How inventory cost influences introduction timing of product line extensions

Abstract

In the industry with radical technology push or rapidly changing customer preference, it is firms' common wisdom to introduce high-end product first, and follow by low-end product-line extensions. A key decision in this "down-market stretch" strategy is the introduction time. High inventory cost is pervasive in such industries, but its impact has long been ignored during the presale planning stage. This study takes a first step toward filling this gap. We propose an integrated inventory (supply) and diffusion (demand) framework and analyze how inventory cost influences the introduction timing of product-line extensions, considering substitution effect among successive generations. We show that under low inventory cost or frequent replenishment ordering policy, the optimal introduction time indeed follows the well-known "now or never" rule. However, sequential introduction becomes optimal as the inventory holding gets more substantial or the product life cycle gets shorter. The optimal introduction timing can increase or decrease with the inventory cost depending on the marketplace setting, requiring a careful analysis. © 2013 Production and Operations Management Society.