The goal of this paper was to examine the effect of debt financing on competitive manufactures’ product flexible capacity decisions. For this purpose, two competing firms were considered to invest in product flexible capacity and product dedicated capacity, respectively, each of them produced two products. Before investing in the capacity, each firm issues the optimal amount of debt. The product flexible capacity decision models of both levered firms and unlevered firms were built based on the competitive newsvendor model. Then the relationship between debt financing and product flexibility decision was discussed. The results indicated that under the competitive setting, the level of product flexibility decreased with debt as well as the difference of demand between the two products. Furthermore, the optimal capacity investment and debt of levered firms decreased with product flexibility. Finally, the firm could benefit from higher debt and total capacity investment when the product profit margin is large.
This is a preview of subscription content, access via your institution.
Buy single article
Instant access to the full article PDF.
Tax calculation will be finalised during checkout.
Subscribe to journal
Immediate online access to all issues from 2019. Subscription will auto renew annually.
Tax calculation will be finalised during checkout.
ACMR. (2020). Monthly overview of China industry automotive manufacturing - Monthly overview. Retrieved October, 9, 2020, from http://data.acmr.com.cn/member/hygk/hygkmshow.asp?code=36.
Alan, Y., & Gaur, V. (2018). Operational investment and capital structure under asset based lending. Manufacturing & Service Operations Management, 20(4), 637–654. https://doi.org/10.1287/msom.2017.0670
Andreou, S. A. (1990). A capital budgeting model for product-mix flexibility. Manufacturing and Operations Management, 3(1), 5–23.
Babich, V., & Kouvelis, P. (2018). Introduction to the special issue on research at the interface of finance, operations, and risk management (iFORM): Recent contributions and future directions. Manufacturing & Service Operations Management, 20(1), 1–18. https://doi.org/10.1287/msom.2018.0706
Birge, J. R. (2015). OM Forum—operations and finance interactions. Manufacturing & Service Operations Management, 17(1), 4–15. https://doi.org/10.1287/msom.2014.0509
Birge, J. R., Parker, R. P., Wu, M. X., & Yang, S. A. (2017). When customers anticipate liquidation sales: Managing operations under financial distress. Manufacturing & Service Operations Management, 19(4), 657–673. https://doi.org/10.1287/msom.2017.0634
Boonman, H. J., Hagspiel, V., & Kort, P. M. (2015). Dedicated versus product flexible production technology: Strategic capacity investment choice. European Journal of Operational Research, 244(1), 141–152. https://doi.org/10.1016/j.ejor.2015.01.007
Boyabatlı, O., Leng, T., & Toktay, L. B. (2015). The impact of budget constraints on flexible versus dedicated technology choice. Management Science, 62(1), 225–244. https://doi.org/10.1287/mnsc.2014.2093
Buzacott, J. A., & Zhang, R. Q. (2004). Inventory management with asset-based financing. Management Science, 50(9), 1274–1292. https://doi.org/10.1287/mnsc.1040.0278
Campello, M. (2006). Debt financing: Does it boost or hurt firm performance in product markets? Journal of Financial Economics, 82(1), 135–172. https://doi.org/10.1016/j.jfineco.2005.04.001
Chod, J. (2017). Inventory, risk shifting, and trade credit. Management Science, 63(10), 3207–3225. https://doi.org/10.1287/mnsc.2016.2515
Chod, J., & Mieghem, J. A. V. (2010). Operational flexibility and financial hedging: Complements or substitutes? Management Science, 56(6), 1030–1045. https://doi.org/10.1287/mnsc.1090.1137
Chod, J., & Zhou, J. (2014). Resource flexibility and capital structure. Management Science, 60(3), 708–729. https://doi.org/10.1287/mnsc.2013.1777
Choi, T.-M. (2020). Supply chain financing using blockchain: impacts on supply chains selling fashionable products. Annals of Operations Research. https://doi.org/10.1007/s10479-020-03615-7
