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A Cross-Functional Approach to Evaluating Multiple Line Extensions for Assembled Products

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Author Info

  • Kamalini Ramdas

    ()
    (Darden Graduate School of Business, University of Virginia, Charlottesville, Virginia 22906)

  • Mohanbir S. Sawhney

    ()
    (Kellogg Graduate School of Management, Northwestern University, Evanston, Illinois 60208)

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    Abstract

    Assembled product manufacturers often introduce line extensions that share components with existing products, or among themselves, resulting in cost interactions among products because of shared costs, and revenue interactions because of cannibalization. We present a cross-functional approach to evaluating multiple line extensions that simultaneously considers revenue implications of component sharing at the product level and cost implications at the component level. We develop a source-of-volume model and a measurement procedure to decompose the life-cycle sales volume from a line extension into sales from cannibalization, competitive draw, and demand expansion. We develop an activity-based costing procedure for estimating the life-cycle costs of line extensions that share components. We develop an optimization model that uses these revenue and cost estimates to identify a subset of line extensions that maximizes incremental profits. We implement our approach at a quartz wristwatch manufacturer. Results suggest that our approach would have improved profits for the firm by over 5%, while actually launching fewer line extensions. We also find that the drivers of cannibalization are counterintuitive. In simulation studies, our approach outperforms three managerial heuristics. We demonstrate that this approach is most valuable when cannibalization dominates competitive draw as a source of volume, and discuss its relative merits under low and high parts-sharing.

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    File URL: http://dx.doi.org/10.1287/mnsc.47.1.22.10667
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    Bibliographic Info

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 47 (2001)
    Issue (Month): 1 (January)
    Pages: 22-36

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    Handle: RePEc:inm:ormnsc:v:47:y:2001:i:1:p:22-36

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    Related research

    Keywords: Product Variety; Component Variety; Profit Maximization; Cost Interactions; Revenue Interactions;

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    Cited by:
    1. Nils Boysen & Armin Scholl, 2009. "A General Solution Framework for Component-Commonality Problems," BuR - Business Research, German Academic Association for Business Research, vol. 2(1), pages 86-106, May.
    2. Brun, Alessandro & Capra, Eugenio & Miragliotta, Giovanni, 2009. "VRP revisited: The impact of behavioural costs in balancing standardisation and variety," International Journal of Production Economics, Elsevier, vol. 117(1), pages 16-29, January.
    3. Kraus, Ursula G. & Yano, Candace Arai, 2003. "Product line selection and pricing under a share-of-surplus choice model," European Journal of Operational Research, Elsevier, vol. 150(3), pages 653-671, November.
    4. Israelsen, Poul & Jørgensen, Brian, 2011. "Decentralizing decision making in modularization strategies: Overcoming barriers from dysfunctional accounting systems," International Journal of Production Economics, Elsevier, vol. 131(2), pages 453-462, June.

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