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According to the production-smoothing buffer stock model, inventories of a

firm’s products allow it to supply unexpected demand without having to adjust

Output immediately. When costs per additional unit produced are increasing,

using inventory to smooth production is efficient as long as the savings from not

adjusting production exceed the cost of holding inventory. Inventory acts as a

buffer stock, absorbing increases or decreases in demand while production

remains relatively steady.

If firms are smoothing production, then sales should vary more than

production. If inventories are used as a buffer stock, then high-frequency

changes in inventory should be in the opposite direction to sales. Empirical

research using aggregate data daes not confirm this expectation, however;

production varies more than sales, and changes in inventory and sales tend to

vary in the same direction. Thus either the production-smoothing buffer stock

model is incorrect, or other factors are preventing empirical confirmation of the

smoothing effect.

Most of the research that finds contradictions of production smoothing uses

seasonally adjusted aggregate data concerning inventory and sales. It is possible

that firms actually do use inventory to smooth production, but the research has

failed to detect signs of this activity because the data are too highly aggregated

over many firms. But even research at the level of individual companies has

failed to confirm the model.

Many policymakers adopt a macro approach to environmental problems in emerging markets (countries experiencing rapid economic growth): discussing ambitious regulations in global faums and looking to giant multinational companies and non-governmental organizations (NGOs) for insight. But examining what successful companies in these countries are already doing to make growth more environmentally sustainable may make more sense.

One study identifies several such firms that are turning eco-consciousness into a source of competitive advantage. The most salient quality of these highly profitable companies Is that they turn limitations (of resources, labor, and Infrastructure) into opportunities. An Indian cement company suffering water shortages developed the world's most water-efficient cement-making method, using air-cooling rather than water cooling. A Philippines utility reduced its water loss through wastage and illegal tapping from 63 percent (1997) to 12 percent (2010) by making water more affordable for lower-Income consumers. A Chinese company makes air conditioners powered with buildings' waste heat, reducing strain on the electric grid.

The companies also seek to shape their business environment to support sustainable objectives. Some lobby regulators: a Brazilian organic-sugar producer works with Brazil's government to establish an organic certification system. Some form partnerships: Kenya's Equity Bank allies with international groups to reduce its risks when lending to smallholders or single-family farms; a Brazilian cosmetics company works with suppliers to produce sustainable packaging. Some firms also work to reach and educate lower-income consumers, sacrificing short-term profits to create future markets: a Chilean forestry company organizes local carpenters into networks and connects them to low-income customers.

One could quibble with the study. Switzerland's Phil Rosenzweig has argued that management writers are prone to a halo effect: they treat a company's temporary success as proof that It has discovered some eternal principle of good management. That some successful companies have embraced environmental sustainability does not prove that It makes companies successful. Some firms, having prospered, can afford splurging on green Initiatives; some pursue eco-Initiatives for public relations purposes.

Nonetheless, the study Is thought-provoking. Critics argue that environmentalism Is a rich-world luxury, but such fears are overblown. When natural resources are scarce and consumers are cash-strapped, sustainability can be a lucrative business strategy.