Reducing channel inefficiency in product line design

Hartanto Wijaya Wong, Kilsun Kim, Dilip Chhajed

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Abstract

It is well known that the optimal product line design in a manufacturer-retailer distribution channel is different from the optimal design achieved under a centralized channel. Channel inefficiencies are observed due to the potential misalignment of the manufacturer's and the retailer's segment targeting strategies. We show that this result in the literature is based on a crucial assumption that the product is comprised of only one attribute, and that one segment's preference structure dominates the other segment's preference structure. In this paper, we generalize the problem by considering a multiple-attribute product line design problem that includes the case of a non-dominating preference structure. Interestingly, we show that channel inefficiencies may become an issue in this non-dominating preference structure only when the market segments are significantly different in the overall part worth across the product attributes. We also show the potential of two important operations management concepts firms can use as an attempt to improve channel efficiency. Contrary to the predominant result in the literature on commonality in the centralized channel, we show that offering commonality in the decentralized channel may actually improve channel efficiency even in the absence of cost saving. Furthermore, firms can benefit from the implementation of decentralized product design where the retailer also takes part in designing product attributes. The overall part worth difference between the two segments appears to have a strong influence on the change in channel profits. These findings give rise to previously unrecognized opportunities for firms to redesign their product lines.

Original languageEnglish
Article number107964
JournalInternational Journal of Production Economics
Volume232
ISSN0925-5273
DOIs
Publication statusPublished - Feb 2021

Keywords

  • Commonality
  • Decentralized product design
  • Marketing/operations interface
  • Non-dominating preference structure
  • Product line design

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