Optimizing Product Variety for Balancing Market Share and Complexity Cost in Product Family Design

Abstract

Product variety has a complex impact on both market share and complexity cost, so determining an optimal variety is a difficult task for a manufacturing company. This paper proposes a variety optimization model that reflects the relationships among market, design, and production units considering the increasing tendencies of market share (concavity) and complexity cost (convexity). Optimization model for finding an optimal variety consists of two main parts: a demand model and a complexity cost model. A demand model is constructed with the nested logit model showing the concavely increasing tendency of variety impact on market share, and a complexity cost model is developed by adopting the zero-based costing approach in which complexity cost is measured by incremental cost depending on the addition of variants. In the case study, we applied a front chassis module family of an automobile to the optimization model by analyzing data from the Korean and European markets. The results show that the greater the similarity level, the perceived similarity of a company's products, the better it is to provide less variety. Also, the more flexible a company's production facilities are, the more diverse the products it can produce.