The differing impacts of operational and financial slack on occupational safety in varying market conditions

• Published date: 01 May 2017
• Date: 01 May 2017
• DOI: http://doi.org/10.1016/j.jom.2016.12.001

The differing impacts of operational and financial slack on

occupational safety in varying market conditions

Frank Wiengarten

a

,DiFan

b

, Chris K.Y. Lo

c

,

*

, Mark Pagell

d

a

Esade Business School, Universitat Ramon Llull, Spain

b

Department of Decision Sciences, School of Business, Macau University of Science and Technology,Macau

c

Business Division, Institute of Textiles and Clothing, The Hong Kong Polytechnic University, Hong Kong

d

University College Dublin Michael Smurfit Graduate Business School, Ireland

article info

Article history:

Received 18 October 2015

Received in revised form

26 November 2016

Accepted 22 December 2016

Available online 20 January 2017

Accepted by: Mikko Ketokivi.

Keywords:

Occupational health and safety

Operational slack

Financial slack

Market environments

Secondary data

abstract

Operations management scholars have long debated the right level of slack resources required to opti-

mize a production system. Recent research suggests that the right level of operational slack, typical ly in

the form of inventory, is very little but not none. However, this conclusion was reached without

considering the role of slack resources in occupational safety, which is a critical oversight since the safety

literature predicts that the reduction of operational slack harms workers. To address this gap, secondary

data from 3945 publically listed U.S. firms is used to explore the role of operational and financ ial slack as

well as market factors in occupational safety. The results show that decreasing operational slack harms

workers and that this effect is mitigated when firms hold higher levels of financial slack. Furthermore,

the external market environment also plays a crucial role in the operational slack esafety relationship.

©2017 Elsevier B.V. All rights reserved.

1. Introduction

The essence of operations management is transforming inputs

into outputs in an efficient and effective manner. Being efficient and

effective has traditionally meant managing an operation or supply

chain with low levels of extra or slack resources and capacities

(Eroglu and Hofer, 2011).

Slack is “the pool of resources in an organization that is in excess of

the minimum necessary to produce a given level of organizational

output”(Nohria and Gulati, 1996, p. 1246). Managers focus their

efforts on finding the optimal level of slack, which for most firms

means less slack. Modi and Mishra (2011) identified that at most

10% of firms would benefit from increasing their level of slack and

operations management research on operational slack has gener-

ally concluded that reducing slack improves operational perfor-

mance (to a point) when performance is operationalized as profits,

cost, quality, delivery and flexibility (Eroglu and Hofer, 2011; Modi

and Mishra, 2011; Kovach et al., 2015). In addition, the increased

focus on creating more sustainable operations has highlighted that

reducing slack is also associated with more efficient use of re-

sources and less pollution (e.g., King and Lenox, 2001).

The discourse in operations on the optimal level of slack mirrors

the long running debate on the relative merits of slack resources in

the organizational literature (e.g., March and Simon, 1958;

Sonenshein, 2014; Kovach et al., 2015). Slack can provide organi-

zations with opportunities to develop new products and enter new

markets or it can be a financial burden and indicative of in-

efficiencies (Tan and Peng, 2003). The arguments for slack posit

that slack resources are a useful buffer (Bourgeois, 1981) that allow

afirm to innovate (Nohria and Gulati, 1996), survive environmental

changes or supply chain disruptions (Hendricks et al., 2009) and

profit(

Lawson, 2001). Agency theorists on the other hand argue

that managers (i.e., agents) accrue and misuse slack resources

because of agency problems (Jensen, 1993). In the operations

management literature the debate has generally focused on the

potential to reduce costs by removing slack (Eroglu and Hofer,

2011).

We enter this discourse from a different perspective by exam-

ining the role of operational slack in terms of the safety of opera-

tional workers. Safety regulations and safety management systems

are designed to protect workers from harm in the form of injuries

and occupational illnesses that occur at work (Pagell et al., 2014); a

*Corresponding author.

E-mail address: tcclo@polyu.edu.hk (C.K.Y. Lo).

Contents lists available at ScienceDirect

Journal of Operations Management

journal homepage: www.elsevier.com/locate/jom

http://dx.doi.org/10.1016/j.jom.2016.12.001

0272-6963/©2017Elsevier B.V. All rights reserved.

Journal of Operations Management 52 (2017) 30e45

safe production system is one where workers are not harmed when

producing goods or services. The recent focus on creating more

sustainable operations has lead researchers to expand the

conceptualization of operational performance to explicitly consider

safety as a primary operational outcome (Brown et al., 2000; Pagell

et al., 2015). Research on the linkages between safety and other

operational outcomes suggests that quality and safety often move

in tandem (e.g., Brown, 1996; Das et al., 2008) and that safety need

not be traded off for other operational goals if appropriate mana-

gerial systems are in place (Lo et al., 2014; Pagell et al., 2015).

However, industrial accidents are still very common and in many

firms there is still a tension between creating a safe production

system and achieving other operational goals, such as reducing

waste (e.g., Pagell et al., 2015).

The operational literature concludes that slack, if not employed

strategically to purposefully decouple processes, is inefficient. Yet,

safety researchers have concluded that reducing operational slack

harms workers (Das et al., 2008; Love et al., 2015). For instance,

econometric research shows that a 1% increase in capacity utiliza-

tion (a decrease in operational slack) in manufacturing firms in the

USA is associated with a 0.69% increase in workplace injuries

(Asfaw et al., 2011). Understandingslack's relationship with safety

may help to explain why there is a tension between safety and

other operational outcomes in many firms. Therefore, the critical

managerial and policy issue this research addresses is that the

literature suggests that the relationship between operational slack

and safety could be different from the relationship between oper-

ational slack and other operational outcomes.

