Balancing Benefits and Flexibility Losses in Platform Planning

Abstract

Manufacturers using product platforms target economies of scale and scope. However, they face the challenge of a reduced ability to react to a dynamic environment, because a platform provides the technological basis for all assigned products. When manufacturers launch new platforms, the timing is crucial. Technological innovations that have been successfully developed prior to the platform launch can be incorporated into the platform. A higher level of innovation increases the revenues. After the platform launch, the individual product development can be initiated. A shorter development time increases the development costs. As a consequence, manufacturers have to trade-off increased revenues due to a higher level of innovation against increased development costs due to expedited product development. Our paper introduces a stylized optimization model for this dynamic platform planning problem based on a stochastic process for capturing the uncertainty of innovations. We find that the optimal policy for the platform launch is a time-dependent threshold of the observed innovation level. Based on a case from the automotive industry, we find that manufacturers can suffer a loss of flexibility that significantly reduces platform benefits. It even outweighs the economies of scale. Hence, manufacturers have to weigh properly the trade-offs to ensure that the combined effect of scale and scope economies does lead to a positive impact of platforms. In particular, during the product-to-platform assignment, manufacturers need to consider the loss of flexibility, which depends on the product introduction schedule and the product heterogeneity of the products assigned to a platform.