Production-Sales Policies for New Product Diffusion under Stochastic Supply

Abstract—In this study, we highlight the importance of produc-tion and sales plans for new products and illustrate the need for explicitly modeling supply uncertainties when making such decisions. We consider the case of variability in the production yield and perform extensive simulation experiments to study its impact on the performance of myopic and build-up policies in terms of the expected profit and risk measures. Managerial implications concerning selection of the production and sales plan are also discussed. The results show that ignoring the production yield variation can result in potentially incorrect decisions on the product launch time. The results also show that the policy selected based on the expected profit does not necessarily minimize risk. Keywords–Innovation diffusion; Production uncertainty; Pro-duction planning; Inventory management; Monte Carlo simulation