Leadtime-Variety Tradeoff in Product Differentiation

Abstract

The literature on mass customization generally focuses on the tradeoff between higher revenues from better matching customer preferences with product specifications, and higher costs of offering a broader - possibly fully customized - product line. Less well-understood is the tradeoff between the increased ability to precisely meet customer preferences and the increased leadtime from order placement to delivery often associated with customized products. In this paper, we use a locational customer choice model to formulate a firm’s integrated product line design problem that involves variety, leadtime (or inventory), and pricing decisions. We propose a dynamic-programming-based solution procedure, which amounts to solving a shortest path problem on an acyclic network, and derive some structural results on the optimal product line design. We find that unimodal preferences generally result in hybrid product lines, with standard products clustering around the mode and custom products covering the tails, in contrast with the all-custom or all-standard product lines that are optimal under uniform preferences. We also numerically examine how the firm should adjust its leadtime and variety in response to changes in parameters such as customer dispersion and operational scale. We find that the tradeoff between leadtime and variety is sometimes non-intuitive and complex.

Keywords: Mass Customization, Product Variety, Product Line Design, Assortment Planning, Hoteling Model, Delivery Leadtime, Make-to-Order, Make-to-Stock, Queueing Theory, Dynamic Programming