The Impact of Duplicate Orders on Demand Estimation and Capacity Investment

Stanford GSB Working Paper No. 1740(R)

Posted: 19 Oct 2003

See all articles by Erica L. Plambeck

Erica L. Plambeck

Stanford Graduate School of Business

Mor Armony

New York University (NYU) - Department of Information, Operations, and Management Sciences

Date Written: June 2003

Abstract

Motivated by a $2.2 billion inventory write-off by Cisco Systems, we investigate how duplicate orders can lead a manufacturer to err in estimating the demand rate and customers' sensitivity to delay, and to make faulty decisions about capacity investment. We consider a manufacturer that sells through two distributors. If a customer finds that his distributor is out-of-stock, then he will sometimes seek to make a purchase from the other distributor; if the latter is also out-of-stock, the customer will order from both distributors. When his order is filled by one of the distributors, the customer cancels any duplicate orders. Furthermore, the customer cancels all of his outstanding orders after a random period of time. Assuming that the manufacturer is unaware of duplicate orders, we prove that she will overestimate both the demand rate and the cancellation rate. Suprisingly, failure to account for duplicate orders can cause short-term underinvestment in capacity. However, in long term equilibrium under stable demand conditions the manufacturer overinvests in capacity. Our results suggest that Cisco's write-off was caused by estimation errors and cannot be blamed entirely on the economic downturn. Finally, we provide some guidance on estimation in the presence of double orders.

Suggested Citation

Plambeck, Erica L. and Armony, Mor, The Impact of Duplicate Orders on Demand Estimation and Capacity Investment (June 2003). Stanford GSB Working Paper No. 1740(R). Available at SSRN: https://ssrn.com/abstract=417620 or http://dx.doi.org/10.2139/ssrn.417620

Erica L. Plambeck (Contact Author)

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

Mor Armony

New York University (NYU) - Department of Information, Operations, and Management Sciences ( email )

44 West Fourth Street
New York, NY 10012
United States
(212) 998-0291 (Phone)
(212) 995-4227 (Fax)

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
555
PlumX Metrics