Manufacturing flexibility: methods for measuring the impact of product variety on performance in process industries

Abstract Product variety is often assumed to yield competitive advantage by offering products or services tailored to specific market segments. This strategy should result in more total sales volume or higher prices, and presumed profit, gained by meeting more specialized demands. However, achieving competitive advantage through increased product variety is heavily dependent on the proper alignment of the marketing and manufacturing strategies. This paper shows that adding product variety can have adverse cost and margin implications when marketing and manufacturing strategies are mis‐aligned. The critical strategic issues involve product pricing and manufacturing flexibility in product mix. We report methods that can be used to measure product mix flexibility and manufacturing performance in terms of costs and margins based on actual orders and production data. Such methods provide a means of empirically diagnosing the degree of strategic mis‐match using actual operating data. These methods are general in nature, and have been tested in field research on high volume batch processes that are representative of many firms in process industries. The results show that gaining competitive advantage through increased product variety requires a clear understanding of the process choice required to support the contemplated range of product volumes, and the cost and profitability trade‐offs involved.