Cannibalization occurs when a manufacturer creates new versions or extensions of a product that take sales away from the original, rather than from competing brands. Webb's research examined two varieties of the phenomenon: a change in basic features such as color, and more extreme additions that are intended to distinguish the product from lower-quality alternatives, but fail to do so.

In the first instance, color changes are a common occurrence in high-end durables such as refrigerators. The resulting drop in sales for the original color are of little concern to the manufacturer, since the change is relatively inexpensive and conveys to the consumer a broader array of choices.

The second kind of cannibalization is more problematic. Webb cites the example of Volkswagen, which acquired the European brand Skoda, known for its inexpensive cars,  in the late 1990s. VW also owned the higher-end Audi nameplate, however, and was unable to differentiate between those two brands to justify the price gap. As a result, Audi sales dropped off.

Some manufacturers will release a premium product first, then follow it up with a less expensive version. "But if you fail to differentiate," Webb says, "people can't tell the difference between the features, and you're in trouble." Similar difficulties arise when the producer starts out with a budget item, then attempts to market a more upscale model. Often the latter will be unable to compete with its successful, low-end counterpart.

Cannibalization can be strategically employed to a company's advantage. It can be a tool for terminating an unwanted or obsolete product, such as a refrigerator that doesn't meet today's standards for energy efficiency. Still, manufacturers need to be careful that the change doesn't chase consumers away from the brand entirely.

Producers need to be aware of the complexities of making any change to their lines, including the need for additional inventory. "Every time we differentiate our supply chains," says Webb, "our costs go up."

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Keywords: supply chain, supply chain management, inventory management, supply chain planning, product cannibalization, retail supply chain