Platform Flexibility Strategies: R&D Investment versus Production Customization Tradeoff

European Journal of Operational Research, Forthcoming

34 Pages Posted: 27 May 2017 Last revised: 30 Mar 2018

Date Written: March 19, 2018

Abstract

Product platforms are assets that are shared by multiple products. We study the optimal investment in platform flexibility. Each platform type is characterized by its functionality that determines its R&D investment and unit production cost, as well as the customization cost to produce the end products from the platform. The firm can invest in a portfolio of specialized platforms that align with the functionalities of a specific product and flexible platforms that cover the functionalities of a product range at lower customization cost. We characterize the optimal platform portfolio strategy using an ex-ante investment versus ex-post production customization tradeoff curve and show comparative statics of these costs, demand forecast, and the decision maker’s regret and risk attitude. Flexible platforms provide operational hedging for risk-averse decision makers who thus should invest more than risk-neutral counterparts. In contrast to manufacturing flexibility, the regret of sub-optimal investments increases as demand is more negatively correlated.

Keywords: Product Development, Platform, Flexibility, Newsvendor Networks, Customization

JEL Classification: M11

Suggested Citation

Van den Broeke, Maud and Boute, Robert N. and Van Mieghem, Jan Albert, Platform Flexibility Strategies: R&D Investment versus Production Customization Tradeoff (March 19, 2018). European Journal of Operational Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2974538 or http://dx.doi.org/10.2139/ssrn.2974538

Maud Van den Broeke

Catholic University of Lille - IESEG School of Management ( email )

socle de la Grande-Arche
1, parvis de la Défense
Puteaux, 92800
France

Robert N. Boute

Vlerick Leuven Gent Management School ( email )

Library
REEP 1
Gent, BE-9000
Belgium

Jan Albert Van Mieghem (Contact Author)

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
116
Abstract Views
866
rank
237,767
PlumX Metrics