Working Paper: CEPR ID: DP17149
Authors: Victor Aguirregabiria; Francis Guiton
Abstract: This paper investigates the impact of decentralizing inventory decision-making in multi-establishment firms using data from a large retail chain. Analyzing two years of daily data, we find significant heterogeneity among the inventory decisions made by 634 store managers. By estimating a dynamic structural model, we reveal substantial heterogeneity in managers’ perceived costs. Moreover, we observe a correlation between the variance of these perceptions and managers’ education and experience. Counterfactual experiments show that centralized inventory management reduces costs by eliminating the impact of managers’ skill heterogeneity. However, these benefits are offset by the negative impact of delayed demand information.
Keywords: inventory management; dynamic structural models; decentralization; information processing in organizations; retail chains; managerial skills; store managers
JEL Codes: D22; D84; L22; L81
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Manager heterogeneity in skills (D29) | Inventory outcomes (L81) |
| Higher education and experience (I23) | Better inventory management decisions (M11) |
| Idiosyncratic perceptions of costs by store managers (L11) | Negative impact on profitability (F61) |
| Delays in demand information processing (D83) | Increased storage and ordering costs (L11) |
| Decentralizing inventory decision-making (M11) | Costly storage and ordering costs without affecting stockouts (C69) |
| Decentralizing inventory decision-making (M11) | Heterogeneity in inventory decisions (C69) |
| Centralizing inventory management (M11) | Reduces costs (D61) |
| Centralizing inventory management (M11) | Increase in annual profit (O49) |