When the informational and incentive
dimensions of inventory control are incorporated
into the model, the optimum level of inventory is
reduced. Lower inventory levels result in greater
transparency of the production system and
improve the information on the effort of the
manager (information effect). Similarly, in the
context of supply chain management, better
information sharing mechanisms and efforts, on
the part of the manager, lead to reduced
inventories across the different stages of the supply
chain. The use of this information in performance
evaluation creates an incentive for managers to
increase the efficiency of the production system.
Moreover, the reduced inventory reduces the
variance of the imperfect signal on manager’s
effort. The signal is incrementally informative
about the effort over the output.