A cost and operations based product heterogeneity index

Abstract

Coping with product variety forces a manufacturing firm to solve a fundamental trade-off: the increased revenue that results from more variety versus increased costs through the loss of production scale economics. Decision making about product variety often results into a conflict between the marketing department and the production department. We are particularly interested in the cost consequences and operational performance of a production system when considering product variety. Therefore, we need to measure heterogeneity inherent to our production system and the operational performance of it. The interaction between these two aspects needs to be linked to the product costs. We extend the traditional product variety index of De Groote towards a multi-factor index including operational characteristics (product mix, demand frequency, production and set-up times and production parameter variances) and product costs. Using analytic experiments, we investigate the relationship with lead times and how product costs interrelate with the factors constituting the index. In our paper, we will introduce the lead time concept and the conceptual framework. Next, we analyse the operational performance of a production system confronted with a change of product variety. Linked to the unit cost of production, we explain how our performance measure can be of practical use.