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Product Line Design with Component Commonality and Cost-Reduction Effort

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Author Info

  • Hans Sebastian Heese

    ()
    (Kelley School of Business, Indiana University, Bloomington, Indiana 47405)

  • Jayashankar M. Swaminathan

    ()
    (Kenan-Flagler Business School, University of North Carolina at Chapel Hill, Chapel Hill, North Carolina 27599-3490)

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    Abstract

    Market pressure for low prices paired with customer demand for high product variety presents a considerable dilemma for many manufacturers. Industry practice and research to date suggest that approaches based on component commonality can substantially lower the costs of proliferated product lines, but at the cost of reducing product differentiation and revenues. We analyze a stylized model of a manufacturer who designs a product line consisting of two products for sale to two market segments with different valuations of quality. The manufacturer determines the component quality levels, the amount of effort to reduce production costs, and whether to use common or different components for the two products. Explicitly considering potential interdependencies between cost-reduction effort and quality decisions, we characterize environments where the optimal product line involving component commonality features products of higher quality and yields higher revenues. Counter to earlier research we show that it can be preferable to make those components common that, relative to their production cost, are attributed a higher importance by customers. Disregarding the interactions between commonality, production cost, quality, and effort decisions can lead manufacturers to offer product lines with excessive differentiation and inefficiently low quality.

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    File URL: http://dx.doi.org/10.1287/msom.1060.0103
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    Bibliographic Info

    Article provided by INFORMS in its journal Manufacturing & Service Operations Management.

    Volume (Year): 8 (2006)
    Issue (Month): 2 (May)
    Pages: 206-219

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    Handle: RePEc:inm:ormsom:v:8:y:2006:i:2:p:206-219

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    Related research

    Keywords: component commonality; marketing-manufacturing interface; product line design;

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    Cited by:
    1. 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.
    2. Nils Boysen & Armin Scholl, 2008. "A general solution framework for component commonality problems," Jena Research Papers in Business and Economics - Working and Discussion Papers 12/2008, Friedrich-Schiller-University Jena, School of Economics and Business Administration.
    3. Hua, Zhongsheng & Zhang, Xuemei & Xu, Xiaoyan, 2011. "Product design strategies in a manufacturer-retailer distribution channel," Omega, Elsevier, vol. 39(1), pages 23-32, January.

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