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Production in advance versus production to order: The role of downstream spatial clustering and product differentiation

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  • Casaburi, Lorenzo
  • Minerva, G. Alfredo

Abstract

In every production process, suppliers have to decide whether an item should be produced and stored as inventory before an explicit purchase order is received (production in advance), or whether it should be produced only after such an order is received (production to order). We study the determinants of this firm-level choice. We present a simple conceptual framework to derive predictions that we subsequently test in the empirical analysis. We argue that an increment in buyers' spatial concentration benefits production in advance more in homogenous industries than in differentiated ones, while the benefits for production to order are larger as product differentiation increases. Consequently, the propensity to adopt one of the two production modes, following an increase in the number of local downstream buyers, changes according to the degree of product differentiation of the goods. Relying on a large data set of Italian manufacturing firms, we find empirical support to our ideas.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Urban Economics.

Volume (Year): 70 (2011)
Issue (Month): 1 (July)
Pages: 32-46

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Handle: RePEc:eee:juecon:v:70:y:2011:i:1:p:32-46

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Web page: http://www.elsevier.com/locate/inca/622905

Related research

Keywords: Production to order Production in advance Downstream spatial clustering Product differentiation Organized exchange markets Supply chain management;

References

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Cited by:
  1. M. Burker & C. Franco & G. A. Minerva, 2011. "Foreign ownership, firm performance, and the geography of civic capital," Working Papers wp782, Dipartimento Scienze Economiche, Universita' di Bologna.
  2. Massimiliano Bratti & Giulia Felice, 2012. "Buyer-Supplier Relationships, Internationalization and Product Innovation," Development Working Papers 327, Centro Studi Luca d\'Agliano, University of Milano, revised 13 Nov 2012.

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