Dada, M., & Hu, Q. (2008). Financing newsvendor inventory. Operations Research Letters, 36(5), 569–573. https://doi.org/10.1016/j.orl.2008.06.004
de Véricourt, F., & Gromb, D. (2019). Financing capacity with stealing and shirking. Management Science, 65(11), 4951–5448. https://doi.org/10.1287/mnsc.2018.3186
Dotan, A., & Ravid, S. A. (1985). On the interaction of real and financial decisions of the firm under uncertainty. Journal of Finance, 40(2), 501–517. https://doi.org/10.2307/2327897
Ellili, N. O. D. (2020). Environmental, social, and governance disclosure, ownership structure and cost of capital: Evidence from the UAE. Sustainability, 12(18), 7706–7728. https://doi.org/10.3390/su12187706
Felsberger, A., & Reiner, G. (2020). Sustainable Industry 4.0 in production and operations management: A systematic literature review. Sustainability, 12(19), 7982. https://doi.org/10.3390/su12197982
Fragapane, G., Ivanov, D., Peron, M., Sgarbossa, F., & Strandhagen, J. O. (2020). Increasing flexibility and productivity in Industry 4.0 production networks with autonomous mobile robots and smart intralogistics. Annals of Operations Research. https://doi.org/10.1007/s10479-020-03526-7
Gao, G.-X., Fan, Z.-P., Fang, X., & Lim, Y. F. (2018). Optimal Stackelberg strategies for financing a supply chain through online peer-to-peer lending. European Journal of Operational Research, 267(2), 585–597. https://doi.org/10.1016/j.ejor.2017.12.006
Geely. (2018). Geely Automobile Holdings Limited 2018 annual report. Retrieved October, 9, 2020, from https://pdf.dfcfw.com/pdf/H2_AN201904101317745877_1.pdf.
Gerwin, D. (1993). Manufacturing flexibility: A strategic perspective. Management Science, 39(4), 395–410. https://doi.org/10.1287/mnsc.39.4.395
Goyal, M., & Netessine, S. (2007). Strategic technology choice and capacity investment under demand uncertainty. Management Science, 53(2), 192–207. https://doi.org/10.1287/mnsc.1060.0611
Goyal, M., & Netessine, S. (2011). Volume flexibility, product flexibility, or both: The role of demand correlation and product substitution. Manufacturing & Service Operations Management, 13(2), 180–193. https://doi.org/10.1287/msom.1100.0311
Iancu, D., Trichakis, N., & Tsoukalas, G. (2017). Is operating flexibility harmful under debt? Management Science, 63(6), 1730–1761. https://doi.org/10.1287/mnsc.2015.2415
Kogut, B., & Kulatilaka, N. (1994). Operating flexibility, global manufacturing, and the option value of a multinational network. Management Science, 40(1), 123–139. https://doi.org/10.1287/mnsc.40.1.123
Kouvelis, P., & Li, R. (2019). Integrated risk management for newsvendors with value-at risk constraints. Manufacturing & Service Operations Management, 21(4), 713–948. https://doi.org/10.1287/msom.2018.0726
Lafou, M., Mathieu, L., Pois, S., & Alochet, M. (2016). Manufacturing system flexibility: Product flexibility assessment. Procedia CIRP, 41, 99–104. https://doi.org/10.1016/j.procir.2015.12.046
Lederer, P. J., & Singhal, V. R. (1994). The effect of financing decisions on the choice of manufacturing technologies. International Journal of Flexible Manufacturing Systems, 6(4), 333–360. https://doi.org/10.1007/BF01324800
Leland, H. E. (1998). Agency costs, risk management, and capital structure. The Journal of Finance, 53(4), 1213–1243. https://doi.org/10.1111/0022-1082.00051
Lippman, S. A., & Mccardle, K. F. (1997). The competitive newsboy. Operations Research, 45(1), 54–65. https://doi.org/10.1287/opre.45.1.54
Mishra, R., Pundir, A. K., & Ganapathy, L. (2014). Manufacturing flexibility research: A review of literature and agenda for future research. Global Journal of Flexible Systems Management, 15(2), 101–112. https://doi.org/10.1007/s40171-013-0057-2
Myers, S. C. (1977). Determinants of corporate borrowing. Journal of Financial Economics, 5(2), 147–175. https://doi.org/10.1016/0304-405X(77)90015-0
