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Platform flexibility strategies: R&D investment versus production customization tradeoff

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  • Van den Broeke, Maud M.
  • Boute, Robert N.
  • Van Mieghem, Jan A.

Abstract

Product platforms are assets that are shared by multiple products. We study the optimal investment in platform flexibility. Each platform type is characterized by its functionality that determines its R&D investment and unit production cost, as well as the customization cost to produce the end products from the platform. The firm can invest in a portfolio of specialized platforms that align with the functionalities of a specific product and flexible platforms that cover the functionalities of a product range at lower customization cost. We characterize the optimal platform portfolio strategy using an ex-ante investment versus ex-post production customization tradeoff curve and show comparative statics of these costs, demand forecast, and the decision maker’s regret and risk attitude. Flexible platforms provide operational hedging for risk-averse decision makers who thus should invest more than risk-neutral counterparts. In contrast to manufacturing flexibility, the regret of sub-optimal investments increases as demand is more negatively correlated.

Suggested Citation

  • Van den Broeke, Maud M. & Boute, Robert N. & Van Mieghem, Jan A., 2018. "Platform flexibility strategies: R&D investment versus production customization tradeoff," European Journal of Operational Research, Elsevier, vol. 270(2), pages 475-486.
    • Handle: RePEc:eee:ejores:v:270:y:2018:i:2:p:475-486
    DOI: 10.1016/j.ejor.2018.03.032
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    2. Van den Broeke, Maud & Paparoidamis, Nicholas, 2021. "Engaging in or escaping co-creation? An analytical model," International Journal of Production Economics, Elsevier, vol. 231(C).

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