Engineering Product Design Optimization for Retail Channel Acceptance

Abstract

Significant recent research has focused on the marriage of consumer preferences and engineering design in order to improve profitability. The extant literature has neglected the effects of channel markets which are increasingly prevalent. At the crux of the issue is the fact that channel dominating retailers, like Wal-Mart, have the ability to unilaterally control manufacturer production decisions as gatekeepers to the consumer or market. In this paper, we propose a new methodology that accounts for this power asymmetry. A chance constrained framework is used to model retailer acceptance of possible engineering designs and accounts for the important effect on the profitability of the retailer’s assortment through a latent class estimation of demand from conjoint surveys. Our approach allows the manufacturer to optimize a product design for profitability while reliably ensuring that the product will make it to market by making the retailer more profitable with the addition of the new product. As a demonstrative example, we apply the proposed approach for product design selection in the case of an angle grinder. For this example, we analyze the market and are able to improve expected manufacturer profitability while simultaneously presenting the decision maker with tradeoffs between slotting allowances, market share, and risk of retailer acceptance.