Beyond Retail Stores: Managing Product Proliferation along the Supply Chain

Abstract

Product proliferation occurs in supply chains when manufacturers respond to diverse market needs by trying to produce a range of products from a limited variety of raw materials. In such a setting, manufacturers can establish market responsiveness and/or cost efficiency in alternative ways. Delaying the point of the proliferation helps manufacturers improve their responsiveness by postponing the ordering decisions of the final products until there is partial or full resolution of the demand uncertainty. This strategy can be implemented in two different ways: (1) redesigning the operations so that the point of proliferation is swapped with a downstream operation or (2) reducing the lead times. To establish cost efficiency, manufacturers can systematically reduce their operational costs or postpone the high-cost operations. We consider a multi-echelon and multi-product newsvendor problem with demand forecast evolution to analyze the value of each operational lever of the responsiveness and the efficiency. We use a generalized forecast-evolution model to characterize the demand-updating process, and develop a dynamic optimization model to determine the optimal order quantities at different echelons. Using anonymized data of Kordsa Inc., a global manufacturer of advanced composites and reinforcement materials, we show that our model outperforms a theoretical benchmark of the repetitive newsvendor model. We demonstrate that reducing the lead time of a downstream operation is more beneficial to manufacturers than reducing the lead time of an upstream operation by the same amount, whereas reducing the upstream operational costs is more favorable than reducing the downstream operational costs. We also indicate that delaying the proliferation may cause a loss of profit, even if it can be achieved with no additional costs. Finally, a decision typology is developed, which shows effective operational strategies depending on product/market characteristics and process flexibility.

Keywords: product proliferation, lead-time reduction, process redesign, delayed differentiation