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Do Policy Risk and Uncertainty Lead Companies to Stockpile Inventory?

April 26, 2020

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Supply chain managers must try to anticipate future developments and adjust their operations accordingly. One factor managers must attempt to forecast is the likelihood of policy intervention. Predicting policymakers’ actions can be particularly tricky given the various personalities and interests involved in government. While policymakers ability to impact supply chains through measures like trade agreements and tariffs recently has come back into focus, the question of how managers react to the possibility that policymakers might take action has been largely overlooked by researchers. Jessica L. Darby (Auburn University), David J. Ketchen, Jr. (Auburn University), Brent D. Williams (University of Arkansas), Travis Tokar (Texas Christian University) analyze how companies react to policy risk in “The Implications of Firm-Specific Policy Risk, Policy Uncertainty, and Industry Factors for Inventory: A Resource Dependence Perspective.

Darby and her co-authors analyze financial data from 2,451 U.S. publicly traded firms to understand how firms use inventory to buffer against policy-related risk and uncertainty. While managers cannot definitively know or control what policymakers will do, they can control how much inventory they have on hand. This inventory stockpile is meant to serve as a buffer if/when policymakers take steps that impede future access to key inputs or markets. The authors find that firms differ in their exposure to risk emanating from the policymaking process, and this policy risk alone does not appear to induce stockpiling. Rather, the authors find that firms react to the combination of policy risk and policy uncertainty by stockpiling inventory. Uncertainty-based stockpiling is more likely in dynamic industries like consumer electronics, where variability, instability, and turbulence are fairly commonplace even in politically certain times. In combination, the findings suggest that firms weigh inventory’s risk-reducing benefits against the costs of carrying extra inventory, and only when policy risk is paired with policy uncertainty or industry dynamism do firms resort to accumulating inventory.

The article has implications for policymakers, supply chain managers, and researchers. It shows policymakers that firms react to policy uncertainty by stockpiling inventory. Inventory accumulation ties up working capital, limiting companies’ ability to invest in other important activities such as expanding into new markets or hiring new employees. Given policy uncertainty’s negative economic impact, the authors urge policymakers to take steps to limit uncertainty such as following a set of clearly communicated principles and/or committing to a particular threshold for policy intervention. Moreover, policymakers can also limit uncertainty by exercising regulatory power only when absolutely necessary. The article shows supply chain managers how their supply chain partners and competitors are likely to manage inventory within uncertain political environments. This knowledge allows managers to adjust strategies to both improve coordination with supply chain partners and take advantage of competitors’ likely moves. The authors also offer questions for other researchers to consider. Because the authors found that there is no one “right” way to manage policy risk, they call for future research to examine other supply chain strategies firms can use to navigate uncertain political environments, such as shifting production locations.

Read the full article in the Journal of Supply Chain Management.

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