Optimal product mix and supply chain design
Abstract
In the first essay, we analyze 360 independent retailers that are supplied by a durable goods manufacturer with a large product variety. Our objective is to identify the links between product variety, mean demand and associated demand uncertainty and suggest how to design product mix and supply chain strategies to manage the impact of variety. Our results reveal that the impact of variety on demand and demand predictability varies by consumer segment. We find that higher variety does not necessarily lead to higher aggregate level demand while higher variety does lead to higher demand variability across time periods and higher volatility in consumer choices. Our results suggest that a product strategy that offers either a focused product line with high value or a tailored product line with high price and margin may improve the profitability of a firm without compromising consumer value. We also see the evidence that firms may improve both operational efficiency and consumer satisfaction by designing its supply chain to reduce delivery lead time for high value products but to utilize multi-sourcing for customized products. Our results suggest that managing variety can be a key ingredient of supply chain performance. In the second essay, we analyze how to leverage product mix strategies to manage the impact of product variety. We model the demand forecast problem that arises both because historical data does not reveal the time-variant consumer preference and also because the consumer choice is fluid due to the complexity of making choices. We describe how the mean and the variance are affected by product variety and product value based on our empirical observations and determine the optimal product mix (the number of products and the level of product features) to offer and the quantity to order for each product using a newsvendor framework. We perform sensitivity analysis to show how the optional solutions are affected by the characteristics of target consumers, the capabilities of a firm (supply chain flexibility and market reputation) and market characteristics (supply chain structure and salvage value). Our results suggest reasons why firms adopt different market approaches when demand uncertainty increases in variety and suggest how to serve consumers to achieve both market opportunity and cost efficiency. In the third essay, we model supply chain design and product variety offered at each facility location and analyze the benefits of a joint decision of product mix and supply chain strategy when demand and demand uncertainty are endogenously determined by the chosen product mix and supply chain structure. We assume that in each region, demand arises in multiple consumer preference scenarios due to unknown demand drivers and model two consumer segments which differ in their willingness to substitute in case of reduction in product variety and their willingness to wait in case of an out-of-stock. We allow the supply chain to satisfy demands from multiple locations, possibly with a different set of DCs under each demand scenario, and analyze if such flexibility mitigates some of the adverse impact of demand uncertainty. Using the dataset offered by a durable goods manufacturer with a large variety, we provide computational results. Our results suggest that coordinating variety choice and supply chain flexibility can provide significant benefits.
Degree
Ph.D.
Advisors
Iyer, Purdue University.
Subject Area
Management
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