Measuring and comparing volume flexibility of small and large firms

This study defines Volume Flexibility as: "the ability to profitably increase or decrease aggregate production (output) in response to changes in customer demand." We use a triangulated approach to measure and relate volume flexibility to firm performance.; Part 1 uses secondary data to measure volume flexibility. Other researchers use variability in sales to measure volume flexibility and conclude that small firms are more volume flexible than large firms are. But, variability in sales essentially measures diversity in the environment, and therefore, it may not be a valid measure of volume flexibility. Our measures consider the combined impact of the firm's technology and environmental diversity by incorporating process properties such as inventory levels and costs incurred in meeting sales variation. Using 20 years (1979--1998) of Compustat data on 550 firms in the capital goods industries (SICs 3510--3590), we identify key sources of volume flexibility that give competitive advantages to small firms. But, when we simultaneously account for environmental uncertainty, production technology, and performance, we find that large firms are more volume flexible than small firms are. We also revalidate these findings with a second data set representing 20 years (1979--1998) of data on 2,100 firms in 93 industries.; In Part 2, we conduct case studies of three small firms in the capital goods industries. We document and assess the drivers and sources of volume flexibility. Our key findings identify drivers of volume flexibility in two categories: external market forces and internal strategic choices. We also identify key sources of volume flexibility and categorize them into a taxonomy of short-term and long-term sources as well as internal and external sources of volume flexibility.; Finally, in Part 3, we conduct a field survey of 750 APICS managers to understand the leverage that volume flexibility provides across small and large firms. Our results validate that the short-term and long-term sources have a positive impact on a firm's volume flexibility. In addition, the results show that volume flexibility has a positive impact on delivery performance and financial performance.