The Role Of Tactical And Strategic Operational Decisions On The Relationship Between Demand Uncertainty And Firm Performance

Abstract

Do strategic and tactical decisions constitute an effective way to mitigate the impact of demand uncertainty on firm performance? We examine this fundamental principle of operations management using panel data from the U.S. manufacturing sector between 1999 and 2019. We conceptualize strategic decisions as capital intensity and bargaining power, tactical decisions as volume flexibility and inventory turnover, and firm performance as return on assets. Our results show that capital intensity accentuates and volume flexibility suppresses the negative association between demand uncertainty and performance. Contrary to popular wisdom, high inventory turnover does not seem to influence the negative effect of demand uncertainty. The results are validated in post-hoc analyses using COVID-19 as an external demand shock and accounting for reverse causality. The findings suggest that managers should strive to increase volume flexibility and reduce capital intensity to counter the negative effects of demand uncertainty.