Impact of Price Postponement on Capacity and Flexibility Investment Decisions

Abstract

Investments in dedicated and flexible capacity have traditionally been based on demand forecasts obtained under the assumption of a predetermined product price. However, the impact on revenue of poor capacity and flexibility decisions can be mitigated by appropriately changing prices. While investment decisions need to be made years before demand is realized, pricing decisions can easily be postponed until product launch, when more accurate demand information is available. We study the effect of this price decision delay on the optimal investments on dedicated and flexible capacity. Computational experiments show that considering price postponement at the planning stage leads to a large reduction in capacity investments, especially in the more expensive flexible capacity, and a significant increase in profits. Its impact depends on demand correlation, elasticity and diversion, ratio of fixed to variable capacity costs, and uncertainty remaining at the times the pricing and production decisions are made.

The effects of customer rebates and retailer incentives on a manufacturer's profits and sales

“…When β = 0.2, the customer rebate dominates the retailer incentive with [5,10], and [1,5], respectively. We choose the values for m+c and β as either "high" (m+c = 45, β = 0.8) or "low" (m + c = 20, β = 0.2).…”

“…Sohoni et al [37] analyze the effects of dealer incentives in the auto industry on sales variability, and show that manufacturers may increase profits and decrease sales variability by offering a stair-step dealer incentive when their dealer is exclusive. Biller et al [5] focus on an auto manufacturer's capacity and flexibility investment decisions where the authors analyze a delayed pricing strategy to cope with uncertainty. Auto manufacturers' flexible capacity decisions were also investigated empirically by Goyal et al [22].…”

Dynamic pricing in the newsvendor problem with yield risks

“…In the study by Van Mieghem and Dada (1999), profit values were analysed and compared when price and/or production quantity decisions can be postponed after the realisation of demand. Biller et al (2006) also considered the price-dependant demand functions.…”

“…This issue has been discussed by Van Mieghem and Dada (1999) and Biller et al (2006). In the study by Van Mieghem and Dada (1999), profit values were analysed and compared when price and/or production quantity decisions can be postponed after the realisation of demand.…”

Stochastic programming approach to process flexibility design

“…As a result, there was a shortage of the PT Cruiser while the dedicated plant for the Neon had excess capacity. This lack of flexibility to reallocate the excess demand to the plant with spare capacity reportedly cost GM an estimated $240 million in pretax profit (Biller et al 2006).…”