Product rollover strategy and inventory policy of a monopoly manufacturing substitutable products

Abstract

In many industries, effective management of product rollovers is extremely important for being able to survive. In management of product rollovers, timing decision; i.e., time to introduce of a secondary product and time to phase out a primal product is critical. Inventory policy is another factor that affects management of rollovers. In this study, we analyze primary rollover strategy of a monopoly manufacturing two substitute products together with its contingency strategies over a two period planning term. Specifically, we consider four different primary rollover strategies, namely Base Strategy, IS Strategy, ISES Strategy and IFES Strategy, derived with existence/non-existence of the products. Base Strategy is associated with the case where we decide to introduce and sell only the primary product. On the other hand, IS Strategy brings introduction of a newer (secondary) product in the second period. If monopoly chooses to make its move with IFES Strategy, it introduces both of the products simultaneously in the first period while phasing out the primary product in the beginning of the next period. Another alternative strategy, ISES Strategy, would be selling products in different periods, primary product first and secondary product next. When a primary strategy is selected, there is a commitment to this strategy. In this study, to reflect market conditions, we consider two alternative demand forms; multiplicative and additive forms and there is an adjustment to market through inventory policy. Firm replenishes its stocks with an order-up-to policy in each period where demands for these substitute products are assumed to be correlated and these products assumed to be substitutable; i.e., there exists stockout-induced substitution between the products.In the analysis, we determine the optimal inventory levels when a specified rollover strategy is executed. Moreover, we explore the conditions, which play important role in making rollover strategies. Furthermore, factors that affect early and late introduction of a new product into the market are investigated. We also discuss the factors that motivate a monopoly to introduce a new product.