Platform flexibility strategies

R&D investment versus production customization tradeoff

Maud M. Van den Broeke, Robert N. Boute*, Jan Van Mieghem

*Corresponding author for this work

Research output: Contribution to journalArticle

2 Citations (Scopus)

Abstract

Product platforms are assets that are shared by multiple products. We study the optimal investment in platform flexibility. Each platform type is characterized by its functionality that determines its R&D investment and unit production cost, as well as the customization cost to produce the end products from the platform. The firm can invest in a portfolio of specialized platforms that align with the functionalities of a specific product and flexible platforms that cover the functionalities of a product range at lower customization cost. We characterize the optimal platform portfolio strategy using an ex-ante investment versus ex-post production customization tradeoff curve and show comparative statics of these costs, demand forecast, and the decision maker's regret and risk attitude. Flexible platforms provide operational hedging for risk-averse decision makers who thus should invest more than risk-neutral counterparts. In contrast to manufacturing flexibility, the regret of sub-optimal investments increases as demand is more negatively correlated.

Original languageEnglish (US)
Pages (from-to)475-486
Number of pages12
JournalEuropean Journal of Operational Research
Volume270
Issue number2
DOIs
StatePublished - Oct 16 2018

Fingerprint

Customization
Trade-offs
Flexibility
Optimal Investment
Regret
Costs
Comparative Statics
Hedging
Forecast
Manufacturing
Strategy
Cover
Curve
Unit
Functionality
Range of data
Decision maker
Optimal investment
Demand

Keywords

  • Flexibility
  • Manufacturing
  • Newsvendor networks
  • Platform
  • Product development

ASJC Scopus subject areas

  • Computer Science(all)
  • Modeling and Simulation
  • Management Science and Operations Research
  • Information Systems and Management

Cite this

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abstract = "Product platforms are assets that are shared by multiple products. We study the optimal investment in platform flexibility. Each platform type is characterized by its functionality that determines its R&D investment and unit production cost, as well as the customization cost to produce the end products from the platform. The firm can invest in a portfolio of specialized platforms that align with the functionalities of a specific product and flexible platforms that cover the functionalities of a product range at lower customization cost. We characterize the optimal platform portfolio strategy using an ex-ante investment versus ex-post production customization tradeoff curve and show comparative statics of these costs, demand forecast, and the decision maker's regret and risk attitude. Flexible platforms provide operational hedging for risk-averse decision makers who thus should invest more than risk-neutral counterparts. In contrast to manufacturing flexibility, the regret of sub-optimal investments increases as demand is more negatively correlated.",
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Platform flexibility strategies : R&D investment versus production customization tradeoff. / Van den Broeke, Maud M.; Boute, Robert N.; Van Mieghem, Jan.

In: European Journal of Operational Research, Vol. 270, No. 2, 16.10.2018, p. 475-486.

Research output: Contribution to journalArticle

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AU - Boute, Robert N.

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N2 - Product platforms are assets that are shared by multiple products. We study the optimal investment in platform flexibility. Each platform type is characterized by its functionality that determines its R&D investment and unit production cost, as well as the customization cost to produce the end products from the platform. The firm can invest in a portfolio of specialized platforms that align with the functionalities of a specific product and flexible platforms that cover the functionalities of a product range at lower customization cost. We characterize the optimal platform portfolio strategy using an ex-ante investment versus ex-post production customization tradeoff curve and show comparative statics of these costs, demand forecast, and the decision maker's regret and risk attitude. Flexible platforms provide operational hedging for risk-averse decision makers who thus should invest more than risk-neutral counterparts. In contrast to manufacturing flexibility, the regret of sub-optimal investments increases as demand is more negatively correlated.

AB - Product platforms are assets that are shared by multiple products. We study the optimal investment in platform flexibility. Each platform type is characterized by its functionality that determines its R&D investment and unit production cost, as well as the customization cost to produce the end products from the platform. The firm can invest in a portfolio of specialized platforms that align with the functionalities of a specific product and flexible platforms that cover the functionalities of a product range at lower customization cost. We characterize the optimal platform portfolio strategy using an ex-ante investment versus ex-post production customization tradeoff curve and show comparative statics of these costs, demand forecast, and the decision maker's regret and risk attitude. Flexible platforms provide operational hedging for risk-averse decision makers who thus should invest more than risk-neutral counterparts. In contrast to manufacturing flexibility, the regret of sub-optimal investments increases as demand is more negatively correlated.

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