Advance Demand Information in a Multiproduct System

Fernando Bernstein () and Gregory A. DeCroix ()
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Fernando Bernstein: Fuqua School of Business, Duke University, Durham, North Carolina 27708
Gregory A. DeCroix: Wisconsin School of Business, University of Wisconsin–Madison, Madison, Wisconsin 53706

Manufacturing & Service Operations Management, 2015, vol. 17, issue 1, 52-65

Abstract: In this paper we examine the impact of different types of advance demand information on firm profit and on the benefits of resource flexibility. Specifically, we consider a firm that must choose capacities of resources that will be used to satisfy stochastic demand for multiple products, where demands follow a multivariate normal distribution. Prior to the capacity decision, the firm receives information revealing either the total volume of demand across products or the mix of demand between products. We examine two different scenarios: a dedicated resource setting with product-specific resources and a common resource scenario with one flexible resource. For both scenarios we derive the distribution of the (possibly imperfect) volume or mix demand signal, as well as the conditional distributions of demand given the particular signal. We explore the impact of either type of information on optimal capacities and profit. We find that commonality and volume information are strategic complements—so that it is more valuable to obtain volume information in settings with a common resource. On the other hand, commonality and mix information are strategic substitutes. Moreover, we find that mix and volume information themselves are complements in systems with dedicated resources. Having either type of information is valuable in reducing uncertainty for each individual product demand, but having both of them together provides information on two different dimensions, allowing for a much greater reduction in demand uncertainty. In systems with a common resource, however, the two types of information are substitutes. Because volume information is well aligned with commonality (both focus on total demand), such information already provides much of the value that can be obtained—having mix information adds limited additional value.

Keywords: advance demand information; capacity planning and investment; multiproduct system; flexible resources (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormsom:v:17:y:2015:i:1:p:52-65

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