Alternative supply chain production–sales policies for new product diffusion: An agent-based modeling and simulation approach

Applying agent-based modeling and simulation (ABMS) methodology, this paper analyzes the impact of alternative production–sales policies on the diffusion of a new generic product and the generated NPV of profit and concludes that on average, the build-up policy with delayed marketing is the preferred policy.

Abstract

Applying Agent-Based Modeling and Simulation (ABMS) methodology, this paper
\nanalyzes the impact of alternative production-sales policies on the diffusion of a new
\nproduct and the generated NPV of profit. The key features of the ABMS model, that
\ncaptures the marketplace as a complex adaptive system, are: (i) supply chain capacity is
\nconstrained; (ii) consumers' new product adoption decisions are influenced by marketing
\nactivities as well as positive and negative word of mouth (WOM) between consumers; (iii)
\ninteractions among consumers taking place in the context of their social network are
\ncaptured at the individual level; and (iv) the new product adoption process is adaptive.
\nConducting over 1 million simulation experiments, we determined the "best" productionsales
\npolicies under various parameter combinations based on the NPV of profit generated
\nover the diffusion process. The key findings are as follows: (1) on average, the build-up
\npolicy with delayed marketing is the preferred policy in the case of only positive WOM as
\nwell as the case of positive and negative WOM. This policy provides the highest expected
\nNPV of profit on average and it also performs very smoothly with respect to changes in
\nbuild-up periods. (2) It is critical to consider the significant impact of negative word-of-mouth
\non the outcomes of alternative production-sales policies. Neglecting the effect of
\nnegative word-of-mouth can lead to poor policy recommendations, incorrect conclusions
\nconcerning the impact of operational parameters on the policy choice, and suboptimal
\nchoice of build-up periods. (authors' abstract)