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Platform flexibility strategies: R&D investment versus production customization tradeoff
Van den Broeke, Maud Boute, Robert Van Mieghem, Jan
Van den Broeke, Maud
Boute, Robert
Van Mieghem, Jan
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Publication Type
Journal article with impact factor
Editor
Supervisor
Publication Year
2018
Journal
European Journal of Operational Research
Book
Publication Volume
270
Publication Issue
2
Publication Begin page
475
Publication End page
486
Publication NUmber of pages
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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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Keywords
Manufacturing, Product Development, Platform, Flexibility, Newsvendor Networks