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What is the right supply chain for your bundle? A conceptual

ABSTRACT

Product bundling is largely discussed in

from the pricing and consumer value perspectives. The literature lacks theoretical and empirical

research investigating operational and supply chain implications of bundling

in the bundle are delivered through supply chains

bundling strategies from a supply chain

in the bundle and supply chain combinations

inefficiencies in the bundling chain

article.

Keywords: Bundling, supply chain,

Journal of Management and Marketing Research

What is the right supply chain


framework

Ahmet Ozkul

University of New Haven

is largely discussed in the economics and marketing literature


research investigating operational and supply chain implications of bundling while the

through supply chains. The purpose of this study is to

supply chain standpoint. It is hypothesized that mismatching product

and supply chain combinations may result in costly capacity and invent

chain. A framework and set of propositions are provided

Bundling, supply chain, forecasting, flexibility, Bullwhip, capacity, inventory


supply chain,


economics and marketing literature usually


while the products

The purpose of this study is to investigate

that mismatching products

and inventory

A framework and set of propositions are provided in the

flexibility, Bullwhip, capacity, inventory

INTRODUCTION

A common marketing practice

products or services are physically bundled in

to gain competitive advantages that include reduced

brand recognition, market share and sales

McCardle et al., 2007; Son et al., 2006

AT&T’s home phone, Internet, cell phone and digital TV bundles, Apple’s iPhone and AT

cell phone voice and data plans, McDonald’s use of Disney movie superhero characters and

LEGO toys as part of kid’s menu, PC’s with “Intel inside”, fast food restaurant combos,

computer bundles including keyboard, mouse, LCD screen and a printer, trav

including air tickets, hotel room and a rental car, and package deals such as toothpaste and

toothbrush, shampoo and conditioner sold in the same bundle.

Bundling has been studied

focusing on such issues as optimal bundle prices,

consumer perceptions on the bundle. Our literature review showed that little research has been

done on bundling from the viewpoints of

is to explore the bundling from the

and testable propositions.

The following section is a

examination of the variables used in the framework

model and a set of propositions. Then,

framework, and implications for academicians and practitioners.

LITERATURE REVIEW

In product bundling, two or more end products are bundled to enhance market positions,

increase profits, and deliver a higher value to the customers

the 60s (e.g. Stigler, 1963), a large body of literature has been accumulated on bundling

economics and marketing literatures

referred to Venkatesh and Mahajan (2009).

Most research investigates optimal bundling policies under various environmental

conditions to maximize the profits, a

bundle than the sum of the individual products (

Mahajan, 2009; Ferreira and Wu, 2009; Andrews et al., 2010).

The bundling firms should consider

products or attributes to bundle (Chung and Rao, 2003; Bradlow and Rao, 2000), creating

sufficient value for the customers (Ansari et al., 1996), matching the internal capabilities for the

bundle (Lawless, 1991), and legal i

Katz, 2001)

From the consumer’s perspective, the benefits of bundling include reducing transaction

costs, cost of searching and locating each product (Lawless, 1991

receiving assembled and matching

Tellis, 2002) and promotional discounts (

2009).



marketing practice today is the product bundling, in which two or more

are physically bundled into a single offering. Many companies

that include reduced logistics and transaction costs, increased

market share and sales (Varadarajan, 1986; Venkatesh & Mahajan, 1997;

, 2006). Some of the well-known bundling examples include

AT&T’s home phone, Internet, cell phone and digital TV bundles, Apple’s iPhone and AT



computer bundles including keyboard, mouse, LCD screen and a printer, travel packages


toothbrush, shampoo and conditioner sold in the same bundle.

been studied largely in the marketing and economics literature, mostly

optimal bundle prices, bundle design and product selection


from the viewpoints of operations and supply chains. Our purpose in this study

the supply chain management perspectives, develop

a literature review on bundling and the supply chains

used in the framework is provided, followed by the conceptual

Then, we conclude the paper with a discussion of

, and implications for academicians and practitioners.

wo or more end products are bundled to enhance market positions,

increase profits, and deliver a higher value to the customers (Blattberg and Neslin, 1989)

large body of literature has been accumulated on bundling

economics and marketing literatures. For a comprehensive review on bundling, the reader is

referred to Venkatesh and Mahajan (2009).


conditions to maximize the profits, and conditions where consumers place more value on the

bundle than the sum of the individual products (Janiszewski and Cunha, 2004; Venkatesh and

Mahajan, 2009; Ferreira and Wu, 2009; Andrews et al., 2010).

The bundling firms should consider a number of bundling issues including which



bundle (Lawless, 1991), and legal issues of bundling (Stremersch and Tellis, 2002; Gilbert and


costs, cost of searching and locating each product (Lawless, 1991; Yadov and Monroe, 1993

and matching products - integration and complementarities (Stremersch and

and promotional discounts (Soman and Gourville, 2001; Venkatesh and Mahajan,


supply chain,

bundling, in which two or more end

any companies use bundling

costs, increased

Venkatesh & Mahajan, 1997;

known bundling examples include

AT&T’s home phone, Internet, cell phone and digital TV bundles, Apple’s iPhone and AT&T’s



el packages


economics literature, mostly

product selection, and


urpose in this study

develop a framework

supply chains. Next,

the conceptual

ion of the

wo or more end products are bundled to enhance market positions,

lattberg and Neslin, 1989). Since

large body of literature has been accumulated on bundling in the

For a comprehensive review on bundling, the reader is


nd conditions where consumers place more value on the

Venkatesh and

including which



ssues of bundling (Stremersch and Tellis, 2002; Gilbert and


; Yadov and Monroe, 1993),

integration and complementarities (Stremersch and

Venkatesh and Mahajan,

Bundles can come in pure or mixed forms. In pure bundling, products

exclusively in bundles. In mixed bundling, individual products are also sold separately. In price

bundling the bundle offers a discount

product bundle sells for more than the sum of the pri

additional benefits, such as complementarities and integration (Stremersch and Tellis, 2002).

