Valuing Supply-Chain Responsiveness Under Demand Jumps

56 Pages Posted: 8 Jun 2018 Last revised: 13 Jun 2018

See all articles by Isik Bicer

Isik Bicer

Schulich School of Business, York University

Verena Hagspiel

Norwegian University of Science and Technology (NTNU) - Department of Industrial Economics and Technology

Suzanne de Treville

University of Lausanne - Faculty of Business and Economics; Swiss Finance Institute

Date Written: May 23, 2018

Abstract

As the time between the decision about what to produce and the moment when demand is observed (the decision lead time) increases, the demand forecast becomes more uncertain. Uncertainty can increase gradually in decision lead time, or can increase as a dramatic change in median demand. Whether the forecast evolves gradually or in jumps has important implications for the value of responsiveness, which we model as the cost premium worth paying to reduce the decision lead time (the justi fied cost premium). Demand uncertainty arising from jumps rather than from constant volatility increases the justifi ed cost premium when an average jump increases median demand, but decreases the justifi ed cost premium when an average jump decreases median demand. We fi t our model to two data sets, fi rst publicly available demand data from Reebok, then point-of-sale data from a supermarket chain. Finally, we present two special cases of the model, one covering a sudden loss of demand, and the other a one-time adjustment to median demand.

Suggested Citation

Bicer, Isik and Hagspiel, Verena and de Treville, Suzanne, Valuing Supply-Chain Responsiveness Under Demand Jumps (May 23, 2018). Swiss Finance Institute Research Paper No. 18-44, Available at SSRN: https://ssrn.com/abstract=3192942

Isik Bicer

Schulich School of Business, York University ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

HOME PAGE: http://https://schulich.yorku.ca/faculty/isik-bicer/

Verena Hagspiel

Norwegian University of Science and Technology (NTNU) - Department of Industrial Economics and Technology ( email )

NO-7491 Trondheim
Norway

Suzanne De Treville (Contact Author)

University of Lausanne - Faculty of Business and Economics ( email )

AnthropĂ´le 3073
Lausanne, 1015
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

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