Inventory Planning for a Modular Product Family

Production and Operations Management, Vol. 24, No. 7, July 2015, pp. 1003-1053

21 Pages Posted: 26 Jan 2014 Last revised: 5 Mar 2021

See all articles by Anand A. Paul

Anand A. Paul

University of Florida

Yinliang (Ricky) Tan

University of Houston - C.T. Bauer College of Business

Asoo Vakharia

University of Florida

Date Written: July 1, 2015

Abstract

This paper is motivated by observing that more and more firms are offering modular products assembled with multiple option choices for the consumer. Starting with the PC offerings by Dell which allowed (and still allows) users to configure their product by choosing among multiple choices for each option, the current market place seems to have evolved to a make-to-stock scenario where Apple offers its IPAD series with multiple models each with a unique storage size, color, and wireless chip technology. The focus of our work is on determining the optimal stocking level of modular end-products. Our analysis is based on a benchmark model with the aim of maximizing expected profit subject to an aggregate fill rate constraint as well as variant-specific individual fill rates under a make-to-stock setting. To further assess the robustness of our finding, we consider the extensions of correlated preferences over options and price-dependent demand. Finally we also show how to extend the single period model into a multiple-period setting. Through extensive computational analysis, we find that more precise estimates of market preferences for various modular options constitute extremely valuable information that goes beyond the usefulness of forecasts of aggregate market demand. From a practical perspective, this might be indicative of another classic marketing-operations trade-off. Offering more options for consumers would be preferred by marketing managers since this would reach more consumers and hence, enhance product sales. On the other hand, the ability to obtaining greater forecast accuracy would decline when the number of options increase. Hence, from an operational perspective, it would be preferred to limit option choices (so that better forecasts can be obtained) since this would lead to lower stocking costs and hence, higher profits.

Keywords: modular products, inventory planning, fill rates

Suggested Citation

Paul, Anand A. and Tan, Yinliang and Vakharia, Asoo, Inventory Planning for a Modular Product Family (July 1, 2015). Production and Operations Management, Vol. 24, No. 7, July 2015, pp. 1003-1053, Available at SSRN: https://ssrn.com/abstract=2385333

Anand A. Paul (Contact Author)

University of Florida ( email )

PO Box 117165, 201 Stuzin Hall
Gainesville, FL 32610-0496
United States

Yinliang Tan

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States

Asoo Vakharia

University of Florida ( email )

PO Box 117165, 201 Stuzin Hall
Gainesville, FL 32610-0496
United States

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