While the traditional bundling

critical factors for successful bundling

align bundling objectives and activities with those of the other firms in their supply chain. While

most bundling research focuses on firm level decisions and lack research on bundling’s imp

on the supply chain, independent and uncoordinated decisions may result in lower firm

performances all over the supply chain. For example, e

bundle or co-promotion may lead to unexpected

insufficient capacity, and stock-outs, eventually resulting in

problems. A well-known case is a promotional campaign by Maytag's Hoover subsidiary in the

United Kingdom that turned out a marketing failu

increase resulting from the co-promotion

A SUPPLY CHAIN PERSPECTIVE ON BUNDLING

A supply chain can be described as a network of organizations such as suppliers,

manufacturers, distributors, and retailers converting raw materials into the specified end

and delivering these end-products to the customers (Simchi

perspective, two or more end products

assembled into a single package. The resulting

end product (the bundle) involving many suppliers in the delivery process.

of literature in the operations and supply chain

strategic factors to ensure smooth flow of materials meeting supply and demand. Managing large

numbers of parts and suppliers, and complex network relationships are the challenges for

practicing managers. Many resear

product/market characteristics and capabilities of the suppliers. (Carter and Narasimhan, 1996;

de Groote, 1994; Fine, 1998; Fisher, 1997;

Fisher (1997) argued that

selling for better overall performance

product (e.g. sugar, salt, cooking oil)

predictable demand, and the supply chain providing

consumer electronics) should be “

demands. Later, Fisher’s model was extended by others, including

and Srinivasan (2005), Wong et al.

(2007) conducted an empirical investigation to test Fisher’s model

supporting the model. On the other hand,

(2010) found that the association between product

significant. Their findings showed that a

responsiveness) was employed by most organi

The supply chain literature also includes

phenomenon, called the Bullwhip effect, in which variance of orders increases as one goes

upstream in the supply chain. The effect



Bundles can come in pure or mixed forms. In pure bundling, products are sold


discount over the sum of the prices of individual products, while

sells for more than the sum of the prices of individual products due to the


traditional bundling literature analyze various bundling strategies

undling, there is still need for more studies guiding managers to

and activities with those of the other firms in their supply chain. While

most bundling research focuses on firm level decisions and lack research on bundling’s imp


performances all over the supply chain. For example, extent of initial customer response to

may lead to unexpected surge in demand, overwhelmed facilities,

outs, eventually resulting in increased costs; quality or delivery

is a promotional campaign by Maytag's Hoover subsidiary in the

United Kingdom that turned out a marketing failure due to the unexpected size of the demand

promotion (Hartley, 2005).

A SUPPLY CHAIN PERSPECTIVE ON BUNDLING


and retailers converting raw materials into the specified end

products to the customers (Simchi-Levi et al., 2000). From the bundling

end products, belonging to the same or different supply chains

into a single package. The resulting network structure is still a supply chain with an

involving many suppliers in the delivery process. There is a large body

perations and supply chain management extensively studying

to ensure smooth flow of materials meeting supply and demand. Managing large


researchers suggested that managers should find a match between

market characteristics and capabilities of the suppliers. (Carter and Narasimhan, 1996;

de Groote, 1994; Fine, 1998; Fisher, 1997; Mason-Jones et al., 2000; Lee, 2002).

that the supply chains should match the type of products firms are

selling for better overall performance. In his model, the supply chain providing a “

(e.g. sugar, salt, cooking oil) should be “physically efficient” to take advantage o

he supply chain providing an innovative product (e.g. fashion apparel,

should be “market responsive” to quickly respond to unpredictable

Later, Fisher’s model was extended by others, including Li and O’brian (2001)

et al. (2005), Vonderembse et al. (2006). Selldin and Olhager

(2007) conducted an empirical investigation to test Fisher’s model and found evidence

model. On the other hand, also testing Fisher’s model empirically,

that the association between product type and supply chain strategy

Their findings showed that a hybrid strategy (pursuing both efficiency and

yed by most organizations.

upply chain literature also includes research on the demand variance amplification


upstream in the supply chain. The effect leads to unnecessarily larger inventories and inefficient


supply chain,

are sold


over the sum of the prices of individual products, while

ces of individual products due to the


bundling strategies and focus on

, there is still need for more studies guiding managers to

and activities with those of the other firms in their supply chain. While

most bundling research focuses on firm level decisions and lack research on bundling’s impact


customer response to the

lmed facilities,

quality or delivery

is a promotional campaign by Maytag's Hoover subsidiary in the

unexpected size of the demand


and retailers converting raw materials into the specified end-products

Levi et al., 2000). From the bundling

different supply chains, are

structure is still a supply chain with an

There is a large body

nt extensively studying operational and

to ensure smooth flow of materials meeting supply and demand. Managing large


find a match between

market characteristics and capabilities of the suppliers. (Carter and Narasimhan, 1996;

Lee, 2002).

products firms are

a “functional”

to take advantage of the

(e.g. fashion apparel,

responsive” to quickly respond to unpredictable

brian (2001), Reeve

Selldin and Olhager

evidence

also testing Fisher’s model empirically, Lo and Power

and supply chain strategy was not

hybrid strategy (pursuing both efficiency and

demand variance amplification


unnecessarily larger inventories and inefficient

use of production resources. The

processing/forecasting, order batching, shortage gaming, and

1997). In terms of promotions, discounts made in certain periods encourage forward buying

(ordering more than needed) which triggers manufacturing activities in the supply chain

disproportionally, usually followed by order cancellations and returns when the demand is not

realized. Lummus, Vokurka and

impacting the supply chain in a simulation study. The surges in demand are passed upstream to

other links in the chain and force them to make production in large quantitie

mean order size increases, firms need to have enough capacity to meet peak levels of demand

incurring costs of additional personnel, equipment and space. Thus, managers are advised to

improve supply chain flexibility and acquire addi

marketing and operations activities all over the chain

(especially the ones for promotional purposes

demand and cause ripple effects in the upstream supply chain. Information sharing, strategic

positioning of inventories, smaller batch sizes

alleviate the problem (Forrester, 1961; Towill et al., 1992; Lee et al.,

2006; Tang and Tomlin, 2008; Datta and Christopher, 2011).

