A cross-functional approach to evaluating multiple line extensions for assembled products

Kamalini Ramdas*, Mohanbir S. Sawhney

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

84 Scopus citations

Abstract

Assembled product manufacturers often introduce line extensions that share components A with existing products, or among themselves, resulting in cost interactions among products because of shared costs, and revenue interactions because of cannibalization. We present a cross-functional approach to evaluating multiple line extensions that simultaneously considers revenue implications of component sharing at the product level and cost implications at the component level. We develop a source-of-volume model and a measurement procedure to decompose the life-cycle sales volume from a line extension into sales from cannibalization, competitive draw, and demand expansion. We develop an activity-based costing procedure for estimating the life-cycle costs of line extensions that share components. We develop an optimization model that uses these revenue and cost estimates to identify a subset of line extensions that maximizes incremental profits. We implement our approach at a quartz wristwatch manufacturer. Results suggest that our approach would have improved profits for the firm by over 5%, while actually launching fewer line extensions. We also find that the drivers of cannibalization are counterintuitive. In simulation studies, our approach outperforms three managerial heuristics. We demonstrate that this approach is most valuable when cannibalization dominates competitive draw as a source of volume, and discuss its relative merits under low and high parts-sharing.

Original languageEnglish (US)
Pages (from-to)22-36
Number of pages15
JournalManagement Science
Volume47
Issue number1
DOIs
StatePublished - Jan 2002

Keywords

  • Component Variety
  • Cost Interactions
  • Product Variety
  • Profit Maximization
  • Revenue Interactions

ASJC Scopus subject areas

  • Strategy and Management
  • Management Science and Operations Research

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