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Capacity Allocation Using Past Sales: When to Turn-and-Earn

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Author Info

  • Gérard P. Cachon

    (The Fuqua School of Business, Duke University, Box 90120, Durham, North Carolina 27708)

  • Martin A. Lariviere

    (The Fuqua School of Business, Duke University, Box 90120, Durham, North Carolina 27708)

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    Abstract

    Consider a supplier selling to multiple retailers. Demand varies across periods, but the supplier's capacity and wholesale price are fixed. If demand is high, the retailers' needs exceed capacity, and the supplier must implement an allocation mechanism to dole out production. We examine how the choice of mechanism impacts retailer actions and supply chain performance. In particular, we analyze turn-and-earn allocation, a method commonly used in the automobile industry. This scheme bases current allocations on past sales and thus enables retailers to influence their future allocations; they compete for scarce capacity even if they do not compete for customers. We show that turn-and-earn induces the retailers to increase their sales when demand is low and the supplier's capacity is otherwise underutilized. Supplier profits thus increase. The impact on the supply chain depends on how restrictive capacity is. With mildly tight capacity, the retailers' higher sales rate does not significantly lower their profits but does reduce the cost of idle capacity. Supply chain performance improves. With extremely tight capacity, the retailers' intense competition dissipates more profits than the supplier gains, and supply chain performance suffers. Consequently, turn-and-earn does not generally coordinate the system. It is best characterized as a means for the supplier to increase her profits at the expense of the retailers and potentially even the supply chain. Furthermore, these results hold even if the retailers can hold inventory in anticipation of scarce capacity.

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    File URL: http://dx.doi.org/10.1287/mnsc.45.5.685
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    Bibliographic Info

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 45 (1999)
    Issue (Month): 5 (May)
    Pages: 685-703

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    Handle: RePEc:inm:ormnsc:v:45:y:1999:i:5:p:685-703

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    Related research

    Keywords: capacity allocation; bullwhip effect; supply chain management; game theory;

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    Cited by:
    1. Schneeweiss, Christoph & Zimmer, Kirstin & Zimmermann, Michael, 2004. "The design of contracts to coordinate operational interdependencies within the supply chain," International Journal of Production Economics, Elsevier, vol. 92(1), pages 43-59, November.
    2. Pishchulov, Grigory & Richter, Knut, 2009. "Inventory rationing and sharing in pre-sell distribution with mobile communication technologies," International Journal of Production Economics, Elsevier, vol. 121(2), pages 584-600, October.
    3. VANOVERMEIRE, Christine & SÖRENSEN, Kenneth & VAN BREEDAM, Alex & VANNIEUWENHUYSE, Bart & VERSTREPEN, Sven, 2012. "Efficient supply chains through flexible horizontal collaboration," Working Papers 2012007, University of Antwerp, Faculty of Applied Economics.
    4. Jang, Wooseung & Kim, Daeki & Park, Kwangtae, 2013. "Inventory allocation and shipping when demand temporarily exceeds production capacity," European Journal of Operational Research, Elsevier, vol. 227(3), pages 464-470.
    5. Cruijssen, F.C.A.M. & Borm, P.E.M. & Fleuren, H.A. & Hamers, H.J.M., 2005. "Insinking: A Methodology to Exploit Synergy in Transportation," Discussion Paper 2005-121, Tilburg University, Center for Economic Research.
    6. Wei, Yihua & Hu, Qiying & Xu, Chen, 2013. "Ordering, pricing and allocation in a service supply chain," International Journal of Production Economics, Elsevier, vol. 144(2), pages 590-598.
    7. Mallik, Suman & Harker, Patrick T., 2004. "Coordinating supply chains with competition: Capacity allocation in semiconductor manufacturing," European Journal of Operational Research, Elsevier, vol. 159(2), pages 330-347, December.
    8. Wu, Cheng-Han, 2012. "Price and service competition between new and remanufactured products in a two-echelon supply chain," International Journal of Production Economics, Elsevier, vol. 140(1), pages 496-507.
    9. Wu, Cheng-Han, 2013. "OEM product design in a price competition with remanufactured product," Omega, Elsevier, vol. 41(2), pages 287-298.

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