A MODEL TO MATCH THE RIGHT SUPPLY CHAIN FOR THE BUNDLE

The literature review above indicates that most economics and marketing literature on

bundling lack studies on operationa

literature lack studies on bundling of finished products.

operations/supply chain perspective, this paper develops a bundling model in the context of

supply chains. The model links customer demand forecasting accuracy, product bundle

matching, supply chain matching, and flexibility to the supply chain’s capacity and inventory

performance.

Customer Demand Response to the Bundle

Operations function in a typical

levels of the safety inventories based on demand forecasts

such as bundling that could possibly

and Spearman, 2001) . Since a bundle could be considered a new product and past demand data

is usually not available, the forecasts developed will probably be subjective based on customer

surveys or expert judgments (Anupindi

demand and its variability are within the expected range, the bundling firms should have no

major issues in meeting the customer demand.

the facilities will run at low utilization levels and/or carry unnecessarily high level of inventories.

However, if the demand for the bundle

proportions, the capacities and inventories in the bundling firms may be

costly overtime or even outsourcing could be options to remedy the situation

have to wait (backorders) or just cancel their orders

expected demand for the bundle is statio

surge may manifest itself with increased mean and



use of production resources. The main causes of the Bullwhip effect include demand signal

, order batching, shortage gaming, and marketing promotions

discounts made in certain periods encourage forward buying



Vokurka and Duclos (2003) investigate price discounts and trade deals in


other links in the chain and force them to make production in large quantities in short periods. As



improve supply chain flexibility and acquire additional capacity and inventory, and coordinate

marketing and operations activities all over the chain. In the same line of thinking, bundling

for promotional purposes – co-promotions) may also create a surge in

ffects in the upstream supply chain. Information sharing, strategic

, smaller batch sizes and flexible processes are recommended to

alleviate the problem (Forrester, 1961; Towill et al., 1992; Lee et al., 1997; Potter and Disney,

Datta and Christopher, 2011).



bundling lack studies on operational aspects of bundling, and most operations and supply chain

literature lack studies on bundling of finished products. In response to the literature’s lack of


chains. The model links customer demand forecasting accuracy, product bundle


Demand Response to the Bundle and Forecast Accuracy

a typical firm normally makes capacity adjustments and decide the

based on demand forecasts in preparation of planned initiatives

such as bundling that could possibly modify the customer demand and increase variability (Hopp

Since a bundle could be considered a new product and past demand data


Anupindi et al., 2011; Fildes et al., 2009). If the magnitude of the


in meeting the customer demand. If the demand turns out to be less than expected,

will run at low utilization levels and/or carry unnecessarily high level of inventories.

for the bundle results in a surge and volatility in unexpected

proportions, the capacities and inventories in the bundling firms may be exhausted

outsourcing could be options to remedy the situation, or customer

have to wait (backorders) or just cancel their orders. Figure 1 shows an example case in which

expected demand for the bundle is stationary with a mean (µ) and variance (σ2). The demand

surge may manifest itself with increased mean and/or variance as illustrated in the figure


supply chain,

demand signal

marketing promotions (Lee et al.,

discounts made in certain periods encourage forward buying



(2003) investigate price discounts and trade deals in


s in short periods. As



tional capacity and inventory, and coordinate

. In the same line of thinking, bundling

promotions) may also create a surge in

ffects in the upstream supply chain. Information sharing, strategic

and flexible processes are recommended to

Potter and Disney,



l aspects of bundling, and most operations and supply chain

In response to the literature’s lack of


chains. The model links customer demand forecasting accuracy, product bundle


firm normally makes capacity adjustments and decide the

in preparation of planned initiatives

crease variability (Hopp

Since a bundle could be considered a new product and past demand data


). If the magnitude of the


If the demand turns out to be less than expected,

will run at low utilization levels and/or carry unnecessarily high level of inventories.

in unexpected

exhausted. In this case,

, or customers will

Figure 1 shows an example case in which

). The demand

as illustrated in the figure.

Underestimating or overestimating the demand

supply chain when forecasting errors at each stage of

effect (Lee et al., 1997; Chen et al., 2000;

may lead to the shortages at the suppliers or

critical to accurately forecast the customer response to the bundle and make

adjustments before starting the bundling initiative in the firms and suppliers across the chain.

The significance of the impact of forecasting accuracy on

known (for example, Chen et al., 2000;

Chandra and Grabis, 2005; Fildes et al., 2009

Figure 1 Expected demand

Bundle Composition and Matching

Bundle composition is concerned with the s

This selection affects not only the success of the bundle and t

also the perceived value of the bundle from the c

In terms of product integration and complementarities, there are three major categories

(Stremersch and Tellis, 2002;Venkatesh

products (e.g. TV and DVD player bundle)

to successive sport games), and 3)

McCardle et al. (2007) investigated bundles

basic products: products with long l

products: products with relatively short life cycles and highly variable demand

Based on these categories, t

guidelines on how to compose bundles considering prices and customer demands of individual

and bundled products to maximize

traditional considerations, some authors included other variables into the analysis. F

Eppen et al. (1991), Ernst and Kouvelis (1999)

inventories in a firm. However, in general,

and incorporating additional financial, operational and marketing constraints that

considered in constructing the bundl

0

5

10

15

20

25

30

35

40

45

50

1 2 3

Quantity



Underestimating or overestimating the demand could become even worse in the upstream

rrors at each stage of the chain are amplified due to the Bullwhip

Chen et al., 2000; Chandra and Grabis, 2005; Fildes et al., 2009

es at the suppliers or delivery delays to the bundling firms. Thu

critical to accurately forecast the customer response to the bundle and make operational


impact of forecasting accuracy on the supply chain performance is well

Chen et al., 2000; Zhao, Xie and Leung, 2002; Zhao, Xie and Wei, 2002;

Fildes et al., 2009).

demand and surge in demand

and Matching Products

Bundle composition is concerned with the selection of the right products

This selection affects not only the success of the bundle and the profitability of the sellers

also the perceived value of the bundle from the consumer’s perspective.

n terms of product integration and complementarities, there are three major categories

Venkatesh and Mahajan, 2009): 1) Bundle of complementary

products (e.g. TV and DVD player bundle), 2) bundle of substitute products (a two ticket combo

and 3) bundle of independent products (Diet Coke with NutraSweet)

2007) investigated bundles in the following product categories:

roducts with long life cycles and more stable demand, and 2) bundles of

with relatively short life cycles and highly variable demand.

