A Procedure for Product Variety Reduction That Considers Linked Revenue

Abstract

Manufacturing companies are facing rising complexity due to customer demands for customized products and additional support services. This complexity comes at a high cost, and the benefits to be gained from product variety reduction projects are therefore significant. Several methods for the reduction of product complexity have been proposed in the literature. Such methods, however, to a large extent fail to consider the role of "linked revenue", i.e., the revenue from the sales of product variants that is lost if other product variants bought by the same customers are eliminated. To address this gap in the literature, this paper develops a procedure for product variety reduction that considers linked revenue. The procedure supports managers in (1) identifying unprofitable products that can be pruned without risking the linked revenue of vital customers, (2) systematically evaluating the profitability and potential of these products, and (3) collecting feedback from affected account managers, before finally deciding which products to eliminate. The procedure is tested using a case study, which shows promising results.