Determining the optimal customization levels, lead times, and inventory positioning in vertical product differentiation

Parisa Bagheri Tookanlou · Hartanto Wong

43 citations0/0 files storedInternational Journal of Production Economics

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Supply Chain and Inventory Management Management and Optimization Techniques Product Development and Customization

Abstract

In this paper we study a manufacturer's product line design decisions when selling customized products in a market where customers are heterogeneous with respect to valuation of product attributes. The product has two attributes based on which a consumer's product valuation is determined. The first attribute is customization level, defined by the extent to which consumers are involved in the value chain. The second attribute is delivery lead time which is influenced by the customization level. We consider a market that consists of two segments. Consumers in the first segment highly value customization level and are not as concerned with lead time. In contrast, customers in the second segment are very concerned with lead time and place less importance on customization level. Given such product and market characteristics, the manufacturer must make a choice whether to offer a single customized product or to exploit the benefits of market segmentation by offering two different customized products. Different from most existing work in the product line design literature that neglects the operational aspects attached to production, here we consider the pipeline and safety inventory positioning along the production processes which is interdependent with the customization level and lead time decisions. The model developed provides insights into the conditions under which the manufacturer should opt for the two-product strategy with two different customization levels or the one-product strategy with a single customization level. In particular, we show that considering pipeline inventory and safety stock costs generally leads to lower optimal customization levels, and that the two-product strategy is preferred in most cases.

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References

1978Monopoly and product quality 1999Mass customization: The new frontier in business competition 2009The “I Designed It Myself” Effect in Mass Customization 2000Approaches to mass customization: configurations and empirical validation 1984Market Segmentation, Self-Selection, and Product Line Design 1982Commercial Use of Conjoint Analysis: A Survey 1993Mass customization: The new frontier in business competition 2001Customerization: The next revolution in mass customization

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2021A systematic literature review about dimensioning safety stock under uncertainties and risks in the procurement process 2023Offering custom products using a C2M model: Collaborating with an E-commerce platform 2021Price and quality decisions in a vertically-differentiated supply chain with an “Online-to-Store” channel 2023Price matching and product differentiation strategies considering showrooming 2022Implementation of mass customization for competitive advantage in Indian industries: an empirical investigation

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