Based on these categories, the marketing and economics literature provides general

undles considering prices and customer demands of individual

and bundled products to maximize sellers’ profits or consumer’s surplus. Beyond these

traditional considerations, some authors included other variables into the analysis. F

Ernst and Kouvelis (1999) and Bulut et al. (2009) investigate

in general, the literature lacks research investigating, identifying

financial, operational and marketing constraints that

bundles (McCardle et al., 2007).

4 5 6 7 8 9 10 11 12 Time

Expected Surge


supply chain,

could become even worse in the upstream

due to the Bullwhip

Fildes et al., 2009) which

delays to the bundling firms. Thus, it is

operational


in performance is well

, 2002; Zhao, Xie and Wei, 2002;

election of the right products for the bundle.

he profitability of the sellers, but

n terms of product integration and complementarities, there are three major categories

Bundle of complementary

a two ticket combo

Diet Coke with NutraSweet).

1) bundles of

bundles of fashion

literature provides general

undles considering prices and customer demands of individual

Beyond these

traditional considerations, some authors included other variables into the analysis. For example,

investigate bundling and

the literature lacks research investigating, identifying

financial, operational and marketing constraints that should be

Time

Fisher (1997) considered

model, “functional” products are

margins, and “innovative” products are characterized by

margins. These categories correspond to

respectively. Fisher (1997) argue

for better overall performance. When supply chains do not match the product types,

inefficiencies and performance problems are observed, including excessive inventories, or

product stock-outs, capacity shortages

customer satisfaction and lower profits.

products should be physically efficient

at the lowest cost possible. On the other hand, the

market responsive supply chain to quickly respond to unpredictable demands.

Table 1 Matching Supply Chain strategies with product types

Source: Fisher (1997)

In this paper, we propose to use

bundling decisions so that operational and supply chain implications are

traditional bundling analysis. On the other hand

(2007) considered mixed bundles, such as the

product. These bundling options are also

Assume that a two product bundle is considered. The firs

product due to its relative importance

“partner” product. The focal product is supplied by the focal firm,

supplied by the partner firm in response to

in which X is the focal product, and Y is the partner product, and F for the functional type and I

for the innovative type, the two product bundle combinations are listed as

[I,F] and [I, I]. We hypothesize that each bundle with different individual product characteristics

would make different operations implications (as well as marketing, finance and other functions)

including the capacity, inventory or

inventory implications of the bundling.

In Table 2, typical pre-bundling conditions

operations strategy used to satisfy the customer demand

product operates at a high level of capacity

achieve efficient production taking advantage of the stable customer demand. On the other hand,

facing an unstable, highly volatile

innovative product keeps higher capacity levels (lower

Product Type

Supply Chain Strategy

Efficiency

Responsiveness



considered a two product category in the context of supply chains.

model, “functional” products are primarily characterized by predictable demand and low profit

, and “innovative” products are characterized by uncertain demand and high profit

rrespond to McCardle et al. (2007)’s basic and fashion product

rgues that the products should be supplied by the right supply chain

When supply chains do not match the product types,

cies and performance problems are observed, including excessive inventories, or

capacity shortages or idleness, delivery delays, and eventually

lower profits. As seen in Table 1, the supply chain providin

efficient with efficient processes to satisfy the predictable demand

On the other hand, the innovative products should be

supply chain to quickly respond to unpredictable demands.

Matching Supply Chain strategies with product types

Fisher (1997)

we propose to use Fisher’s product/supply chain matching framework in

operational and supply chain implications are introduced

On the other hand, neither Fisher (1997) nor to McCardle et al.

sidered mixed bundles, such as the bundle of one functional and one innovative

product. These bundling options are also studied in this paper.

Assume that a two product bundle is considered. The first product is called

importance compared to the other product in the bundle, which is the

ocal product is supplied by the focal firm, and the partner product is

response to the orders of the focal firm. If we use [X,Y] notation,


for the innovative type, the two product bundle combinations are listed as follows:

We hypothesize that each bundle with different individual product characteristics

would make different operations implications (as well as marketing, finance and other functions)

capacity, inventory or lead times. In this paper, we consider only capacity and

inventory implications of the bundling.

bundling conditions of each product type are shown

operations strategy used to satisfy the customer demand. The firm supplying the functional

level of capacity utilization and/or keeps low inventory levels

efficient production taking advantage of the stable customer demand. On the other hand,

highly volatile (high variance) customer demand, the firm providing the

keeps higher capacity levels (lower utilization) and/or keeps high inventory

Product Type

Supply Chain Strategy

Functional

Innovative

Efficiency Match Mismatch

Responsiveness Mismatch Match


supply chain,

in the context of supply chains. In his

predictable demand and low profit

and high profit

(2007)’s basic and fashion products

right supply chains

When supply chains do not match the product types,

cies and performance problems are observed, including excessive inventories, or

eventually lower

he supply chain providing functional

to satisfy the predictable demand

innovative products should be supplied by a

matching framework in the

introduced into the

McCardle et al.

onal and one innovative

called the “focal”

compared to the other product in the bundle, which is the

he partner product is

If we use [X,Y] notation,


follows: [F,F], [F,I],

We hypothesize that each bundle with different individual product characteristics

would make different operations implications (as well as marketing, finance and other functions),

In this paper, we consider only capacity and

are shown in terms of

he functional

and/or keeps low inventory levels to

efficient production taking advantage of the stable customer demand. On the other hand,

providing the

and/or keeps high inventory

buffers.

