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Delayed production and raw materials inventory under uncertainty

Listed author(s):
  • Nilsen, Jeffrey

Firms producing seasonal goods often make order and production choices prior to highly uncertain sales, thus lending an investment quality to their decisions. Using specialized inputs imposes a delay in receiving them and linked with a long production period the firm makes its order, production and pricing choices under successively reduced uncertainty. The model shows that input and production costs have distinctive effects on the firm's order size with implications for the stock of raw materials inventory. Firms facing relatively low input costs are willing to risk leaving inputs unused as a bet for a good state of nature. Further, we investigate situations of greater uncertainty and find a more nuanced explanation of firm behavior than previous research. Firms with relatively inexpensive inputs facing equal odds of good and bad states of nature will increase their order size (a known result). However, a firm with a low relative cost of completing production may either raise or reduce its order size depending on the demand elasticity and the relative demand uncertainty. Intuitively, firms with expensive inputs facing highly uncertain demand and with many substitute output goods are inhibited by the high cost of insuring against stock-outs.

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Article provided by Elsevier in its journal International Journal of Production Economics.

Volume (Year): 146 (2013)
Issue (Month): 1 ()
Pages: 337-345

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Handle: RePEc:eee:proeco:v:146:y:2013:i:1:p:337-345
DOI: 10.1016/j.ijpe.2013.07.022
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  1. Jan A. Van Mieghem & Maqbool Dada, 1999. "Price Versus Production Postponement: Capacity and Competition," Management Science, INFORMS, vol. 45(12), pages 1639-1649, December.
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  7. Voros, Jozsef, 1999. "On the risk-based aggregate planning for seasonal products," International Journal of Production Economics, Elsevier, vol. 59(1-3), pages 195-201, March.
  8. Wanke, Peter F., 2008. "The uniform distribution as a first practical approach to new product inventory management," International Journal of Production Economics, Elsevier, vol. 114(2), pages 811-819, August.
  9. Alan S. Blinder & Louis J. Maccini, 1991. "Taking Stock: A Critical Assessment of Recent Research on Inventories," Journal of Economic Perspectives, American Economic Association, vol. 5(1), pages 73-96, Winter.
  10. Moon, Ilkyeong & Choi, Sangjin, 1997. "Distribution free procedures for make-to-order (MTO), make-in-advance (MIA), and composite policies," International Journal of Production Economics, Elsevier, vol. 48(1), pages 21-28, January.
  11. Carlson, John A, 1973. "The Production Lag," American Economic Review, American Economic Association, vol. 63(1), pages 73-86, March.
  12. Herrera, Ana Mari­a & Murtazashvili, Irina & Pesavento, Elena, 2008. "The comovement in inventories and in sales: Higher and higher," Economics Letters, Elsevier, vol. 99(1), pages 155-158, April.
  13. Sen, Alper, 2008. "The US fashion industry: A supply chain review," International Journal of Production Economics, Elsevier, vol. 114(2), pages 571-593, August.
  14. Choi, Tsan-Ming, 2007. "Pre-season stocking and pricing decisions for fashion retailers with multiple information updating," International Journal of Production Economics, Elsevier, vol. 106(1), pages 146-170, March.
  15. Bivin, David, 1999. "A Model of the Production Lag and Work-in-Process Inventories," Journal of Macroeconomics, Elsevier, vol. 21(3), pages 509-536, July.
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