The Effect of Production Uncertainty on the Optimal Production and Sales Plans for New Products

Once a new product is available, if the company starts the sales without building an initial inventory (myopic policy), the demand for the product grows rapidly due to extensive word of mouth spreading from past sales and soon may exceed the firm’s capacity resulting in lost sales. To avoid this problem, companies generally delay product launch to build sufficient inventory prior to starting sales (build-up policy). In this study, we use simulation to evaluate the expected profit and risk associated with myopic and build-up policies under production uncertainties. The results show that ignoring production uncertainties can result in potentially incorrect decisions regarding the number of inventory build-up periods and product launch time. We also show that the policy with the maximum expected profit does not necessarily minimize risk.