Prior to the bundling initiative starting for the first time, operations managers at the firms

change capacity and inventory levels based on the forecasted, expected levels of the customer

demand for the bundle. This capacity adjustment is usually a relatively longer term solution

involving hiring workers, acquiring equipment or space, and providing training. Past

customer surveys and expert judgments

The error (difference between forecast and actual) can be covered by short term measures such

as overtime and safety stocks.

Table 2 Customer demands and s

Adapted from: Fisher (1997)

Combining the discussions on

Table 3 shows the capacity/inventory levels that may be needed to successfully execute

bundling initiative. Depending on the accuracy of the demand forecast, capacity/inventory needs

are given for demand overestimated, accurately estimated

The basis for determining the capacity/inventory needs for each combination is explained

below. Consider the accurately estimated demand case. In [F, F] bundle, the demand level and

volatility is not expected to be extreme since the focal product in the bundle is of the functional

type. Also, the fact that the change in the customer demand is forecasted with enough accuracy, a

combination of core capacity expansion and/or some overtime

sufficient to satisfy the mild ups and downs of the demand. A medium level capacity and

inventory needs is projected for this situation.

Table 3 Capacity and inventory needs

Notation: VL: very low, L: low,

Product Type Demand

F Stable

I Unstable

Bundle

Focal

Product

Partner

product

Demand

Overestimated

Focal

F F L

F I L

I F VL

I I VL




and inventory levels based on the forecasted, expected levels of the customer


involving hiring workers, acquiring equipment or space, and providing training. Past

judgments may help with determining error level in the forecasts.


and suitable operations strategies before bundling

Adapted from: Fisher (1997)

Combining the discussions on the forecast accuracy and matching products in a bundle,

inventory levels that may be needed to successfully execute


emand overestimated, accurately estimated and underestimated situations.



olatility is not expected to be extreme since the focal product in the bundle is of the functional


combination of core capacity expansion and/or some overtime and safety inventory should be


inventory needs is projected for this situation.

Capacity and inventory needs during bundling

Notation: VL: very low, L: low, M: medium, H: high, VH: very high

Appropriate Strategy

Demand Capacity Inventory

Stable Tight; high utilization Low

Unstable Ample; low utilization High

Capacity/Inventory Needs

Demand

Overestimated

Demand Estimated

Accurately

Demand

Underestimated

Focal Partner Focal Partner Focal

L M M VH

VL M L VH

L M H H

VL M M H


supply chain,


and inventory levels based on the forecasted, expected levels of the customer


involving hiring workers, acquiring equipment or space, and providing training. Past data,

may help with determining error level in the forecasts.


before bundling

forecast accuracy and matching products in a bundle,

inventory levels that may be needed to successfully execute each


and underestimated situations.



olatility is not expected to be extreme since the focal product in the bundle is of the functional


and safety inventory should be


Inventory

ow

High

Demand

Underestimated

Partner

VH

H

VH

H

Same argument could be made for [F, I] combination.

partner firm providing the innovative product

resources, which reduce the need for

capacity/inventory needs for the partner.

volatile since the focal product is

volatility is transmitted to the partner, whose production system is designed around

efficiency, high utilization and low inventories. Thus,

resources or build inventories, it

outs, or delays. The situation for [I, I] combination is better since the firms providing

innovative products have already ample capacity and/or safety inventories to cope with the

increased volatility.

When the demand for the bundle

are less than enough to satisfy the customer demand.

the functional products, whose supplying firms have

magnitude and volatility of the customer demand.

overestimated, need for additional capacity/inventory resources are none

capacities already acquired are underutilized.

Assuming the product choice is made

at the focal firm to select the right product for the bundle.

where forecast accuracy is low, the partner product could be chosen

managers are advised to avoid [I, F] bundle

Supply Chain Composition and Matching Products and Supply Chains

When each product in a given bundle is supplied by a separate chain, the resulting larger

structure can be called a “bundling chain”, which is illustrated in Figure 2. In this

bundling situation (Guiltinan, 1997), the products in the bundle (X and

separately. Following Fisher’s framework, consider two different supply chains that are

strategically oriented on either efficiency, or responsiveness. Then,

chain produces one primary product that is either functio

shows all possible product pairs and matching (or mismatching) supply chains

framework to match the right supply chain for the bundle

In the purely functional bundle [F,F], both focal and partner products

Their corresponding supply chains could be either an efficient one or a responsive one.

According to Fisher, it is a good match when a functional product is produced by an efficient

supply chain. If not, it is a mismatch. Using product

the functional bundle combinations: F(E)+F(E),

to Fisher, a responsive supply chain making functional products is basically wasting valuable

resources, with low capacity utilization and/or unnecessarily high inventory levels. From this

perspective, the only fully matching bundle is F(E)+F(E).

On the other hand, in the purely innovative bundle [I,I], both of the products are

innovative, and it is a perfect match when their

supply chains are functional, it will be a mismatch. The four innovative bundle combinations are:

I(E)+I(E), I(E)+I(R), I(R)+I(E), I(R)+I(R). According to Fisher, if an innovative product is

supplied by a functional firm, it will be a mismatch due to the high cost of production of the

innovative products with volatile demands. Therefore, the only fully matching bundle is



Same argument could be made for [F, I] combination. However, in this bundle,

partner firm providing the innovative product has already ample capacity and inventory

reduce the need for extra buffers for the bundle; hence the low level of

capacity/inventory needs for the partner. However, when it comes to [I, F] bundle, the demand is

is an innovative one. Through the orders of the focal firm, t

nsmitted to the partner, whose production system is designed around

utilization and low inventories. Thus, unless the partner acquires higher capacity

suffers and experiences costly overtime, outsourcing, stock

outs, or delays. The situation for [I, I] combination is better since the firms providing


for the bundle is underestimated, expanded capacity/inventory levels

are less than enough to satisfy the customer demand. The most affected bundles are the ones with

the functional products, whose supplying firms have little buffers/flexibility in place

itude and volatility of the customer demand. On the other hand, when the demand is

overestimated, need for additional capacity/inventory resources are none to low and

are underutilized.

