Beyond Retail Stores: Managing Product Proliferation along the Supply Chain

42 Pages Posted: 23 Jul 2019 Last revised: 10 Feb 2020

See all articles by Isik Bicer

Isik Bicer

Schulich School of Business, York University

Florian Lücker

City University London - Sir John Cass Business School

Tamer Boyaci

ESMT European School of Management and Technology

Date Written: February 10, 2020

Abstract

Product proliferation occurs in supply chains to produce diverse 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 the responsiveness by postponing the ordering decisions of the final products until partial or full resolution of demand uncertainty. This strategy can be implemented in two different approaches: (1) redesigning the operations such that the point of proliferation is swapped with a downstream operation and (2) reducing the lead times. To establish cost efficiency, manufacturers can systematically reduce the costs of all operations 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 the multiplicative martingale model of forecast evolution to characterize the demand-updating process, and develop a dynamic optimization model to determine the optimal order quantities at different echelons. We show 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 costs of upstream operations is more favorable than reducing the costs of downstream operations. We also indicate that delaying the proliferation may cause a loss of profit even if it can be achieved with no additional cost. We develop a decision typology that shows effective operational strategies depending on product/market characteristics and process flexibility.

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

Suggested Citation

Bicer, Isik and Lücker, Florian and Boyaci, Tamer, Beyond Retail Stores: Managing Product Proliferation along the Supply Chain (February 10, 2020). ESMT Berlin Working Paper No. 19-02 (R1), February 2020. Available at SSRN: https://ssrn.com/abstract=3423905 or http://dx.doi.org/10.2139/ssrn.3423905

Isik Bicer

Schulich School of Business, York University ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

HOME PAGE: http://https://schulich.yorku.ca/faculty/isik-bicer/

Florian Lücker

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Tamer Boyaci (Contact Author)

ESMT European School of Management and Technology ( email )

Schlossplatz 1
Berlin, 10178
Germany

HOME PAGE: http://https://www.esmt.org/tamer-boyaci

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