Abstract
The number of products or stock keeping units (SKUs) in most product categories has been growing at a phenomenal rate. Even though the number of products increases, the average sale of products can decrease. Due to cannibalization, the sales of some products may even drop below a threshold that makes them unprofitable. This has spurred some firms to remove these under-performing products from their product lines. This ad-hoc “trim the lame duck” procedure can have an adverse effect on the firm’s profit for two reasons: first, the “lame duck” may not be the most substitutable product within the line, trimming it results in higher lost sales; second, the “lame duck” may be cheaper to keep with lower inventory cost due to less variability in sales. As an initial step to developing a better product elimination procedure, we use a model that explicitly captures product substitution phenomenon to examine various product portfolios. We compare the mean and the variance of the sales associated with two basic strategies: trimming and no trimming. Our results provide insight into when and which products could be trimmed.
We would like to thank Professor Josh Eliashberg, Professor Amiya K. Chakravarty and an anonymous reviewer for their constructive comments on an earlier version of this paper. This research is partially supported by the Center for Technology Management at UCLA and NUS Research Grant R-314-000-018-112.
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Chong, JK., Ho, TH., Tang, C.S. (2005). Demand Modeling in Product Line Trimming: Substitutability and Variability. In: Chakravarty, A.K., Eliashberg, J. (eds) Managing Business Interfaces. International Series in Quantitative Marketing, vol 16. Springer, Boston, MA. https://doi.org/10.1007/0-387-25002-6_2
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DOI: https://doi.org/10.1007/0-387-25002-6_2
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