Supply chain coordination in the new product launch

Abstract

In some industries, product components provided by key suppliers have a great impact on the performance of downstream manufacturers’ products. Therefore, downstream manufacturers should plan the launch times of their new products according to the technology upgrading routes of upstream suppliers. We consider a supply chain consisting of a supplier and a manufacturer. They introduce new products at regular intervals. First, the supplier decides its product launch cycle. Then, the manufacturer chooses to launch one new product (denoted as the single flagship strategy) or two new products at the staggered time (denoted as the staggered double flagship strategy) in the supplier’s product cycle. We find that the profit of the supplier is higher when the manufacturer adopts the staggered double flagship strategy. However, the profit of the manufacturer adopting the single flagship strategy is higher when the R&D cost of the manufacturer is high. The supplier can induce the manufacturer to adopt the staggered double flagship strategy by providing compensation. We show that as the manufacturer’s R&D cost increases, the supplier should prioritise extending the product cycle until the supply chain is coordinated, after which it continues to compensate the manufacturer through revenue sharing until the compensation becomes ineffective.

Keywords:

• New product introduction
• supply chain management
• time-pacing
• upgrade timing

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 Some people call it the double flagship strategy. However, this term cannot be distinguished from the situation wherein every time a company launches a new product, it always launches two flagship products simultaneously. Thus, we refer to it as the staggered double flagship strategy.

2 Samsung uses its own Exynos SoC in flagship smartphones in Korea and Europe and uses Qualcomm Snapdragon SoC in flagship smartphones in China mainland and the United States.

3 Because customer demand is changing and the technological level of the industry is improving, the product will become obsolete gradually after release.

4 The R&D cost in this paper refers to all the fixed costs of launching a new product. It mainly includes product R&D costs, sales and advertising expenses and so on. Some papers refer to it as the product launch cost. To highlight the importance of product R&D, this paper refers to it as the product R&D cost.

5 This condition is unnecessary and easy to generalise. Assuming that the residual value of the old product is $r$ and the unit production cost is $c,$ then the product price $p=u$ becomes $p=u+r,$ and the profit of unit product is $p-c=u+r-c.$

6 This assumption is unnecessary. Assuming that $N_1$ customers buy every version of the product and $N_2$ customers buy every other version, then the total demand is $N_1+\frac{N_2}{2}.$ Because the utility of each type of customers is different, the precise calculation will be exceedingly complicated, but this has no effect on the main results.

7 The establishment condition of this hypothesis is that $\frac{1-\lambda }{\lambda }$ cannot be large, i.e., $\lambda$ cannot be small. In the paper, the supplier is the leader and its revenue ratio is naturally not small.

8 Specifically, it is similar to the cannibalization effect which is often considered in the literature of product line design.

Additional information

Funding

This work was supported by the National Natural Science Foundation of China [grant numbers 71991464/71991460 and 71921001].