Monitoring, Operational Manager Efforts and Inventory Policy

Operations managers are becoming more important in modern corporations. They do not only care on firms’ inventory management but also they are involved in firms’ strategic decisions. Within this setting we ask about the consequences in the inventory policy of this new role undertaken by these managers. To do so, we develop a model where a firm’s Operations Manager can devote some efforts to develop non-inventory related activities. These efforts, although non-verifiable, may be known with a certain probability if the owner monitors them. Interestingly, by monitoring these efforts, a firm’s owner may end up stimulating Operations Manager to achieve steep inventory cost reductions in the short-term. Basic idea is that Operations Manager, in general, avoids reducing inventory costs significantly in one period because this makes additional cost cuts difficult which, in turn, reduce expected future inventory-related retribution. However, by compensating those non-inventory-related efforts may offset these losses. Thus, although Operations Managers in modern corporations carry out non-inventory related responsibilities, this may bring about some benefits on inventory costs reduction.