Optimal Sales and Production Rollover Strategies under Capacity Constraints
42 Pages Posted: 18 Apr 2019
Date Written: April 1, 2019
A product rollover takes place when a product generation is replaced by a successor generation. Production capacity limitations are commonly observed during the introduction period of a new product. To manage the transition from the old product to the new generation in the market and also in the manufacturing system, a firm must decide on the number of old products to be pre-produced before the introduction period, and then decide on the prices, sales volumes, and production volumes of the old and the new generation during the introduction period. We examine how a production capacity constraint affects these optimal decisions and thereby determine the optimal sales and production rollover strategies. A single sales/production rollover implies that the sales/production of the old generation are discontinued before introducing the new generation. With a dual sales/production rollover strategy, the old and the new generation are sold/produced simultaneously. We find that depending on the capacity shortage, there are two levels of mitigation actions: (i) increasing the prices, (ii) changing the sales and/or production rollover strategies and pre-production and adjusting the prices accordingly. If the capacity is unlimited, choosing the same strategy for the sales and production rollover is always optimal. In the case of limited capacity, we characterize the conditions under which it is optimal to combine a single production rollover strategy with a dual sales rollover strategy. Moreover, we show that choosing the optimal sales and production rollover strategy that explicitly considers the capacity constraint has a high impact on the firm's profit.
Keywords: Inventory-Production, Policies, Capacity, New Product Introduction, Cannibalization
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