Patterns in firms’ inventories and flexibility levels after a low‐probability, high‐impact disruption event: Empirical evidence from the Great East Japan Earthquake

Abstract

How do firms respond after being exposed to a low‐probability, high‐consequence (lp‐hc) disruption event? This study examines inventory and flexibility patterns in manufacturing firms in the years following an lp‐hc event, the Great East Japan Earthquake of 2011. We find patterns suggesting that most firms exposed to the event began to increase their raw material inventories (RAW) over the longer term and increased their volume flexibility for a shorter period. Furthermore, we found that firms increased their RAW mainly when inventories were already at high levels, while the opposite is true for volume flexibility. Firms that were classified as risk‐averse before the event show stronger swings after the event. Preliminary explorations suggest that the performance of firms that have engaged in these inventory shifts is significantly impeded. This study provides insight into a previously unexplored phenomenon, namely, the longer‐term responses of firms to exposure to lp‐hc events. It opens the possibilities of new research regarding causality, economic consequences, and mechanisms of the identified patterns. Increased efforts in this direction should enable our discipline to provide improved normative guidance both socially and operationally.