Just-in-Time, Cost Uncertainty and Strategic Customers

Project: Research

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Description

Just-in-time operations strategy has received a lot of attention in practice and in academia. It allows a firm to reduce inventory holding cost and to capture more savings from learning by doing. However, since customers who expect a cost reduction and hence a future price reduction may wait for a lower price, this kind of strategic waiting directly reduces the firm's initial production quantity and hence the firm's cost saving from learning by doing. This brings doubt to the performance of just-in-time policy in the presence of strategic customers. While pricing strategies such as price commitment have been proposed to alleviate strategic waiting of customers, these strategies usually reduces the firm’s flexibility to respond to updated information about uncertainty. In particular, when future cost is uncertain, a firm may want to have the flexibility to adjust price and production quantity based on the latest cost information.We propose to consider the pricing and production decisions of a firm facing cost uncertainty and strategic customers. In particular, the production cost of a firm decreases in its cumulative production quantity, but the actual cost reduction is uncertain. We first study the case when the firm adopts just-in-time policy and carries no inventory. Our preliminary results suggest that the firm may suffer when the average cost reduction is higher but the firm may benefit when uncertainty is higher. These results are driven by the existence of strategic waiting. In this project, we plan to study the effectiveness of just-in-time policy by analyzing the case when the firm carries inventory. We will further compare different types of cost reduction (external cost reduction in the whole industry vs. internal cost reduction from learning by doing). We will look at the social impact of strategic waiting in the presence of production learning and the role of government intervention. Finally, we will look at the impact on retail competition. The successful completion of the project will contribute to the interface of customer behavior and production/inventory management. Particularly, it will improve our understanding of how strategic waiting affects pricing and inventory strategy.

Detail(s)

Project number9042145
Grant typeGRF
StatusFinished
Effective start/end date1/11/1414/03/18

    Research areas

  • just-in-time,supply chain management,strategic customers,inventory,