Reducing Product Expiration by Aligning Salesforce Incentives: A Data‐driven Approach

Abstract

P roduct expirations at retail stores erode profits and burden the environment. We investigate whether manufacturers can leverage salesforce compensation design as a waste-reduction tool. We propose a data-driven framework that uses structural econometric modeling and agency theory. Our analysis starts with a game theoretic model in which a salesperson interacts with a manufacturer that reimburses retailers and penalizes its own salesforce for expired products. We then use our model's equilibrium outcome to estimate factors that determine the effort exerted by the sales representatives of a consumer-packaged-goods manufacturer. We first show theoretically that a manufacturer can simultaneously increase profits and reduce waste by increasing its sales representatives' penalty for product expiration that occurs at the retailer. Based on this, we formulate a manufacturer's profit maximization problem to compute optimum expiration penalties. Solving this problem for the manufacturer, we find the potential to simultaneously reduce waste and improve profits for 14% of the product-market combinations in our dataset. For these cases, we find that charging the salesperson 2.1 times the commission (on average) for each expired unit can increase the manufacturer's profits by 0.58% and reduce waste by 23.3%. This study determines that a profit-seeking manufacturer can reduce waste at retailers by optimizing its salesforce incentive structure. Our work bridges the salesforce compensation and sustainable operations literatures. Furthermore, our framework allows consumer-packaged-goods manufacturers to identify win-win opportunities for the environment and their bottom line.

When do group incentives for retail store managers work?

“…It is especially important to study the practice of incentives with field data since poorly designed incentives can result in unintended consequences such as damaged company reputations and lowered financial performances (Kesner et al., 2016). Our paper adds to a growing body of the literature on the empirical study of incentives in retailing (Akkas & Sahoo, 2020; DeHoratius & Raman, 2007) and other settings (Chan et al., 2019; Guajardo, 2018; Guajardo et al., 2012) as well as theoretical studies (Siemsen et al., 2007) by documenting the important factors to consider when designing a new incentive plan for store managers.…”

“…The OM literature has a large body of theoretical research in contracting and incentives, but has a few empirical studies using field data (Cachon, 2003). Notable exceptions include DeHoratius and Raman (2007) who use field data from a retailer to study the impact of incentives on store managers' effort allocation between sales and inventory shrinkage; Akkas and Sahoo (2020) who study how to reduce product waste by designing salesforce incentive scheme; and an emerging stream that examines the effects of contract design on operational performance (Chan et al., 2019; Guajardo et al., 2012; Guajardo, 2018). From a behavioral perspective, Li et al.…”

Don't waste that free lettuce! Impact of BOGOF promotions on retail profit and food waste

“…Akkas et al. (2019) empirically investigate the drivers of product expiration in the consumer packaged goods industry, and Akkas and Saho (2020) focus on the impact of sales force compensation schemes on such expiration. Teller et al.…”

Joint case pack size and unpacking location optimization in a retail supply chain including product returns

“…In bricks-and-mortar grocery retailing, product expiration erodes profits and burdens the environment , and expired products on the shelf may have negative impact on consumer experience and the value of the brand (Akkas ¸ & Sahoo, 2020). Thus, the retailers need recognize the critical time (a specific time of product lifetime) (Akbari Kaasgari et al, 2017) and return products to suppliers.…”