AN INVESTIGATION INTO THE EFFECT OF FULL‐SCALE SUPPLY CHAIN MANAGEMENT SOFTWARE ADOPTIONS ON INVENTORY BALANCES AND TURNS

Abstract

Supply chain management (SCM) software vendors, analysts, and others claim that firms implementing SCM software stand to benefit by being able to reduce inventory holdings and increase inventory turns. We theorize that full‐scale implementations lead to system‐wide inventory optimization, which in turn leads to cost improvement associated with inventory balances and turns. To examine the question, we develop an analytical model of inventory optimization, then analyze the effects of the model with a numerical experiment, and finally confirm the results with an empirical examination. We find that firm‐wide implementation is significant in explaining improvement in inventory metrics, relative to pre‐implementation metrics for our sample. Our empirical tests indicate that implementing SCM software across only a portion of the firm does not impact inventory metrics, but that the scale of implementation does. More precisely, we find that firms implementing SCM software across the entire company significantly improve both inventory turns and inventory as a percent of revenue relative to partially‐implementing firms and non‐implementers.