A Cross-Functional Approach to Evaluating Multiple Line Extensions for Assembled Products
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.
Volume (Year): 47 (2001)
Issue (Month): 1 (January)
|Contact details of provider:|| Postal: 7240 Parkway Drive, Suite 300, Hanover, MD 21076 USA|
Web page: http://www.informs.org/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Ulrich, Karl, 1995. "The role of product architecture in the manufacturing firm," Research Policy, Elsevier, vol. 24(3), pages 419-440, May.
- Kelvin J. Lancaster, 1966. "A New Approach to Consumer Theory," Journal of Political Economy, University of Chicago Press, vol. 74, pages 132.
- Kelvin Lancaster, 1990. "The Economics of Product Variety: A Survey," Marketing Science, INFORMS, vol. 9(3), pages 189-206.
- Schmalensee, Richard. & Thisse, Jacques François., 1985.
"Perceptual maps and the optimal location of new products,"
1722-85., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Schmalensee, R. & Thisse, J.-F., 1986. "Perceptual maps and the optimal location of new products," CORE Discussion Papers 1986020, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Gregory Dobson & Shlomo Kalish, 1993. "Heuristics for Pricing and Positioning a Product-Line Using Conjoint and Cost Data," Management Science, INFORMS, vol. 39(2), pages 160-175, February.
- Suresh K. Nair & Lakshman S. Thakur & Kuang-Wei Wen, 1995. "Near Optimal Solutions for Product Line Design and Selection: Beam Search Heuristics," Management Science, INFORMS, vol. 41(5), pages 767-785, May.
- Gregory Dobson & Shlomo Kalish, 1988. "Positioning and Pricing a Product Line," Marketing Science, INFORMS, vol. 7(2), pages 107-125.
- Paul E. Green & Abba M. Krieger, 1985. "Models and Heuristics for Product Line Selection," Marketing Science, INFORMS, vol. 4(1), pages 1-19.
- Richard D. McBride & Fred S. Zufryden, 1988. "An Integer Programming Approach to the Optimal Product Line Selection Problem," Marketing Science, INFORMS, vol. 7(2), pages 126-140.
- John Paul MacDuffie & Kannan Sethuraman & Marshall L. Fisher, 1996. "Product Variety and Manufacturing Performance: Evidence from the International Automotive Assembly Plant Study," Management Science, INFORMS, vol. 42(3), pages 350-369, March.
- Marshall Fisher & Kamalini Ramdas & Karl Ulrich, 1999. "Component Sharing in the Management of Product Variety: A Study of Automotive Braking Systems," Management Science, INFORMS, vol. 45(3), pages 297-315, March.
- Karl T. Ulrich & David J. Ellison, 1999. "Holistic Customer Requirements and the Design-Select Decision," Management Science, INFORMS, vol. 45(5), pages 641-658, May.
- Glen L. Urban & Philip L. Johnson & John R. Hauser, 1984. "Testing Competitive Market Structures," Marketing Science, INFORMS, vol. 3(2), pages 83-112.
When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:47:y:2001:i:1:p:22-36. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mirko Janc)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.