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The Distinction between Inventory Holding and Stockout Costs: Implications for Target Inventories, Asymmetric Adjustment, and the Effect of Aggregation on Production Smoothing

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  • Krane, Spencer D

Abstract

This paper shows that differences between the costs of holding inventories and the costs of incurring stockouts provide a convenient theoretical distinction between production-to-stock and production-to-order industries. Furthermore, differences in holding and stockout costs can cause a firm to replenish inventories following a positive demand surprise at a different speed than it reduces stocks following unexpectedly low sales. This asymmetric adjustment lessens the tendency for firm-specific production shocks to cancel out in aggregation and can cause industry output to be more variable than industry sales even when representative firms exhibit production smoothing behavior. Copyright 1994 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

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  • Krane, Spencer D, 1994. "The Distinction between Inventory Holding and Stockout Costs: Implications for Target Inventories, Asymmetric Adjustment, and the Effect of Aggregation on Production Smoothing," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(1), pages 117-136, February.
  • Handle: RePEc:ier:iecrev:v:35:y:1994:i:1:p:117-36
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    Cited by:

    1. repec:ebl:ecbull:v:3:y:2003:i:10:p:1-10 is not listed on IDEAS
    2. Graham Elliott & Ivana Komunjer & Allan Timmermann, 2008. "Biases in Macroeconomic Forecasts: Irrationality or Asymmetric Loss?," Journal of the European Economic Association, MIT Press, vol. 6(1), pages 122-157, March.
    3. Jonathan McCarthy & Egon Zakrajsek, 1998. "Microeconomic inventory adjustment and aggregate dynamics," Staff Reports 54, Federal Reserve Bank of New York.
    4. Cook, Steven, 2007. "A threshold cointegration test with increased power," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 73(6), pages 386-392.
    5. Scott Schuh, "undated". "Evidence on the Link between Firm-Level and Aggregate Inventory Behavior," Finance and Economics Discussion Series 1996-46, Board of Governors of the Federal Reserve System (US).
    6. Marcel Fafchamps Jan Willem Gunning & Remco Oostendorp, "undated". "Inventories, Liquidity, and Contractual Risk in African Manufacturing," Working Papers 97020, Stanford University, Department of Economics.
    7. Ramey, Valerie A. & West, Kenneth D., 1999. "Inventories," Handbook of Macroeconomics,in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 13, pages 863-923 Elsevier.
    8. Louri, Helen, 1996. "Inventory investment in Greek manufacturing industry: Effects from participation in the European market," International Journal of Production Economics, Elsevier, vol. 45(1-3), pages 47-54, August.
    9. Steven Cook, 2000. "The alternative asymmetric behaviour of Australian consumers' expenditure," Applied Economics Letters, Taylor & Francis Journals, vol. 7(6), pages 349-352.
    10. Fafchamps, Marcel & Gunning, Jan Willem & Oostendorp, Remco, 2000. "Inventories and Risk in African Manufacturing," Economic Journal, Royal Economic Society, vol. 110(466), pages 861-93, October.

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