Safety is a primary metric of operational performance and a

basic indicator of the social sustainability of a firm. Hence, efforts to

become more operationally efficient may harm the workforce and

hinder efforts to make an operation more socially sustainable.

Much of the existing debate on slack addresses the question of if

slack resources are good or bad for firm economic and operational

performance. By considering safety as an operational outcome this

research addresses the possibility that the level of slack creates

trade-offs between various forms of operational performance. This

suggests a more complex relationship between slack and various

operational and firm outcomes.

Workers and communities are directly and negatively impacted

by poor safety. Safety is then an important operational and societal

outcome and if tradeoffs do exist they will matter to managers and

a wide range of societal stakeholders. Therefore, this research takes

a multi-stakeholder perspective and explores the relationship be-

tween slack and worker safety from both the firm's perspective and

from the perspective of regulators as representatives for society.

The present discourse on slack is fragmented with managerial

scholars focusing mainly on economic outcomes like quality or

profits while safety researchers only examine worker outcomes.

Few studies have considered the impact of having little or no slack

on safety (Filer and Golbe, 2003). Slack resources can be used to

respond to environmental uncertainty, supply chain disruptions, or

engage in risky innovation projects (Bourgeois, 1981; Nohria and

Gulati, 1996; Love and Nohria, 2005; Hendricks et al., 2009).

“Slack resources include excess inputs such as redundant employees,

unused capacity, and unnecessary capital expenditures. They also

include unexploited opportunities to increase outputs, such as in-

creases in the margins and revenues that might be derived from cus-

tomers and innovations that might push a firm closer to the technology

frontier”(Nohria and Gulati, 1996, p. 1246).

Slack then has two dimensions: Excess inputs or resources and

unexploited opportunities (Nohria and Gulati, 1996). In this

research we explore the input dimension of slack via operational

slack and the opportunity dimension of slack via financial slack.

“Operational slack represents the buffer resources available to support

the operational activities of a firm and allows firms to better match

variations between supply and demand

…

Excess capacity and in-

ventory (each representing a form of operational slack) help firms

effectively manage demand variation for their products”(Kovach

et al., 2015, p. 1). Financial slack is a form of Nohria and Gultai's

(1996) unexploited opportunities in that the ability to take on

further debt, deploy retained earnings or sell assets allows a firm to

respond to threats and opportunities (Lungeanu et al., 2016).

We posit that one of the reasons for the divergentviews of slack

in the literature is that operational and financial slack have

different organizational roles and lead to different outcomes. We

base this contention on the coupling component of Normal Accident

Theory (NAT) (Perrow, 1981). NAT suggests that in complex envi-

ronments, a reduction in operational slack leads to higher levels of

coupling and accidents. Financial slack might be used to offset the

negative safety implications of coupling.

Globalization and a focus on efficiency have generally meant a

reduction in operational slack and more tightly coupled operations.

For instance, the inventory to shipment ratio for U.S. manufacturers

declined from 1.46 in 1995 to 1.34 in Sep. 2016 (United States

Census Bureau, 2012, 2016,

1

). Increasing coupling generally im-

proves operational efficiency (e.g., Modi and Mishra,2011). NATand

research in both the safety and operations domains (Babson, 1993;

Love et al., 2015) predict that this increase in coupling will have

negative implications for operational workers in the guise of

increased stress or a greater likelihood of injury. This prediction is

explored via the following research question: (1) Does increasing

coupling by reducing operational slack lead to higher levels of safety

violations?

Financial slack is a means to manage risk and uncertainties

(Bourgeois, 1981, 1985). Firms with buffers of financial slack would

have the resources to potentially mitigate the negative safety im-

plications of tighter coupling. Increased financial slack would allow

afirm to train operational workers, hire safety or ergonomic ex-

perts or develop innovative new processes. Hence, we propose that

organizations can employ financial slack to counteract the

increased coupling that results from reducing operational slack.

Thus, we explore the following research question (2) Can financial

slack attenuate the impact of tightly coupled operations on safety

violations?

Regulators have typically examined the relative danger of a

firm's operations to determine the likelihood that workers will be

harmed; safety risks are higher in a mine than in a distribution

center. Research questions one and two suggest that operational

and financial slack may also predict how likely firms are to harm

their workers. Previous research suggestedthat industry or market

characteristics such as munificence, dynamism, and complexity are

important factors when it comes to identifying optimum levels of

slack for specific operational outcomes (Eroglu and Hofer, 2011;

Modi and Mishra, 2011; Kovach et al., 2015). Eroglu and Hofer

(2011) for example identified that the shape of the inventory-

performance (i.e., ROS, ROA) relationship varies across industry. If

the optimal level of slack from an economic perspective, is due to

market conditions then it is possible that accounting for an

industry's wider market characteristics may help regulators predict

which workers are at risk, and design regulation accordingly. We

test this notion by addressing the following research question: (3)

Can an industry's market characteristics intensify the impact of tightly

coupled operations on safety violations?

These research questions are addressed using longitudinal

1

U.S. Census Bureau, Statistical Abstract of the United States: 2012, Table 1018;

U.S. Census Bureau, Full Report on Manufacturers’Shipments, Inventories and Or-

ders, Sep. 2016, Table 7.

F. Wiengarten et al. / Journal of Operations Management 52 (2017)30e45 31