Managing Self-Replicating Innovative Goods 

31 Dec 2019
Research

Operations Research and Operations Management

Bin Hu, Zhankun Sun 

Management Science, forthcoming

Inspired by self-replicating 3D printers and innovative agricultural and husbandry goods, Dr Zhankun Sun from the Department of Management Sciences and Dr Bin Hu from the University of Texas at Dallas, study optimal production and sales policies for a manufacturer of self-replicating innovative goods with a focus on a unique “keep-or-sell” trade-off.  

The distinctive feature of self-replicating 3D printers is the intertwined relation between production capacity and inventory level. From a manufacturer’s perspective, the production system of self-replicating 3D printers is operationally fascinating: the inventory serves as the production facility and limits the production capacity, and the firm faces a unique “keep-or-sell” trade-off for each newly-produced unit – should it be sold to satisfy demand and stimulate future demand, or should it be added to inventory to increase production capacity? 

Sun and Hu study the optimal production and sales decisions for a manufacturer of self-replicating innovative goods with a focus on this unique “keep-or-sell” trade-off. They adopt a continuous-time optimal control framework and marry a self-replication model on the production side to the canonical innovation diffusion model on the demand side. By analyzing the model, they identify a simple but very insightful mathematical condition that separates two production regimes characterized by sales price, production/holding cost and replication rate. They are able to fully characterize the optimal policies under both regimes.  

“The main insight from the optimal policies is that sometimes it is better to reject demands and hold up inventory to boost production,” says Sun. 

“The producer may lose demand – and revenue – in the short term, but will gain more in the long run. This insight is highly robust under various extensions.” 

The self-replicate feature is not unique to 3D printers. Many innovative agricultural and husbandry goods are produced by self-replication. By modelling and analyzing the unique “keep-or-sell” trade-off for self-replicating goods, Sun and Hu provide helpful insights to assist the decision making of production and sales. They also find that social marketing strategies are particularly well-suited for self-replicating innovative goods.