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Supplier-Buyer Proximity and Production to Order Choice

Author

Listed:
  • Lorenzo Casaburi

    () (University of Bologna and Harvard University)

  • G. Alfredo Minerva

    () (University of Bologna)

Abstract

We study the determinants of the firm-level choice to produce following an order placed by a downstream firm (production to order) or to produce in advance. We rationalize this choice through a simple theoretical model and apply it to a firm-level empirical analysis. Relying on a large panel of Italian manufacturing firms, we show that two main variables affect this choice: the distance between the supplier and the buyer and the degree of product differentiation in downstream industries where products are sold. The impact of proximity on the choice of producing to order crucially depends on the degree of product differentiation in downstream markets. We find that, in industries where average product differentiation is high, production to order prevails if the supplier is located close to the buyer. On the contrary, proximity is associated to production in advance in homogeneous sectors. We also find that, if suppliers are located in a different country from that of the buyers, they will tend to produce to order if product differentiation in downstream industries is low, and produce in advance if product differentiation is high. We also narrow the scope of our analysis to analyze the determinants of production to order originating from the same province where the supplier is located.

Suggested Citation

  • Lorenzo Casaburi & G. Alfredo Minerva, 2008. "Supplier-Buyer Proximity and Production to Order Choice," Development Working Papers 241, Centro Studi Luca d'Agliano, University of Milano.
  • Handle: RePEc:csl:devewp:241
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    File URL: http://www.dagliano.unimi.it/media/WP2008_241.pdf
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    More about this item

    Keywords

    Industrial Districts; Networks; Production to Order; Relationship-Specific Investments;

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • F10 - International Economics - - Trade - - - General
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • R34 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Input Demand Analysis

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