Ni, J., Chu, L. K., & Li, Q. (2017). Capacity decisions with debt financing: The effects of agency problem. European Journal of Operational Research, 261(3), 1158–1169. https://doi.org/10.1016/j.ejor.2017.02.042
Ning, J., & Babich, V. (2017). R&D investments in the presence of knowledge spillover and debt financing: Can risk shifting cure free riding? Manufacturing & Service Operations Management, 20(1), 97–112. https://doi.org/10.1287/msom.2017.0668
Parlar, M. (1988). Game theoretic analysis of the substitutable product inventory problem with random demands. Naval Research Logistics, 35(3), 397–409. https://doi.org/10.1002/1520-6750(198806)35:3%3c397::AID-NAV3220350308%3e3.0.CO;2-Z
Ritchken, P., & Wu, Q. (2020). Capacity investment, production flexibility, and capital structure. Production and Operations Management, Early View. https://doi.org/10.1111/poms.13253
Sethi, A. K., & Sethi, S. P. (1990). Flexibility in manufacturing: A survey. International Journal of Flexible Manufacturing Systems, 2(4), 289–328. https://doi.org/10.1007/BF00186471
Simchi-Levi, D., Wang, H., & Wei, Y. (2018). Increasing supply chain robustness through process flexibility and inventory. Production and Operations Management, 27(8), 1476–1491. https://doi.org/10.1111/poms.12887
Tseng, M.-C. (2004). Strategic choice of flexible manufacturing technologies. International Journal of Production Economics, 91(3), 223–227. https://doi.org/10.1016/j.ijpe.2003.08.010
Van Mieghem, J. A. (1998). Investment strategies for flexible resources. Management Science, 44(8), 1071–1078. https://doi.org/10.1287/mnsc.44.8.1071
Van Mieghem, J. A. (2007). Risk mitigation in newsvendor networks: Resource diversification, flexibility, sharing, and hedging. Management Science, 53(8), 1269–1288. https://doi.org/10.1287/mnsc.1070.0700
Varela, L., Araújo, A., Ávila, P., Castro, H., & Putnik, G. (2019). Evaluation of the relation between lean manufacturing, Industry 4.0, and sustainability. Sustainability, 11(5), 1439. https://doi.org/10.3390/su11051439
Yang, S. A., & Birge, J. R. (2017). Trade credit, risk sharing, and inventory financing portfolios. Management Science, 64(8), 3667–3689. https://doi.org/10.1287/mnsc.2017.2799
Zhang, C. (2020). Automotive industry depth report: Automotive annual report summary, how to deal with 2020? Retrieved October 9, 2020, from https://baijiahao.baidu.com/s?id=1663929518720172359&wfr=spider&for=pc.
Zhao, L., & Huchzermeier, A. (2015). Operations–finance interface models: A literature review and framework. European Journal of Operational Research, 244(3), 905–917. https://doi.org/10.1016/j.ejor.2015.02.015
Conflict of interest
We declare that we do not have any commercial or associative interest that represents a conflict of interest in connection with the work submitted.
There are two authors in this manuscript: Guozhao Cao and Zhan Wang. The contributions of each author are as follows: (1) Guozhao Cao put forward the idea, established and solved the models mentioned in this paper, analyzed the results of numerical examples, and wrote the original version of this manuscript. (2) Zhan Wang revised the English version of the manuscript. No conflict of interest exists in the submission of this manuscript, and the manuscript is approved by all authors for publication. I would like to declare on behalf of my co-authors that the work described was original research that has not been published previously, and not under consideration for publication elsewhere in any form or language (partially or in full). The results are presented clearly, honestly, and without fabrication, falsification, or inappropriate data manipulation (including image-based manipulation).
Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.
About this article
Cite this article
Cao, G., Wang, Z. Product flexibility of competitive manufactures: the effect of debt financing. Ann Oper Res (2021). https://doi.org/10.1007/s10479-021-04132-x
- Product flexibility
- Capacity investment
- Competitive newsvendor