Assuming the product choice is made by the focal firm, Table 3 may guide the managers

at the focal firm to select the right product for the bundle. The table suggests that i

where forecast accuracy is low, the partner product could be chosen as an innovative one. Also,

[I, F] bundles due to the detrimental effects on the partner firm

and Matching Products and Supply Chains


structure can be called a “bundling chain”, which is illustrated in Figure 2. In this

bundling situation (Guiltinan, 1997), the products in the bundle (X and Y) are also sold


strategically oriented on either efficiency, or responsiveness. Then, assume that each supply

chain produces one primary product that is either functional, or innovative in nature.

all possible product pairs and matching (or mismatching) supply chains providing a

right supply chain for the bundle.

In the purely functional bundle [F,F], both focal and partner products are functional ones.



supply chain. If not, it is a mismatch. Using product(supply chain) notation, we generate all of

the functional bundle combinations: F(E)+F(E), F(E)+F(R), F(R)+F(E), F(R)+F(R). According


utilization and/or unnecessarily high inventory levels. From this

perspective, the only fully matching bundle is F(E)+F(E).


innovative, and it is a perfect match when their supply chains are both responsive. If any of these


I(R)+I(R). According to Fisher, if an innovative product is

functional firm, it will be a mismatch due to the high cost of production of the



supply chain,

in this bundle, the

ample capacity and inventory

ence the low level of the

F] bundle, the demand is

Through the orders of the focal firm, this

nsmitted to the partner, whose production system is designed around stability,

unless the partner acquires higher capacity

utsourcing, stock-

outs, or delays. The situation for [I, I] combination is better since the firms providing the


expanded capacity/inventory levels

The most affected bundles are the ones with

in place to match the

On the other hand, when the demand is

low and extra

by the focal firm, Table 3 may guide the managers

The table suggests that in situations

as an innovative one. Also,

due to the detrimental effects on the partner firm.


structure can be called a “bundling chain”, which is illustrated in Figure 2. In this “mixed”

Y) are also sold


that each supply

nal, or innovative in nature. Table 4

providing a

are functional ones.



(supply chain) notation, we generate all of

F(E)+F(R), F(R)+F(E), F(R)+F(R). According


utilization and/or unnecessarily high inventory levels. From this


supply chains are both responsive. If any of these


I(R)+I(R). According to Fisher, if an innovative product is

functional firm, it will be a mismatch due to the high cost of production of the


I(R)+I(R).

In the [F,I] bundle, the focal product is a functional type while its part

innovative one. Since focal product is more significant than the partner product, the mixed

bundle is called a “functional mix”. The functional mix combos include: F(E)+I(E), F(E)+I(R),

F(R)+I(E), F(R)+I(R). The only fully matching bundle

Figure 2 Bundling in the supply chain

Focal Supply Chain

Supplier

Supplier

X

Focal

Firm

Bundle

End products

Firms

Material/product flows

Bundling Orders

1



In the [F,I] bundle, the focal product is a functional type while its partner product is an



F(R)+I(R). The only fully matching bundle is F(E)+I(R).

in the supply chain

Partner Supply Chain Focal Supply Chain

Partner

Firm

Supplier

Supplier

Supplier

Supplier

Y Y X

Consumers

Focal

Firm

Material/product flows

Bundling Orders


supply chain,

ner product is an



The performance of these bundles is a research question yet to be answered. Since

Fisher’s model implies that a supply chain should

or responsiveness, we can hypothesize that uniformly constructed matching bundles, namely,

efficient supply chains producing functional bundles, F(E)+F(E), or responsive supply chains

producing innovative bundles, I(R)+I(R), should outperform the others. Other mixed bundles and

the ones with mismatching supply chains would not perform as good as the uniform bundles in

terms of capacities or inventories. Other performance measures in operations/supply chain

management include customer order fill rates, delivery lead times, quality measures (such as

rates of scraps, defectives, returns), and cost measures (such as

and inventory holding costs). Since it is impossible to optimiz

time, the bundle should be evaluated in terms of a few key performance measures that are

consistent with firm’s strategic priorities.

Table 4 Matching supply chains with bundles adapted from Fisher (1997)

Notation: F: Functional product, I: Innovative product

Please note that supply chain matching will make sense when

properly matched first. Otherwise, the inefficiencies and volatility will be amplified through the

tiers of the supply chain straining all of the suppliers even if the right supply chain is selected for

the bundle. However, this conclusion is contingent on the accuracy of

When the demand is overestimated, the product and supply chain matching will lose its

significance since ample resources acquired by the firms will absorb negative consequences of

mismatching. On the other hand, if the demand is undere

chains for the right product bundles may not be

Volume Flexibility and Bundles

The stochastic nature of the demand

production according to the changes (ups and downs) in demand.

overtime or safety inventories ensures that

production volume is a significant capabi

agility) over the competition (Lee, 2002

Volume flexibility can be defined

minimal amount of time, effort, cost or performance

Flexibility can be gained from internal or external sources. Internal sources include

slack production capacity and extra inventory buffers although carrying these redundant

resources are usually costly (Sheffi, 2005). Other methods for flexibility include

Bundle Type Functional

Bundle

Product Position Focal Partner

Product Type

SC Type

F

Efficient M

Responsive MM MM




Fisher’s model implies that a supply chain should be strategically designed for either efficiency



I(R)+I(R), should outperform the others. Other mixed bundles and



nagement include customer order fill rates, delivery lead times, quality measures (such as

rates of scraps, defectives, returns), and cost measures (such as labor cost, material cost, ordering

and inventory holding costs). Since it is impossible to optimize these measures all at the same


consistent with firm’s strategic priorities.

Matching supply chains with bundles adapted from Fisher (1997)

Notation: F: Functional product, I: Innovative product, M: Match, MM: Mismatch

Please note that supply chain matching will make sense when products in

first. Otherwise, the inefficiencies and volatility will be amplified through the


the bundle. However, this conclusion is contingent on the accuracy of the demand forecast.



