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Communication and Inventory as Substitutes in Organizing Production

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Author Info

  • Milgrom, Paul
  • Roberts, John

Abstract

A major organizational design decision for manufacturing firms is t he extent to which production should be to stock versus to order: inventories and communication with customers are substitutes. The authors show that profits are convex in the share of the market supplied from inventory. Thus, firms will tend to specialize in one mode of organization. The authors examine how this choice depends on market size, the level and variability of demand, the costs of communication, price levels, production costs, and the costs of expanding product lines. The results are consistent with observed patterns in several industries. Copyright 1988 by The editors of the Scandinavian Journal of Economics.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Scandinavian Journal of Economics.

Volume (Year): 90 (1988)
Issue (Month): 3 ()
Pages: 275-89

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Handle: RePEc:bla:scandj:v:90:y:1988:i:3:p:275-89

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Web page: http://onlinelibrary.wiley.com/journal/10.1111/(ISSN)1467-9442

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Cited by:
  1. Son, Joong Y. & Sheu, Chwen, 2008. "The impact of replenishment policy deviations in a decentralized supply chain," International Journal of Production Economics, Elsevier, vol. 113(2), pages 785-804, June.
  2. Goel, Sanjay & Chen, Vicki, 2008. "Integrating the global enterprise using Six Sigma: Business process reengineering at General Electric Wind Energy," International Journal of Production Economics, Elsevier, vol. 113(2), pages 914-927, June.
  3. Paul Milgrom, . "The Envelope Theorems," Working Papers 99016, Stanford University, Department of Economics.
  4. Bijman, W.J.J. & Hendrikse, G.W.J. & Veerman, C.P., 2000. "A marketing co-operative as a system of attributes," ERIM Report Series Research in Management ERS-2000-10-ORG, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni.
  5. Blandine Laperche, 2012. "How to Coordinate the Networked Enterprise in a Context of Open Innovation? A New Function for Intellectual Property Rights," Journal of the Knowledge Economy, Springer, vol. 3(4), pages 354-371, December.
  6. Taihyeong Lee & Patricia Mokhtarian, 2008. "Correlations between industrial demands (direct and total) for communications and transportation in the U.S. economy 1947–1997," Transportation, Springer, vol. 35(1), pages 1-22, January.
  7. Uçkun, Canan & Karaesmen, Fikri & Savas, Selçuk, 2008. "Investment in improved inventory accuracy in a decentralized supply chain," International Journal of Production Economics, Elsevier, vol. 113(2), pages 546-566, June.
  8. Wheatley, W. Parker & Buhr, Brian L. & Dipietre, Dennis, 2001. "E-Commerce In Agriculture: Development, Strategy, And Market Implications," Staff Papers 13938, University of Minnesota, Department of Applied Economics.
  9. Liberopoulos, George & Koukoumialos, Stelios, 2005. "Tradeoffs between base stock levels, numbers of kanbans, and planned supply lead times in production/inventory systems with advance demand information," International Journal of Production Economics, Elsevier, vol. 96(2), pages 213-232, May.
  10. Kroes, James R. & Manikas, Andrew S., 2014. "Cash flow management and manufacturing firm financial performance: A longitudinal perspective," International Journal of Production Economics, Elsevier, vol. 148(C), pages 37-50.
  11. Andrea Pierce & Debapriya Sen, 2014. "Outsourcing versus technology transfer: Hotelling meets Stackelberg," Journal of Economics, Springer, vol. 111(3), pages 263-287, April.
  12. Thomas J. Holmes, 1999. "Bar codes lead to frequent deliveries and superstores," Staff Report 261, Federal Reserve Bank of Minneapolis.
  13. Dolfsma, W.A., 2004. "Towards a Dynamic (Schumpeterian) Welfare Economics," ERIM Report Series Research in Management ERS-2004-026-ORG, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni.
  14. Bourland, Karla E. & Powell, Stephen G. & Pyke, David F., 1996. "Exploiting timely demand information to reduce inventories," European Journal of Operational Research, Elsevier, vol. 92(2), pages 239-253, July.

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