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Role of resource flexibility and responsive pricing in mitigating the uncertainties in production systems

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  • Hariharan, Sharethram
  • Liu, Tieming
  • Shen, Zuo-Jun Max

Abstract

Two effective strategies that mitigate a firm’s demand risk are resource flexibility investment and responsive pricing. In addition to demand uncertainties firms also face capacity uncertainties and capacity disruptions and the effectiveness of these strategies under these risks are less clear. We investigate the value of resource flexibility and responsive pricing under different risk settings for a firm that produces two substitutable products each with its own dedicated resource that can be optionally reconfigured to produce the other product. Reconfiguration or cross-production incurs efficiency loss which can be mitigated by choosing the degree of flexibility of these resources, at a cost, in the planning stage along with capacity levels. In the production stage, after capacities and market potentials are realized, the firm allocates resources and sets prices.

Suggested Citation

  • Hariharan, Sharethram & Liu, Tieming & Shen, Zuo-Jun Max, 2020. "Role of resource flexibility and responsive pricing in mitigating the uncertainties in production systems," European Journal of Operational Research, Elsevier, vol. 284(2), pages 498-513.
    • Handle: RePEc:eee:ejores:v:284:y:2020:i:2:p:498-513
    DOI: 10.1016/j.ejor.2019.12.040
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