When flexibility fails: the critical role of digitalization in sustaining capacity utilization under a dynamic environment

Purpose This study investigates the contingent, nonlinear relationship between inventory flexibility and capacity utilization in manufacturing. It challenges the prevailing assumption of flexibility's universal benefit by examining the moderating roles of environmental dynamism and supply chain digitalization investment. Design/methodology/approach We analyzed a large panel dataset of 2,062 Chinese listed manufacturing firms from 2016 to 2023. A moderated moderation model was tested using fixed-effects regressions with industry-year clustered standard errors. To ensure robust identification, we employed instrumental variable and system GMM estimators to address endogeneity, complemented by propensity score weighting and extensive robustness checks. Findings The results confirmed a significant inverted U-shaped relationship between inventory flexibility and capacity utilization, indicating an optimal flexibility level. Environmental dynamism negatively moderated this relationship, flattening the curve and shifting the optimum. Supply chain digitalization investment positively moderated this negative effect, acting as a digital buffer that preserves the operational benefits of flexibility even under volatile conditions. Practical implications Managers should calibrate inventory flexibility toward a quantified optimum, avoiding both rigidity and over-agility. In dynamic environments, prioritizing digital infrastructure investment is essential before pursuing aggressive flexibility strategies. Building integrated data-model-decision loops is key to mitigating the coordination costs that erode flexibility's returns. Originality/value This research shifts the discourse from inventory levels and financial outcomes to inventory adjustment speed and operational efficiency. It contributes a novel framework that integrates inverted U-shaped baseline relationship, negative contingency of environmental dynamism, and digital buffering effect, drawing upon resource-based, contingency, and dynamic capabilities views. By specifying the mechanisms through which environmental dynamism undermines flexibility and digitalization counteracts these effects, it demonstrates how digitalization reconfigures the viability of traditional operational strategies under volatility.