One too many: Product proliferation and the financial performance in manufacturing

Abstract

Managers are often inclined to maximize the utilization of production plants to compensate for the high fixed costs. Therefore, when marketing conditions justify higher variety and manufacturers have excess capacity, they tend to introduce new variants. By studying product proliferation in the context of the economic lot sizing problem, we show that the mindset of adding new products as long as the utilization is “low” can cause unbearable cash flow issues and profit losses. Instead of capacity utilization, we propose manufacturers to pay attention to the idle fraction of non-productive time (IFNPT); when IFNPT drops to zero (i.e., absence of idleness), managers should first increase capacity and then consider introducing new products. Since managers cannot observe the net profit contribution of a product, IFNPT constitutes a pragmatic indicator for deciding when to stop product proliferation. We also show that firms can afford a larger product portfolio with lower setup times and higher sale heterogeneity across the products. We gain additional insights by proving useful properties of the profit function that allow the study of product portfolio growth through time. We provide analytical justifications to support our main insights.