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Valuing Supply-Chain Responsiveness Under Demand Jumps

Author

Listed:
  • Isik Bicer

    (Erasmus University Rotterdam)

  • Verena Hagspiel

    (Norwegian University of Science and Technology (NTNU))

  • Suzanne de Treville

    (University of Lausanne and Swiss Finance Institute)

Abstract

As the time between the decision about what to produce and the moment when demand is observed (the decision lead time) increases, the demand forecast becomes more uncertain. Uncertainty can increase gradually in decision lead time, or can increase as a dramatic change in median demand. Whether the forecast evolves gradually or in jumps has important implications for the value of responsiveness, which we model as the cost premium worth paying to reduce the decision lead time (the justi fied cost premium). Demand uncertainty arising from jumps rather than from constant volatility increases the justifi ed cost premium when an average jump increases median demand, but decreases the justifi ed cost premium when an average jump decreases median demand. We fi t our model to two data sets, fi rst publicly available demand data from Reebok, then point-of-sale data from a supermarket chain. Finally, we present two special cases of the model, one covering a sudden loss of demand, and the other a one-time adjustment to median demand.

Suggested Citation

  • Isik Bicer & Verena Hagspiel & Suzanne de Treville, 2018. "Valuing Supply-Chain Responsiveness Under Demand Jumps," Swiss Finance Institute Research Paper Series 18-44, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1844
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    File URL: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3192942
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    Citations

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    Cited by:

    1. Işık Biçer, & Florian Lücker, & Tamer Boyaci,, 2019. "Beyond retail stores: Managing product proliferation along the supply chain," ESMT Research Working Papers ESMT-19-02_R2, ESMT European School of Management and Technology, revised 16 Mar 2021.
    2. Samuel N. Kirshner & Brent B. Moritz, 2023. "For the future and from afar: Psychological distance and inventory decision‐making," Production and Operations Management, Production and Operations Management Society, vol. 32(1), pages 170-188, January.
    3. Pinçe, Çerağ & Yücesan, Enver & Bhaskara, Prithveesha Govinda, 2021. "Accurate response in agricultural supply chains," Omega, Elsevier, vol. 100(C).
    4. Lin, Junyi & Huang, Hongfu & Li, Shanshan & Naim, Mohamed M., 2023. "On the dynamics of order pipeline inventory in a nonlinear order-up-to system," International Journal of Production Economics, Elsevier, vol. 266(C).
    5. Anna Maria Gambaro & Nicola Secomandi, 2021. "A Discussion of Non‐Gaussian Price Processes for Energy and Commodity Operations," Production and Operations Management, Production and Operations Management Society, vol. 30(1), pages 47-67, January.
    6. Işık Biçer, & Florian Lücker, & Tamer Boyaci,, 2019. "Beyond retail stores: Managing product proliferation along the supply chain," ESMT Research Working Papers ESMT-19-02_R3, ESMT European School of Management and Technology, revised 16 Sep 2021.
    7. Işık Biçer & Florian Lücker & Tamer Boyacı, 2022. "Beyond Retail Stores: Managing Product Proliferation along the Supply Chain," Production and Operations Management, Production and Operations Management Society, vol. 31(3), pages 1135-1156, March.
    8. Işık Biçer & Florian Lücker & Tamer Boyaci, 2019. "Beyond retail stores: Managing product proliferation along the supply chain," ESMT Research Working Papers ESMT-19-02_R1, ESMT European School of Management and Technology, revised 10 Feb 2020.
    9. Işık Biçer, & Florian Lücker, & Tamer Boyaci,, 2019. "Beyond retail stores: Managing product proliferation along the supply chain," ESMT Research Working Papers ESMT-19-02, ESMT European School of Management and Technology.
    10. Anne E. Dohmen & Jason R. W. Merrick & Lance W. Saunders & Theodore P. Stank & Thomas J. Goldsby, 2023. "When preemptive risk mitigation is insufficient: The effectiveness of continuity and resilience techniques during COVID‐19," Production and Operations Management, Production and Operations Management Society, vol. 32(5), pages 1529-1549, May.

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