On the other hand, if the demand is underestimated, even selecting

chains for the right product bundles may not be adequate to meet supply and demand.

undles

The stochastic nature of the demand requires the companies to adjust the pace of the

ccording to the changes (ups and downs) in demand. Use of methods such as

or safety inventories ensures that the supply meets the demand. Flexibility in changing

production volume is a significant capability that could constitute a strategic advan

(Lee, 2002).

can be defined as the ability to increase or decrease production in a

minimal amount of time, effort, cost or performance (Carlsson, 1989; Slack,1993;

be gained from internal or external sources. Internal sources include

extra inventory buffers although carrying these redundant

resources are usually costly (Sheffi, 2005). Other methods for flexibility include

Functional

Bundle

Innovative

Bundle

Functional

Mix

Partner Focal Partner Focal Partner Focal

F I I F I

M MM MM M MM

MM M M MM M


supply chain,


be strategically designed for either efficiency



I(R)+I(R), should outperform the others. Other mixed bundles and



nagement include customer order fill rates, delivery lead times, quality measures (such as

cost, material cost, ordering

e these measures all at the same


products in the bundle are

first. Otherwise, the inefficiencies and volatility will be amplified through the


the demand forecast.



selecting the right supply

to meet supply and demand.

to adjust the pace of the

Use of methods such as

supply meets the demand. Flexibility in changing

advantage (such as

the ability to increase or decrease production in a

Slack,1993; Upton,1994).

be gained from internal or external sources. Internal sources include carrying

extra inventory buffers although carrying these redundant

employing

Innovative

Mix

Focal Partner

I F

MM M

M MM

flexible, multi-skilled labor and flexible manufacturing systems (Tang and Tomlin, 2008)

External sources include outsourcing and collaborating with supply chain partners (

Raturi, 2002). Lummus, Duclos,

for the flexibility in the supply chain

flexibility and supply chain performance. Stevenson and Spring (2007) proposed the operational,

tactical, and strategic flexibilities as well as the supply

out that the supply chain flexibility is greater than the sum of the flexibilities of the individual

firms. Lao, Hang and Rao (2010) found empirical evidence between supply fl

supply chain performance.

Figure 3 Demand amplification in

Orders

Focal Supply Chain

Focal Firm

Supplier

Customer Demand

for the Bundle



and flexible manufacturing systems (Tang and Tomlin, 2008)

External sources include outsourcing and collaborating with supply chain partners (

Duclos, and Vokurka, (2003) provides a general conceptual

supply chain, explaining relationships between supplier characteristics,


egic flexibilities as well as the supply-chain flexibility dimension.

that the supply chain flexibility is greater than the sum of the flexibilities of the individual

Lao, Hang and Rao (2010) found empirical evidence between supply flexibility and

Demand amplification in the bundling supply chain

�, ��

�, ��

�, ��

�, ��

�, ��

Partner Supply Chain Focal Supply Chain

Focal Firm

Supplier

Partner

Firm

Supplier-1

Supplier-2

Customer Demand

for the Bundle


supply chain,

and flexible manufacturing systems (Tang and Tomlin, 2008).

External sources include outsourcing and collaborating with supply chain partners (Jack and

provides a general conceptual framework

, explaining relationships between supplier characteristics,


chain flexibility dimension. They point

that the supply chain flexibility is greater than the sum of the flexibilities of the individual

exibility and

Swafford et al. (2008) and

flexibility as an antecedent of supply chain agility, which could be defined as the capability of

the supply chain to adapt or respond in a speedy manner to marketplace changes and disruptions.

Tang and Tomlin (2008) study flexibility in the context of supply chain risks in the supply,

process and demand. The risk could be defined as either the likelihood of the occurrence of an

undesirable event, or the negative implications of the event. To reduce the negative

consequences of an undesirable event associated with supply, process or demand, a number of

flexibility mechanisms and strategies could be used in the short, medium and long run. These

include use of multiple suppliers, flexible contracts, flexible manufacturing

postponement, and flexible pricing.

From this risk perspective, the likelihood of a demand surge in unexpected proportions

coupled with Bullwhip effect can create an increasing supply chain risk across the tiers. To

ensure the agility of the supply chain to respond to such disruptions, gradually increasing levels

of flexibility in the upstream supply chain could be recommended in response to the growing

chance of undesired demand volatility in the upstream supply chain. Figure 3 illustr

example bundling situation in which an end product is bundled by a focal firm using a product

from its partner. In this example, original customer demand is assumed to be normally

distributed with a mean (µ) and variance (

the end customers, place its own orders with its supplier and its bundling partner. Assuming

there are no external customers other than the one shown in the illustration, the mean of the

demand remains the same in the long run t

system. However, the variance of the demand is expected to increase due to the Bullwhip effect.

Figure 4 Demand amplification in the

Firm Focal Firm

Orders

received

from

Customer orders,

��

Demand

amplification

Need for

volume

flexibility

To mitigate the negative effects of the demand variance amplification, the supply chain

literature provides some guidance such as information sharing, collaborative forecasting and

planning (Lee et al., 1997). In cases where the amplification is difficult

need to be more volume flexible to respond to the changes in demand in a cost effective manner.

For example, assuming the variance amplification in the example in Figure 3 is revealed in the

Lower



Swafford et al. (2008) and Braunscheidel & Suresh (2009) considered supply chain



study flexibility in the context of supply chain risks in the supply,



uences of an undesirable event associated with supply, process or demand, a number of


include use of multiple suppliers, flexible contracts, flexible manufacturing processes, product

postponement, and flexible pricing.



of the supply chain to respond to such disruptions, gradually increasing levels


chance of undesired demand volatility in the upstream supply chain. Figure 3 illustr



distributed with a mean (µ) and variance (σ12). Focal firm receiving orders for the bundle from



demand remains the same in the long run transmitted through orders from firm to firm in the


Demand amplification in the bundling supply chain

Focal Firm Partner Firm Supplier-1

Customer orders, Focal Firm’s

orders, ��

Partner Firm’s

orders, ��

Supplier



planning (Lee et al., 1997). In cases where the amplification is difficult to overcome, the firms




supply chain,

Suresh (2009) considered supply chain



study flexibility in the context of supply chain risks in the supply,



uences of an undesirable event associated with supply, process or demand, a number of


processes, product



of the supply chain to respond to such disruptions, gradually increasing levels


chance of undesired demand volatility in the upstream supply chain. Figure 3 illustrates an



orders for the bundle from



ransmitted through orders from firm to firm in the


Supplier-2

Supplier-1’s

orders, ��



to overcome, the firms



Higher

following pattern:

Then, the need for flexibility increases in the upstream supply chain as the volatility

increases as shown in Figure 4.

