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| Production, Sales and Inventories Under Uncertain Demand: The Effect of Product Durability |
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| Abstract: |
Manufacturers often have to make their production
decisions under conditions of demand uncertainty. This is especially true for
product categories such as automobiles and white goods where manufacturers need
to make their capacity/production decisions well in advance of the selling
season. In these instances, an important issue to consider is how a firm's
production decisions affect its subsequent marketing decisions. For example,
what is the firm's optimal sales strategy if demand turns out to be lower than
the amount produced by the firm? We develop a dynamic model of a durable product
market in which the demand functions are developed from a micro-modeling of
consumer utility functions and an equilibrium analysis of consumer strategies.
The durable nature of the product is such that the firm creates its own future
competition: current sales of new units create a secondhand market that competes
with future sales of new units. In our model, after taking into account the
demand uncertainty as well as the potential for cannibalization of future sales,
the manufacturer makes its production, sales and inventory decisions. We
characterize the firm's optimal production and sales decisions, and examine the
relationship between the manufacturing and marketing decisions. We identify
conditions under which the firm would find it optimal to carry inventory to a
future period, and analyze how the durability of the product and the level of
demand uncertainty affect the optimal inventory levels. We subsequently analyze
optimal inventory levels when the firm leases its output and when its products
become partially obsolete over time. | |
| Keywords: |
manufacturing-marketing interface, durable goods,
demand uncertainty | |
| View paper (246.66 Kbytes)
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| Areas: |
Marketing
Operations Management
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