Volume Flexibility, Product Flexibility, or Both: The Role of Demand Correlation and Product Substitution

Manu Goyal () and Serguei Netessine ()
Additional contact information
Manu Goyal: David Eccles School of Business, University of Utah, Salt Lake City, Utah 84112
Serguei Netessine: INSEAD, 77305 Fontainebleau, France

Manufacturing & Service Operations Management, 2011, vol. 13, issue 2, 180-193

Abstract: We analyze volume flexibility--the ability to produce above/below the installed capacity for a product--under endogenous pricing in a two-product setting. We discover that the value of volume flexibility is a function of demand correlation between products, an outcome that cannot be explained by classical risk-pooling arguments. Furthermore, whereas the value of product flexibility always decreases in demand correlation, we show that the value of volume flexibility can increase or decrease in demand correlation depending on whether the products are strategic complements or substitutes. We further find that volume flexibility better combats aggregate demand uncertainty for the two products, whereas product flexibility is better at mitigating individual demand uncertainty for each product. Our results thus underscore the necessity of analyzing volume flexibility with more than one product and emphasize the contrast with product flexibility. Furthermore, we highlight the possible pitfalls of combining flexibilities: we show that although adding volume flexibility to product flexibility never hurts performance, adding product flexibility to volume flexibility is not always beneficial, even when such an addition is costless.

Keywords: capacity planning and investment; operations strategy; technology management (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (51)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormsom:v:13:y:2011:i:2:p:180-193

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