Sweating the Assets: Asset Leanness and Financial Performance in the Motor Carrier Industry

• Author: Amydee M. Fawcett,Vitaly Brazhkin,Matthew A. Waller,Yao Henry Jin,Christian Hofer
• DOI: http://doi.org/10.1111/jbl.12116
• Date: 01 March 2016
• Published date: 01 March 2016

Sweating the Assets: Asset Leanness and Financial Performance

in the Motor Carrier Industry

Amydee M. Fawcett

1

, Yao Henry Jin

2

, Christian Hofer

3

, Matthew A. Waller

3

, and

Vitaly Brazhkin

4

1

Weber State University

2

Miami University

3

University of Arkansas

4

Western Illinois University

Originally adopted by the automotive manufacturers, lean management practices have since been applied to many other manufacturing

industries. This study reviews the different theoretical perspectives on the leanness-performance relationship in the context of the motor

carriage industry. Drawing on both the lean management in logistics and organizational slack literatures, we develop hypotheses addressing the

link between asset leanness and financial performance. These hypotheses are empirically tested using a comprehensive panel data set of 1,172

firm-quarter observations from the U.S. publicly traded truckload motor carriers. Initially expecting an inverted U-shaped relationship between

asset leanness and performance, findings indicated a U-shaped relationship, both for carriers’total assets and the subset of trailer assets.

Keywords: lean asset management; organizational slack; ELI estimation

INTRODUCTION

Our goal is to become more asset-light in certain areas of

the services we provide, [and] to continue to grow with

new and existing customers by providing the most efficient

transportation solutions to their supply chains. –J.B. Hunt

2009 Annual Report

Lean management centers on creating customer value through

eliminating waste (Womack et al. 1990). Originally adopted by

the automotive manufacturers (e.g., Holweg 2007; Shah and

Ward 2007), lean management has since been applied to many

other manufacturing industries (e.g., Eroglu and Hofer 2011) and

has become popular around the globe (Wu 2003). In general,

lean management considers surplus assets as a potential source

of waste and contends that firms may achieve leaner operations

by “generating the greatest outcome from the least input”(Gold-

sby et al. 2006, 60). In turn, the combination of reduced waste

and increased value creation allows firms that adopt lean man-

agement to enjoy superior firm financial performance (e.g.,

Jayaram et al. 2008).

While the literature has examined lean management in a vari-

ety of service operations (e.g., Swank 2003; 

Ahlstr€

om 2004)

and supply chains (e.g., Cox and Chicksand 2005; Goldsby

et al. 2006), its application to transportation, particularly truck-

ing, remains limited. Yet, the adoption of lean management in

trucking has been advocated by industry (e.g., Taylor et al.

2006), government (e.g., Department of Transportation 2010),

and the academy (Sternberg et al. 2013). The underlying

assumption is that lean management is beneficial for trucking

despite ample evidence disputing its universal applicability (e.g.,

Cooney 2002; Eroglu and Hofer 2011; Isaksson and Seifert

2014). Indeed, possessing some degree of surplus resources, ter-

med “organizational slack,”enables firms to experiment, take

risks, and make proactive strategic choices (Cyert and March

1963; Nohria and Gulati 1996; Chen and Huang 2010) that

enhance firm financial performance (Bromiley 1991; Greenley

and Oktemgil 1998).

This study reviews the different theoretical perspectives on the

leanness–performance relationship in the context of the motor

carriage industry. Drawing on both the lean management in

logistics and organizational slack literatures, we develop

hypotheses about the link between asset leanness and financial

performance. These hypotheses are empirically tested using a

comprehensive panel data set of 1,172 firm-quarter observations

from the U.S. publicly traded truckload (TL) motor carriers. The

empirical analyses draw on a measure of motor carrier asset lean-

ness based on the Empirical Leanness Indicator (ELI) developed

by Eroglu and Hofer (2011). This indicator assesses a carrier’s

asset leanness by comparing its assets to a size-adjusted industry

benchmark in order to account for the potential existence of (dis)

economies of scale (e.g., McMullen and Okuyama 2000; Scher-

aga 2011). We not only assess carriers’overall asset leanness but

also analyze specific subgroups of motor carrier assets, namely

trailers and tractors to gain further insights into the specific dri-

vers of the overall asset leanness–performance relationship.

Finally, a series of semistructured interviews with senior execu-

tives from U.S. motor carrier companies and senior financial ana-

lysts who specialize in the U.S. motor carrier industry is used to

contextualize our statistical results.

This article is structured as follows. A brief overview of the

literature streams associated with this study lays out a theoretical

framework that supports our hypotheses. Subsequently, informa-

tion on the data and variable measurement is provided. This is

followed by a presentation and discussion of the empirical results

and their interpretation in the context of the executive interviews

we conducted. The concluding remarks address limitations of this

study, its contribution to the academic literature, and future

research opportunities.

Corresponding author:

Amydee M. Fawcett, Business Administration Department, Weber

State University, Ogden, UT 84408, USA; E-mail: amydeefawcett@

weber.edu

Journal of Business Logistics, 2016, 37(1): 43–58 doi: 10.1111/jbl.12116

© Council of Supply Chain Management Professionals

THEORY AND HYPOTHESES DEVELOPMENT

The pursuit of either efficiency-focused cost leadership or service

differentiation is a strategic choice made by firms that involves

direct manipulation of their structural forms (Miles and Snow

1984). Even for firms competing in the same industry and thereby

subject to similar environmental features, multiple strategic choices

are present due to heterogeneous managerial perspectives and pref-

erences (Child 1972). In transportation, price and capacity flexibil-

ity are two most desired traits by shippers in general (Meixell and

Norbis 2008). Accordingly, carriers manage their assets to achieve

operational efficiency (Stephenson and Stank 1994) or provide

superior levels of service (Dobie 2005). For motor carriers, the

decision to structure firm assets in pursuit of cost leadership may

imply the adoption of lean management. On the other hand, those

carriers that choose to compete through a differentiation strategy

may operate with greater levels of asset slack.