In summary, the need for flexibility in a supply chain increases due to the Bullwhip

factors such as the bundling itself, operati

accuracy. Matching right supply chains for the bundles should alleviate the demand

amplification problem. However, a supply chain with a high degree of flexibility capability can

cope with even the mismatching situations. On the other hand, supply chains with lower

flexibilities are unlikely to perform very well in the bundling operations even if they match the

products in the bundle.

PROPOSED BUNDLING MODEL

This paper proposes a bundling model

literature (for example, Fisher, 1997;

2003; Tang and Tomlin, 2008; Swafford et al., 2008)

forecast, product matching in the bundle

bundling supply chain performance

shows this model, from which the following propositions are devised:

1) There is a positive relati

performance and this relationship is perfectly mediated by

2) Product matching and supply chain matching is

forecast accuracy.

• The higher the degree of the

relationship between product matching and supply chain matching.

3) Supply chain matching and supply chain performance

volume flexibility.

• The higher the degree of the volume flexibility,

between supply chain matching and supply chain performance.

CONCLUSION

Bundling is an important business practice widely used by many companies. Key factors

on bundling are investigated largely in the marketing and economics

and supply chain perspective is needed to further complete the bundling theory. This paper is an

early attempt to build a framework to fill this gap in the literature by providing a conceptual

framework and testable hypotheses.

More specifically, the framework presented in this article explains the role of the product

bundles and supply chain matching in affecting the supply chain capacity/inventory performance

by modifying well-known supply chain/product matching framework of Fis

article further introduces other variables into the model and examines the moderating roles of

demand forecast accuracy and volume flexibility in impacting the supply chain performance. The

model suggests that the product matching in the bu





factors such as the bundling itself, operational policies such as order batching, and forecast



hing situations. On the other hand, supply chains with lower


PROPOSED BUNDLING MODEL

This paper proposes a bundling model drawn mostly from the operations and supply chain

Fisher, 1997; McCardle et al., 2007; Lee et al., 1997; Lummus et al.,

Swafford et al., 2008) relating such factors as customer demand

n the bundle, supply chain matching, and volume flexibility to

performance defined in terms of capacity and inventory costs. Figure

he following propositions are devised:

There is a positive relationship between product matching and supply chain

and this relationship is perfectly mediated by supply chain matching.

Product matching and supply chain matching is positively moderated by demand

The higher the degree of the demand forecast accuracy, the stronger the


upply chain matching and supply chain performance is negatively moderated by

The higher the degree of the volume flexibility, the weaker the relationship



on bundling are investigated largely in the marketing and economics literatures. An operations



framework and testable hypotheses.

ore specifically, the framework presented in this article explains the role of the product


known supply chain/product matching framework of Fisher (1997). The



model suggests that the product matching in the bundle and matching supply chains for the

��

�< ��

�


supply chain,



onal policies such as order batching, and forecast



hing situations. On the other hand, supply chains with lower


from the operations and supply chain

Lummus et al.,

relating such factors as customer demand

, and volume flexibility to the

in terms of capacity and inventory costs. Figure 5

onship between product matching and supply chain

supply chain matching.

moderated by demand

demand forecast accuracy, the stronger the


moderated by

the weaker the relationship



literatures. An operations



ore specifically, the framework presented in this article explains the role of the product


her (1997). The



ndle and matching supply chains for the

bundle are significant factors in affecting operational performance of the supply chains

depending on the forecast accuracy and volume flexibility.

The article contributes existing bundling theory in the economics a

literatures by introducing operational and supply chain variables into the theory. A more

encompassing theory could be built by not only considering profits, prices, demand, and

consumer’s evaluation of bundles, but also examining supply chain

inventories, flexibilities, and forecasts. The paper also proposes new terms not found in the

literature to best knowledge of the

purely functional and innovative bu

On the other hand, the framework developed in the context of bundling could be

generalized to model and test the relationships in the supply chains. Fisher’s article does not

include a testable framework with hypotheses and it does not include the variables and their

relationships discussed in this paper.

Finally, although the proposed framework is based on existing theory and developed

rationally, it should be tested empirically. If validated, the mo

practicing managers, and new research opportunities for academicians in understanding the

dynamics of bundling in the supply chains.

Figure 5 Modeling the effects of bundling variables on the SC performance

Product

Matching

Demand

Forecast

Accuracy




depending on the forecast accuracy and volume flexibility.

The article contributes existing bundling theory in the economics and marketing



consumer’s evaluation of bundles, but also examining supply chain implications, capacities and


literature to best knowledge of the author of this article, including the bundling supply chain,

purely functional and innovative bundles, functional bundle mix and innovative bundle mix.



ork with hypotheses and it does not include the variables and their

relationships discussed in this paper.


rationally, it should be tested empirically. If validated, the model offers significant benefits for


dynamics of bundling in the supply chains.

the effects of bundling variables on the SC performance

Supply Chain

Matching

Volume

Flexibility

Demand

Forecast

Accuracy

Supply Chain

Capacity &

Inventory

Performance


supply chain,


nd marketing



implications, capacities and


, including the bundling supply chain,

ndles, functional bundle mix and innovative bundle mix.



ork with hypotheses and it does not include the variables and their


del offers significant benefits for


the effects of bundling variables on the SC performance

Supply Chain

Capacity &

Inventory

Performance

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