Too much of a lean thing? The impact of inventory leanness on circular economy performance

Purpose Effective inventory management matters for a firm’s circular economy (CE) performance due to its relevance to waste reduction and slack resource creation. Thus, drawing on the resource orchestration theory, we investigate the influence of inventory leanness on a firm’s CE performance and the boundary conditions of this link. Design/methodology/approach The hypotheses are tested using fixed-effects models applied to a large-scale panel dataset of Chinese manufacturing firms spanning the period from 2012 to 2022. Various additional analyses are conducted to verify the robustness of the results. Findings The results reveal an inverse U-shaped relationship between inventory leanness and CE performance, where both low and high levels of inventory leanness are associated with poorer CE performance than a moderate level of leanness. We further demonstrate that the turning point of the inverse U-shape, where CE performance is maximized, occurs at a lower level of inventory leanness when the firm exhibits higher labor productivity. Finally, our empirical results suggest that the firm’s market power moderates the relationship by flattening the curve, causing the marginal effect of inventory leanness on CE performance to decrease at a decreasing rate. Originality/value The findings of the present research provide nuanced theoretical insights into inventory management and CE literature. Moreover, our identification of the optimal level of inventory leanness offers valuable practical implications for firms seeking to “do more with less.”