Lean operations and firm resilience - contrasting effects of COVID-19 and economic recession

Abstract

In recent times, there has been a call in the Operations Management discipline to study the effect of operations strategies during pandemics. Firms adopt various strategies to sustain their competitiveness and reduce the likelihood of financial distress. Operating lean is one of these strategies to achieve sustainable efficiency and success. However, there is little empirical evidence on whether lean is an effective strategy for reducing future financial distress and remaining resilient and viable. In this study, we examine if a firm's operational leanness along three dimensions – inventory, property/plant/equipment (PPE), and supply chain – impacts the probability of future financial distress and if the effects from these dimensions are substitutable. An equally interesting and related question is whether and how this relationship is affected by challenging macroeconomic times that cause shocks to the supply chain. Specifically, we study the contextual effect of 2020 COVID-19 and also the 2001 and 2008 economic recessions. Our results address the impact of operating lean as well as highlight the differential effects of the pandemic and the economic recession on the relationship between operational leanness and the likelihood of financial distress.