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

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

European Journal of Operational Research, 2018, vol. 270, issue 2, 475-486

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.

Keywords: Manufacturing; Product development; Platform; Flexibility; Newsvendor networks (search for similar items in EconPapers)
Date: 2018
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