Platform flexibility strategies: R&D investment versus production customization tradeoff

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.

[1]  W. Scott,et al.  Tracking the Giant Corporation@@@Scale and Scope: The Dynamics of Industrial Capitalism. , 1991 .

[2]  Liu Yang,et al.  Flexible capacity strategy with multiple market periods under demand uncertainty and investment constraint , 2014, Eur. J. Oper. Res..

[3]  Saurabh Gupta,et al.  Special Issue on Design and Development: Appropriateness and Impact of Platform-Based Product Development , 2001, Manag. Sci..

[4]  Azad M. Madni,et al.  Adaptable platform‐based engineering: Key enablers and outlook for the future , 2012, Syst. Eng..

[5]  Peter M. Kort,et al.  Dedicated vs product flexible production technology: Strategic capacity investment choice , 2015, Eur. J. Oper. Res..

[6]  Manu Goyal,et al.  Volume Flexibility, Product Flexibility, or Both: The Role of Demand Correlation and Product Substitution , 2011, Manuf. Serv. Oper. Manag..

[7]  V. Krishnan,et al.  Technology Selection and Commitment in New Product Development: The Role of Uncertainty and Design Flexibility , 2002, Manag. Sci..

[8]  Zahed Siddique,et al.  Advances in product family and product platform design: Methods & applications , 2014 .

[9]  A. Vakharia,et al.  Product Portfolio Strategies: The Case of Multifunction Products , 2008 .

[10]  Yixiong Feng,et al.  An integrated method for flexible platform modular architecture design , 2013 .

[11]  Eun Suk Suh,et al.  Flexible product platforms: framework and case study , 2007 .

[12]  Ramandeep S. Randhawa,et al.  Optimal Flexibility Configurations in Newsvendor Networks: Going Beyond Chaining and Pairing , 2010, Manag. Sci..

[13]  Robert N. Boute,et al.  Barco Implements Platform-Based Product Development in Its Healthcare Division , 2018, Interfaces.

[14]  Karthik Ramachandran,et al.  Managing Technology Selection and Development Risk in Competitive Environments , 2011 .

[15]  Christoph H. Loch,et al.  Special Issue on Design and Development: Project Management Under Risk: Using the Real Options Approach to Evaluate Flexibility in R...D , 2001, Manag. Sci..

[16]  Farrokh Mistree,et al.  Product platform design: method and application , 2001 .

[17]  Jan A. Van Mieghem,et al.  Commissioned Paper: Capacity Management, Investment, and Hedging: Review and Recent Developments , 2003, Manuf. Serv. Oper. Manag..

[18]  Kannan Srinivasan,et al.  Special Issue on Design and Development: Product Differentiation and Commonality in Design: Balancing Revenue and Cost Drivers , 2001, Manag. Sci..

[19]  Karthik Ramachandran,et al.  Flexible Products for Dynamic Preferences , 2019, Production and Operations Management.

[20]  Alexander J. Triantis,et al.  Dynamic R&D Investment Policies , 1999 .

[21]  K. Ulrich,et al.  Planning for Product Platforms , 1998 .

[22]  Bert De Reyck,et al.  Optimal investment under operational flexibility, risk aversion, and uncertainty , 2011, Eur. J. Oper. Res..

[23]  Karl T. Ulrich,et al.  Special Issue on Design and Development: Product Development Decisions: A Review of the Literature , 2001, Manag. Sci..

[24]  Janne Kettunen,et al.  New product development flexibility in a competitive environment , 2015, Eur. J. Oper. Res..

[25]  Jan A. Van Mieghem,et al.  Risk Mitigation in Newsvendor Networks: Resource Diversification, Flexibility, Sharing, and Hedging , 2007, Manag. Sci..

[26]  Linda L. Zhang,et al.  A literature review on multitype platforming and framework for future research , 2015 .

[27]  Roger Jianxin Jiao,et al.  Product family design and platform-based product development: a state-of-the-art review , 2007, J. Intell. Manuf..

[28]  Serguei Netessine,et al.  Flexible Service Capacity: Optimal Investment and the Impact of Demand Correlation , 2002, Oper. Res..

[29]  Fuqiang Zhang,et al.  Dynamic Capacity Management with Substitution , 2009, Oper. Res..

[30]  J. V. Mieghem.  Investment Strategies for Flexible Resources , 1998 .

[31]  Jiri Chod,et al.  Operational Flexibility and Financial Hedging: Complements or Substitutes , 2010, Manag. Sci..

[32]  Charles H. Fine,et al.  Optimal investment in product-flexible manufacturing capacity , 1990 .

[33]  Harry M. Markowitz,et al.  Foundations of Portfolio Theory , 1991 .

[34]  Brecht Cardoen,et al.  An efficient solution method to design the cost-minimizing platform portfolio , 2017, Eur. J. Oper. Res..

[35]  Robert Boute,et al.  Evaluation of product-platform decisions based on total supply chain costs , 2015 .