Joint optimization of new production, warranty servicing strategy and secondary market supply under consumer returns

Abstract

ABSTRACT. In this paper, we consider an OEM selling new products to the market offering (i) a warranty period during which defective units are dealt with at no cost for the customer, and (ii) a full refund to customers who return products that do not meet their expectations (consumer returns). The manufacturer has different options for satisfying the warranty cases as well as for utilizing the consumer returns. Warranty cases could be dealt with by repairing the defective units, replacing them with new products, or replacing them with refurbished consumer returns. Alternatively leftover new products or consumer returns can also be sold on a secondary market. We develop a model and derive the OEMs optimal decisions with respect to these options under demand uncertainty on the primary market.

Should a manufacturer sell refurbished returns on the secondary market to incentivize retailers to reduce consumer returns?

“…Akcay et al (2013) and Crocker and Letizia (2014) address a retailer's disposition decision of either salvaging, or reselling consumer returns on a secondary market after a possible refurbishment. Reimann and Zhang (2013) and Pinçe et al (2016) analyze how a manufacturer should allocate consumer returns between resale in a secondary market, and fulfillment of warranty claims. Motivated by practical examples, we complement this stream of research by analyzing a manufacturer's disposition of consumer returns as refurbishment and resale in a secondary market that competes with the retailer's new products.…”

Accurate Response with Refurbished Consumer Returns

“…() is deterministic thus abstracting from the information update problem. The work presented in Reimann and Zhang () captures demand uncertainty, but no reaction to an information update is modeled. In Li et al.…”

“…Moreover, the model in Akcay et al (2013) is deterministic thus abstracting from the information update problem. The work presented in Reimann and Zhang (2013) captures demand uncertainty, but no reaction to an information update is modeled. In Li et al (2011) all the supply decisions are taken under demand uncertainty, that is, returns are not utilized to react to improved demand information.…”

“…However, given the discounted price of products on the secondary market, total sales volumes increase and consumers previously unserved now purchase on the secondary market. An imperfect substitution case is also analyzed in Reimann and Zhang (). However, in this setting the firm is considered to be a price taker.…”