Optimal Sales and Production Rollover Strategies under Capacity Constraints

Product rollovers take place when a product generation is replaced by a successor generation. The problem of deciding on the number of old products to be pre-produced before the introduction period, and then deciding on the prices, sales volumes, and production volumes of the old and the new generation during the introduction period under capacity constraint is considered. Production capacity limitations are commonly observed during the introduction period of a new product. We provide the first study that examines how a production capacity constraint affects the optimal decisions and thereby determine the optimal sales and production rollover strategies. The optimal decisions for a deterministic period-based model are provided in closed-form. The optimal solutions are compared numerically to a sequential planning approach that is common in industrial practice. A single sales/production rollover strategy implies that the sales/production of the old generation are discontinued before introducing the new generation. With a dual sales/production rollover strategy, the old and the new generation are sold/produced simultaneously. Depending on the capacity shortage, there are two levels of mitigation actions: (i) increasing the prices, (ii) changing the sales and/or production rollover strategies and pre-production and adjusting the prices accordingly. If the capacity is unlimited, choosing the same strategy for the sales and production rollover is always optimal. In the case of limited capacity, we characterize the conditions under which it is optimal to combine a single production rollover strategy with a dual sales rollover strategy. We show that choosing the optimal sales and production rollover strategy that explicitly considers the capacity constraint has a high impact on the firm's profit and substantially outperforms a sequential planning approach.