming). Available at SSRN: https://ssrn.com/abstract=3377478 or http://dx.doi.org/10.2139/ssrn.3377478

Howard Hao-Chun Chuang

National Chengchi University - College of Commerce ( email )

64 Sec 2 Zhinan Rd
Wens
Taipei, Taiwan 11605
Taiwan

Rogelio Oliva (Contact Author)

Mays Business School, Texas A&M University ( email )

430 Wehner
College Station, TX 77843-4218
United States

Gregory R. Heim

Texas A&M University - Department of Information & Operations Management ( email )

320 Wehner Building
4217 TAMU
College Station, TX 77843-4217
United States
979-845-9218 (Phone)

HOME PAGE: http://mays.tamu.edu/info/

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