Managing Product Variety in a Supply Chain

This paper investigates a vertically differentiated product (VDP) line design problem in both a centralized and decentralized supply chain setting with one manufacturer and one retailer. We study how the product variety decision making in the decentralized setting affects the number of VDPs developed and produced by the manufacturer, as well as the number of products that the retailer will accept from the manufacturer. We show the value of flexibility, timeliness of information, and product development lead time reduction in three market scenarios where the retailer will elect to carry a product only if the product meets a specified target profit. Our results reveal that if the manufacturer faces a long design lead time and designs only one product line, he may be better off not lowering wholesale prices to accommodate the retailer´s profit restriction. If design lead time is short, negotiation between manufacturer and retailer along with a side payment could possibly lead to a profit improving solution for both parties. Optimization models and computational results are presented.