We explore both the “lean”and “slack”perspectives to

develop and support the hypotheses in this article. Research on

lean (asset) management in the broader supply chain manage-

ment literature typically emphasizes the virtues and financial ben-

efits of lean practices. The organizational slack literature, on the

other hand, suggests that some surplus resources are needed and

contribute to greater performance. Table 1 summarizes and con-

trasts empirical studies drawing on these literatures to explore

the relationship between leanness/slack and firm performance.

Lean asset management and firm performance

Lean asset management can be viewed as “producing more

revenue and profit with the same or fewer assets ... [thus

improving] return on assets (ROA) and other financial ratios”

(Papatheodorou 2005, 12) and can be traced back to the Toyota

production system developed by Taiichi Ohno and Shigeo

Shingo (Inman 1999). The goal of being lean is to drive out

waste in business operations (Holweg 2007) and reduce process

complexity to enhance asset productivity and generate customer

value (Papatheodorou 2005; Jacobs and Chase 2012). Strategi-

cally, a lean approach to management involves using “less of

everything”in an effort to improve firm performance (Womack

et al. 1990; Hines et al. 2004). When excess capacity is present,

firms tend to benefit from eliminating surplus assets, thereby

enhancing operational effectiveness and ultimately improving a

company’s competitive position in the industry (Neinstedt 1989;

McKinley et al. 1995; De Meuse et al. 2004).

Despite the intuitive appeal of lean management, empirical

evidence of its relationship with firm performance is not univer-

sally positive (Eroglu and Hofer 2011). Prior research has sug-

gested that the leanness–performance linkage may be influenced

by a variety of factors. For example, adopting lean management

may result in lower profitability for suppliers if they are depen-

dent on a dominant buyer, who may place highly varied orders

and demand rapid supplier response (Cox and Chicksand 2005).

In addition, overzealous application of lean management to assets

that mitigate uncertainty, such as inventory, may leave firms vul-

nerable to demand shocks (Zipkin 1991; Hendricks and Singhal

2003). Further, lean management may hinder the effective use of

batched manufacturing for products with intermittent demand

(Cooney 2002). Last, the leanness–performance relationship is

also subject to influence from factors that are unique to different

industries (e.g., Jayaram et al. 2008; Eroglu and Hofer 2011).

Organizational slack and firm performance

Whereas lean management suggests that firm performance tends to

improve with resource reduction (e.g., Womack et al. 1990), not

all surplus resources are considered waste (Penrose 1959). Instead,

such resources provide potentially valuable organizational slack,

which is commonly defined as a “cushion of actual or potential

resources [to] allow an organization to adapt successfully to inter-

nal pressures for adjustment or to external pressures for change in

policy, as well as to initiate changes in strategy with respect to the

external environment”(Bourgeois 1981, 30).

According to the basic tenets of the organizational slack

perspective, firms may improve performance by proactively

deploying surplus resources for the purpose of mitigating negative

consequences of competing in an uncertain competitive environ-

ment (Cyert and March 1963). Slack allows firms to simultane-

ously manage multiple competitive objectives (Rosenzweig and

Roth 2004) and encourages experimentation to gain greater flexi-

bility (Moses 1992; Adler et al. 2009) and innovative capacity

(Nohria and Gulati 1996). Further, because slack allows firms to

successfully and rapidly adapt to environmental changes (Cheng

and Kesner 1997), adverse effects of supply chain disruptions may

also be successfully mitigated (Hendricks et al. 2009).

While some degree of resource slack may be beneficial, prior

research has emphasized that too much slack is problematic and

may, in fact, hurt performance (e.g., Cyert and March 1963;

Cheng and Kesner 1997; Daniel et al. 2004). That is, surplus

resources may create a false sense of abundance, foster compla-

cency, and ultimately stifle innovation (Young et al. 1996).

Without a properly aligned incentive system, slack can encourage

satisficing, politics, or self-serving managerial behaviors that will

hurt performance (Jensen 1986; George 2005). As a result, slack

may either be squandered by firms or simply sit idle and, thus,

harm performance (Jensen 1986; Singh 1986; Greenley and

Oktemgil 1998; Modi and Mishra 2011).

Lean management and organizational slack in services

The empirical lean management and organizational slack litera-

tures mostly focus on manufacturing settings (Daniel et al. 2004;

Wee and Wu 2009). However, both concepts are applicable to a

wide range of service settings as well (Arnheiter and Maleyeff

2005; Modi and Mishra 2011). Proponents of both the lean and

organizational slack perspectives have documented a perfor-

mance effects in sectors such as retail (Abernathy et al. 2000;

Daniel et al. 2004), financial services (Swank 2003; Daniel et al.

2004), apparel (Ferdows et al. 2004), information technology

(Womack and Jones 2005), and health care (Spear 2005).

In transportation, both lean management and organizational

slack have been applied to airlines and railroads. In the airline

industry, for example, the application of lean practices may

improve asset efficiency to enjoy superior operations and

financial performance (Tsikriktsis 2007). Madsen (2013), on the

other hand, suggests that possessing slack reduces accident rates

and improves safety performance. Moreover, Hambrick et al.

(1996) argue that resource slack is needed to gain market share.

44 A. M. Fawcett et al.