W e develop a three-step methodology to restructure a product line by quantifying the restructuring's likely effects on revenues and costs: (i) Constructing migration lists to capture customer preferences and willingness to substitute; (ii) Explicitly capturing the (positive and negative) cost of complexity across different functional areas, using statistical analysis of cost data; and (iii) Integrating these tools within a mathematical optimization program to produce a final product line, incorporating the possibility of differentiating products by lead-time (into different lanes). Our methodology is highly flexible-each step can be tailored to a company's particular setting, data availability and strategic needs, so long as it produces the necessary output for the next step. We report on the successful application of our methodology to the Backhoe Loader product line at Caterpillar: In collaboration with Caterpillar, we were able to significantly simplify this line, reducing the number of configurations from 37,920 to 135, in three lanes, while increasing sales by almost 7%.

Caterpillar recently embarked on an ambitious program to radically change how it markets and sells key products of its Building Construction Products division (BCP). The goal was to move from a strict build-toorder strategy, in which customers selected one of millions of possible configurations, to a Lane Strategy in which the majority of their customers would choose machines from just over 100 configurations. To successfully make such a radical change Caterpillar needed to quantify how customers would potentially react to the new strategy, and how such a drastic simplification of their product line would affect their manufacturing, sales, and service costs. We embarked on a study with Caterpillar to explicitly model customers' reactions to reduced product lines, to estimate the (positive and negative) effect such variety has on Caterpillar's costs -the cost of complexity -and ultimately help them design and implement this strategy for their flagship BCP product, the Backhoe Loader. Based on our analysis, Caterpillar began implementing the new strategy with their 2010 price list, moving completely to the new strategy in 2011. Since that time Caterpillar has expanded their Lane strategy throughout all of their product lines, fundamentally remaking their business.

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