MEASURING AND COMPARING VOLUME FLEXIBILITY IN THE CAPITAL GOODS INDUSTRY

Eric P. Jack · Amitabh S. Raturi

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Supply Chain and Inventory Management Management and Optimization Techniques Capital Investment and Risk Analysis

Abstract

This paper presents a theoretical framework for measuring volume flexibility and relating these measures to firm performance. We develop four metrics using the principle that a volume flexible firm can handle similar levels of uncertainty (as measured by sales variability) with smaller fluctuations in inputs (as measured by variability in cost of goods sold and variability in inventory levels). Then, using 20 years of Compustat data on 550 firms in the capital goods industry, we find that on three of four process‐based measures, small firms are more volume flexible. However, when we incorporate financial performance into our fourth metric, we find that large firms are more volume flexible. We conclude that, to be volume flexible is one thing, but to benefit from this flexibility, firms need to focus on the cost of being flexible.

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References

1995The Theory of the Growth of the Firm 2018Entrepreneurship Theory and Practice 1993Manufacturing Flexibility: A Strategic Perspective 1962Planning Production, Inventories, and Work Force.1995Principles on the Benefits of Manufacturing Process Flexibility 1984Restoring our competitive edge 1999A theoretical framework for analyzing the dimensions of manufacturing flexibility 1939Production and Distribution in the Short Run

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