The impact of decentralised control on firm‐level inventory

Abstract

PurposeThe purpose of this paper is to investigate the effect of decentralised control on finished goods inventory levels in a distribution system, and to identify the factors that determine the overall inventory level.Design/methodology/approachThe authors' study is based on a mixed method approach using both a survey and semi‐structured interviews to assess inventory management practices and firm performance.FindingsIt was found that the common assumptions that distribution outlets or dealers are homogenous and that their behaviour is uniform in response to central control, such as the manufacturer's strategy, do not hold in practice. In fact, the authors show that under conditions of decentralised control, the inventories held at outlet level vary greatly around the aggregate inventory at overall manufacturer level and in this sense bear little resemblance to it. Amongst other conclusions, these findings provide a possible explanation for previous studies' inconclusive evidence on inventory reduction.Research limitations/implicationsThe authors' research is based on evidence from the automotive industry in the USA; future research may include a wider industry analysis and geographical scope.Practical implicationsThe paper identifies how incentives and decision‐making structures at the outlet level need to be considered in order to derive decisions that are optimal at the supply chain level.Originality/valueThe paper extends the current literature on the determinants of inventory levels by using dealer‐level data, as opposed to manufacturer or firm‐level data in previous studies, thereby identifying possible causes for the previously inconclusive evidence on inventory levels in distribution systems.