The Effects of Product Line Breadth: Evidence from the Automotive Industry

Antonio  Moreno; Christian  Terwiesch

Article | Marketing Science

The Effects of Product Line Breadth: Evidence from the Automotive Industry

by Antonio Moreno and Christian Terwiesch

Abstract

Using a detailed data set from the U.S. automotive industry, we enrich the existing literature on product line breadth with new results that highlight previously unexplored operational aspects of its benefits and costs. We find that expanding product line breadth has a significant effect on increasing mismatch costs arising from the increased demand uncertainty associated with product proliferation. These mismatch costs are manifested through additional discounts and inventories. The effect of product line breadth on mismatch costs is comparable in magnitude to the effect on production costs, suggesting that the operational benefits of inventory pooling achievable by rationalizing product lines can be very substantial. Furthermore, we quantify the benefit of using a platform strategy to mitigate the effects of a broad product line on production costs. Finally, we propose an additional, attribute-based measure of product line breadth and find that product line breadth can work as a hedge against changes in demand conditions. For example, automakers that offer a broader range of fuel economy levels increase their market share and reduce their average discounts as gas prices become more volatile.

Keywords: variety; pricing; automotive industry; marketing/operations interface; platforms; empirical operations management; Product Marketing; Production; Management; Market Platforms; Auto Industry;

Format: Print

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Moreno, Antonio, and Christian Terwiesch. "The Effects of Product Line Breadth: Evidence from the Automotive Industry." Marketing Science 36, no. 2 (March–April 2017): 254–271.

Spoilage, expiration, damage due to employee/customer handling, employee theft, and customer shoplifting usually are not reflected in inventory records. As a result, records often report phantom inventory, i.e., units of good not available for sale. We derive an optimal polynomial-time algorithm for the auditing and replenishment problem with phantom inventory, under the assumption that inventory is known immediately after replenishment. Moreover, we numerically show that a projected service-level threshold policy performs comparably to the optimal.

In 2010, amidst the growth of ecommerce and the emergence of new, purely online, fashion players, Zara launched its first online store, Zara.com. Since then, Zara’s online business had grown at a fast pace. By 2018, 12% of Inditex Group’s total sales came from the online channel. Since the inception of the first online store, Inditex leadership wanted its online and offline businesses to be integrated. However, the increase of online orders challenged some of its operations. Inditex was committed to the vision of becoming fully integrated, fully digital, and fully sustainable by 2020. How could stores continue to be relevant in a world with increasing presence of online touchpoints? What should the store portfolio look like in the medium term? How should Zara use and advance the integrated model going forward? What other challenges and opportunities would arise with the increase of online sales?

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The Effects of Product Line Breadth: Evidence from the Automotive Industry

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