On the optimal product assortment: Comparing product and customer based strategies

This paper deals with the following general question: which products should be in our product assortment/portfolio if part or all of the (potential) customers only order if we can deliver on-time the desired quantities for all or a predefined subset of the products that the customers desire (one-stop-shopping concept)? In this context, two strategies are compared: a product based assortment, in which products are included based on their expected individual contribution to the total net profit, and a customer based assortment, in which customers are included based on their expected contribution to the total net profit. Mathematical models are presented to calculate the net profit for each of the above two strategies for a manufacturer confronted with limited production capacity, setup times, setup cost, and holding cost. The results of a case study from practice show that an assortment made up of products selected based on their individual contribution may lead to a much lower expected total net profit than a customer based assortment. Suggestions for further research are given.