Toward an Understanding of the Product Variety Decision: An Integrative Model (2007)

In recent years product variety management has been a popular topic in business management. In this paper, we present a marketing-operations integrative framework for dealing with complex product variety decisions where dynamic supply and demand impacts are both considered. Our framework specifically focuses on a few critical cost and revenue factors such as increased mismatch between supply and demand due to variety increase. Our simplified structure allows for straightforward understanding and in-depth model development. We discuss the existing techniques for cost and revenue modeling and provide an example for framework application. The paper is concluded with future research directions in the field. 1. Introduction Product variety refers to the number of different products (SKU) included in one product line (e.g., Dixit and Stiglitz 1977). In recent years, rapidly evolving technologies, fierce competition and demanding customers have contributed to a continuous increase of product variety in almost all product categories (Ho and Tang 1998). However, increasing product variety does not guarantee profit increase and managing variety still remains to be a highly challenging task. People often wonder how a company should organize its design, manufacturing and marketing activities to cope with the right product variety strategy. As a result, product variety has been a popular research topic in areas of economics, engineering, marketing, and operations management (see for example, Lancaster 1990; Martin and Ishii 1996; Casado- Izaga and Saracho 2002; Ramdas 2003). Generally speaking, operations management and engineering literature usually focuses on techniques for minimizing manufacturing and inventory related costs when satisfying certain variety requirements. These techniques include product modular structure (Baldwin and Clark 1997), mass customization (Pine 1993), differentiation delay (Lee and Tang 1997), and product platform (Robertson and Ulrich 1998). Meanwhile, marketing research often focuses on issues such as why consumers seek variety and how they make decision (Kahn and Lehmann 1991), product line pricing (Shugan and Desiraju 2001), market segmentation (Green and Kreiger 1991), and coordination in a distribution channel (Villas-Boas 1998). As one can imagine, product variety decisions have both operations and marketing implications and considering variety decision within the functional boundaries does not necessarily generate a global optimal solution. In this paper, we intend to present a marketing-operations integrative framework for making product variety decisions in some complicated business scenarios. Unlike the existing literature, our framework specifically focuses on a few critical cost and revenue factors and the simplified structure allows for straightforward understanding and indepth model development. We discuss the existing techniques for modeling various cost and revenue factors and provide an example to show how the framework can be applied to solve highly sophisticated variety problems. We conclude this paper with future research directions. 2. An Integrative Product Variety Research Framework To companies, one fundamental motivation for offering product variety is to meet diverse consumer needs and improve profitability. To consumers, wider variety means better choice thus is often desirable. Providing variety to match customer demand allows firms to charge higher selling price and/or increase sales volume. Overall, increasing product variety has somewhat positive impact over the product line's revenue. However, the exact effect is usually difficult to state, especially when customer demand is stochastic and difficult to understand. On the supply side, product proliferation creates operational complexities and increases operating costs in sourcing, manufacturing, and distribution sectors. Variety creation involves design, manufacture and assembly of large number of component parts and finished goods. …