Product flexibility of competitive manufactures: the effect of debt financing

Abstract

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.

Fig. 1
Fig. 2
Fig. 3
Fig. 4
Fig. 5
Fig. 6
Fig. 7
Fig. 8
Fig. 9
Fig. 10

References

  1. 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.

  2. 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

    Article  Google Scholar 

  3. Andreou, S. A. (1990). A capital budgeting model for product-mix flexibility. Manufacturing and Operations Management, 3(1), 5–23.

    Google Scholar 

  4. 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

    Article  Google Scholar 

  5. 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

    Article  Google Scholar 

  6. 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

    Article  Google Scholar 

  7. 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

    Article  Google Scholar 

  8. 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

    Article  Google Scholar 

  9. 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

    Article  Google Scholar 

  10. 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

    Article  Google Scholar 

  11. Chod, J. (2017). Inventory, risk shifting, and trade credit. Management Science, 63(10), 3207–3225. https://doi.org/10.1287/mnsc.2016.2515

    Article  Google Scholar 

  12. 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

    Article  Google Scholar 

  13. Chod, J., & Zhou, J. (2014). Resource flexibility and capital structure. Management Science, 60(3), 708–729. https://doi.org/10.1287/mnsc.2013.1777

    Article  Google Scholar 

  14. 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

    Article  Google Scholar 

  15. 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

    Article  Google Scholar 

  16. 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

    Article  Google Scholar 

  17. 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

    Article  Google Scholar 

  18. 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

    Article  Google Scholar 

  19. 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

    Article  Google Scholar 

  20. 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

    Article  Google Scholar 

  21. 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

    Article  Google Scholar 

  22. Geely. (2018). Geely Automobile Holdings Limited 2018 annual report. Retrieved October, 9, 2020, from https://pdf.dfcfw.com/pdf/H2_AN201904101317745877_1.pdf.

  23. Gerwin, D. (1993). Manufacturing flexibility: A strategic perspective. Management Science, 39(4), 395–410. https://doi.org/10.1287/mnsc.39.4.395

    Article  Google Scholar 

  24. 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

    Article  Google Scholar 

  25. 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

    Article  Google Scholar 

  26. 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

    Article  Google Scholar 

  27. 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

    Article  Google Scholar 

  28. 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

    Article  Google Scholar 

  29. 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

    Article  Google Scholar 

  30. 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

    Article  Google Scholar 

  31. 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

    Article  Google Scholar 

  32. 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

    Article  Google Scholar 

  33. 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

    Article  Google Scholar 

  34. 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

    Article  Google Scholar 

  35. 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

    Article  Google Scholar 

  36. 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

    Article  Google Scholar 

  37. 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

    Article  Google Scholar 

  38. 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

    Article  Google Scholar 

  39. 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

    Article  Google Scholar 

  40. 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

    Article  Google Scholar 

  41. 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

    Article  Google Scholar 

  42. 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

    Article  Google Scholar 

  43. 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

    Article  Google Scholar 

  44. 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

    Article  Google Scholar 

  45. 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

    Article  Google Scholar 

  46. 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.

  47. 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

    Article  Google Scholar 

Download references

Author information

Affiliations

Authors

Corresponding author

Correspondence to Guozhao Cao.

Ethics declarations

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.

Ethical statements

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).

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Rights and permissions

Reprints and Permissions

About this article

Verify currency and authenticity via CrossMark

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

Download citation

Keywords

  • Product flexibility
  • Debt-financing
  • Capacity investment
  • Competitive newsvendor