THE DISTINCTION BETWEEN INVENTORY HOLDING AND STOCKOUT COSTS - IMPLICATIONS FOR TARGET INVENTORIES, ASYMMETRIC ADJUSTMENT, AND THE EFFECT OF AGGREGATION ON PRODUCTION SMOOTHING

This paper shows that differences between the costs of holding invento ries and the costs of incurring stockouts provide a convenient theoret ical distinction between production-to-stock and production-to-order i ndustries. Furthermore, differences in holding and stockout costs can cause a firm to replenish inventories following a positive demand surp rise at a different speed than it reduces stocks following unexpectedl y low sales. This asymmetric adjustment lessens the tendency for firm- specific production shocks to cancel out in aggregation, and can cause industry output to be more variable than industry sales even when rep resentative firms exhibit production smoothing behavior.