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Communication and Inventory as Substitutes in Organizing Production

Author

Listed:
  • 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.

Suggested Citation

  • Milgrom, Paul & Roberts, John, 1988. " Communication and Inventory as Substitutes in Organizing Production," Scandinavian Journal of Economics, Wiley Blackwell, vol. 90(3), pages 275-289.
  • Handle: RePEc:bla:scandj:v:90:y:1988:i:3:p:275-89
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    Cited by:

    1. 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.
    2. Norton, Seth W, 1997. "Information and Competitive Advantage: The Rise of General Motors," Journal of Law and Economics, University of Chicago Press, vol. 40(1), pages 245-260, April.
    3. 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 University Rotterdam.
    4. Holmes, Thomas J, 2001. "Bar Codes Lead to Frequent Deliveries and Superstores," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 708-725, Winter.
    5. Andrea Pierce & Debapriya Sen, 2014. "Outsourcing versus technology transfer: Hotelling meets Stackelberg," Journal of Economics, Springer, vol. 111(3), pages 263-287, April.
    6. Fangruo Chen, 2001. "Market Segmentation, Advanced Demand Information, and Supply Chain Performance," Manufacturing & Service Operations Management, INFORMS, vol. 3(1), pages 53-67, February.
    7. 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;Portland International Center for Management of Engineering and Technology (PICMET), vol. 3(4), pages 354-371, December.
    8. 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.
    9. 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.
    10. repec:bin:bpeajo:v:26:y:1995:i:1995-3:p:175-246 is not listed on IDEAS
    11. 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.
    12. 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.
    13. Ganesh Iyer & Chakravarthi Narasimhan & Rakesh Niraj, 2007. "Information and Inventory in Distribution Channels," Management Science, INFORMS, vol. 53(10), pages 1551-1561, October.
    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.
    15. 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.
    16. 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.
    17. Fangruo Chen, 1998. "Echelon Reorder Points, Installation Reorder Points, and the Value of Centralized Demand Information," Management Science, INFORMS, vol. 44(12-Part-2), pages 221-234, December.
    18. Oke, Adegoke, 2003. "You may not use inventory levels to fill orders if...: Evidence from a survey of UK manufacturing plants," International Journal of Production Economics, Elsevier, vol. 81(1), pages 85-94, January.
    19. Paul Milgrom, "undated". "The Envelope Theorems," Working Papers 99016, Stanford University, Department of Economics.
    20. repec:spr:grdene:v:19:y:2010:i:3:d:10.1007_s10726-010-9193-7 is not listed on IDEAS
    21. Mohammed Hichame Benbitour & Evren Sahin, 2015. "Evaluation of the Impact of Uncertain Advance Demand Information on Production/Inventory Systems," Post-Print hal-01199290, HAL.
    22. Fangruo Chen, 1999. "Decentralized Supply Chains Subject to Information Delays," Management Science, INFORMS, vol. 45(8), pages 1076-1090, August.
    23. Yuntong Wang, 2014. "Envelope Theorem without Differentiability," Working Papers 1404, University of Windsor, Department of Economics.
    24. Dolfsma, Wilfred, 2005. "Towards a dynamic (Schumpeterian) welfare economics," Research Policy, Elsevier, vol. 34(1), pages 69-82, February.
    25. Fu, Qi & Zhu, Kaijie, 2010. "Endogenous information acquisition in supply chain management," European Journal of Operational Research, Elsevier, vol. 201(2), pages 454-462, March.

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