Knowledge Management: High-Quality Production Decisions in Partial Volume Flexibility to Create Value for Customers

Abstract

Uncertainty in the demand of individual customers increases demand volatility in the entire market. In this context, partial volume flexibility can help hedge against demand uncertainty and competition pressure, and subsequently help create value by means of high-quality production decisions and market responsiveness, within the assumption of transformation and applied knowledge incorporated into the production stages. The article aims to investigate this phenomenon. To achieve this, as part of the methodology, a unified measure, the flexibility degree, is taken to represent the level of partial volume flexibility. We find that under demand uncertainty, a firm goes through a process with four stages—capacity decision, stable production, flexible production, and pricing. In a monopoly model, we find that a slight change in the flexibility degree could significantly increase a firm's adjustable production range to respond to demand changes. Furthermore, we develop a general asymmetric duopoly model. We characterize the equilibrium and find that a firm with a higher flexibility degree is more sensitive to demand changes. Accordingly, in response to specific demand, a higher flexibility firm obtains more profit only when the demand is sufficiently high or low, otherwise, the lower flexibility firm wins. Finally, we observe that a firm's capacity increases in its flexibility degree and decreases in its rival's flexibility degree; this is because the firm balances the market share and product profitability.