The Effects of Supply Chain Management Systems on Productivity through a Reduction in Inventory Levels

Abstract

Empirical studies in the literature of IT and business value indicate that IT increases productivity, but the underlying mechanism that leads to higher productivity is unclear. Motivated by various models in the literature of supply chain management that stress the benefits of information sharing to upstream manufacturing firms in a supply chain due to a reduction in inventory levels, this paper tests whether a reduction in inventory levels caused by adopting supply chain management (SCM) systems increases productivity by increasing operational efficiency, in order to reveal the mechanism of the productivity effect of SCM systems. Using a panel data set of manufacturing firms, our results indicate that firms that adopt SCM systems do indeed reduce inventory levels which lead to higher productivity, and that these effects are pronounced in firms that have a high sales variance.