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Collect, Recover, & Remarket
Designing End-of-Use Product Acquisition Policies
Dwayne ColeDoctoral Candidate
Whitman School of ManagementSyracuse UniversitySyracuse, New York
April 1, 2011
Trade-ins & Buyback Is it worth it, & when?
1Final Purchase and End-of-Life Acquisition Decision
Distribution intensity…
“Recycling end-of-use (EOU) electronics rather than disposing of them makes use of valuable materials there by conserving natural resources & saving energy”
Research MotivationA Sustainability Concern
2Final Purchase and End-of-Life Acquisition Decision
Research MotivationInnovation and growth in computer sales has led to deep environmental concerns
3,028 million
1,862 million
360million
2000 -2007 2000 -2007
130,000,000 cell phones retired annually. EPA, e-Cycling FAQ’s
133,000units of computers are thrown away each day.Gartner, Inc.
400,000,000units of electronic waste is scraped annually. International Association of Electronics Recyclers.
E-waste has become a significant environmental concern
3Final Purchase and End-of-Life Acquisition Decision
Research Motivation
EPR seeks to reduce waste disposal, & prompt manufactures to adopt eco-friendly product designs.
Extended Producer Responsibility (EPR) is a global supply chain management concern.
Admin What Who Collects?
Who pays? Targets
European Union
Regulation Appliances, electronics, TVs
Drop-offs OEMs Take-back/ Reuse
Japan Regulation Appliances, electronics, TVs
Mail-back Visible fee Take-back/ Reuse
Korea Regulation Appliances, electronics, TVs
Gov. Pick up Deposit-Refund
Take-back/ Reuse
United States Voluntary Market-Driven
Depends Depends Depends None
Durable good industries facing global environmental legislations
4Final Purchase and End-of-Life Acquisition Decision
Research MotivationTake-back and recovery is becoming an attractive remedy State Legislation on E-waste
A new era of supply chains and reverse marketing channels designed to capture “residual” economic
value from used goods
5Final Purchase and End-of-Life Acquisition Decision
Product Recovery (Opportunities)Supply Side and Demand Side Recovery Opportunities
Dell Sales computer equipment with extended warranties
Supply Side Harvest reusable
components
GameStopCollects, recovers, and remarkets
used gaming consoles
Demand Sidemeet secondhand market
demand
6Final Purchase and End-of-Life Acquisition Decision
Supply Chain Managerial ProblemMarket Driven Product-Acquisition Decisions are Complicated
• How to determine how much to pay?• How to motivate the right returns, at the right time?• How to matching supply and demand?• How to develop take-back policies that coordinate
forward and reverse channel profit objectives?
Collecting consumer returns for the purpose of harvesting components and remarketing recovered goods requires
coordinating forward and reverse channel profit objectives
7Final Purchase and End-of-Life Acquisition Decision
P1: Recovery for Remanufacturing
Final Purchase and End-of-Life Acquisition Decision 8
Product Tack-back policies for the purpose of resell
GameStopCollects, recovers, and remarkets
used gaming consoles
Demand Sidemeet secondhand market
demand
Online Trade-in Value Calculator
9
OEMs and Retailers Providing Online Trade-in Applications
Large retailers (e.g., BestBuy, RadioShack) and OEMs (e.g., XEROX, Dell) provide value estimators to support trade-in and
take back
Managerial Dilemma
10
Determining Trade-in Value : Critical to Success Concern
What buyback or trade-in price should the firm offer for used product of a particular age or condition, and how should this price
change over time?
Under what settings is a buyback policy preferred over a trade-in policy, should a firm use both types of policies simultaneously or
does a single policy dominate, and if there is dominance, does the dominant policy depend on the stage of the new or
remanufactured product life-cycle?
How does the introduction of a new generation of the product influence the optimal buyback price function?
Trade-in Offers (Decision Complexity)
11
Evolving heterogeneity in condition and willingness to return
Incorporating life cycle dynamics into end-of-use product acquisition pricing is complicated, yet potentially worthwhile
Related Marketing Literature
12
Focused on Demand Management
Price discrimination and cannibalization: Van Ackere and Reyniers (1995), Levinthal and Purohit (1989) Fudenberg and Tirole (1998)
Accelerate replacement purchases Bruce et al. (2006); Rao et al. (2009)
Quality and timing returns: Guide and Jayaraman (2000) and Flapper (2001); Klausner and Hendrickson (2000); Galbreth and Blackburn (2006); Zikopoulos and Tagaras (2007)
Matching supply and demand: Bakal and Akcali (2006) and Ray et al. (2006) (Continuous quality); Guide et al. (2003) and Karakayali et al. (2007) (Discrete quality classes)
Lifecycle dynamics: Tibben-Lembke(2002) and Östlin et al. (2009); Marketing recovered products: Debo et al. (2006); Reuse Economics: Geyer et al. (2007), Zikopoulos and Tagaras (2007)
Product Take-back Policies
Final Purchase and End-of-Life Acquisition Decision 13
Policy Development and Analysis
Buyback
×
Trade-in
Myopic
Proactive
Project Status
14
Trade-in Polices
Buyback
Myopic Proactive
Trade-in
Myopic Proactive
Mo
de
l
De
velo
pm
en
t
Algorithm
QP Formulation
QP Implementation
Analysis of Results
Comparative Analysis
E D
E C
B B
A A A A
A A A A
Essay I
P2: Recovery for Harvesting Components
Final Purchase and End-of-Life Acquisition Decision 15
Trade-in and recovery in response to CPOA
Dell Sales computer equipment with extended warranties
Supply Side Harvest reusable
components
Managerial Decision Dilemma
16
Balance Environmental Benefits & Economic Value
… The supplier will come to us and say okay, in the next three months we are going to stop producing this part forever, how many do you want?
… in those situations where demand for warranty parts ends up greater than we thought, if in those situations we can go out to the install base and proactively identify those units that we would like to have back. We could offer the current customer a very good deal on an upgrade and get those systems back and then tear them down.
Final Purchase and End-of-Life Acquisition Decision
State of the Literature
17
Little research integrates marketing variable
How to predict warranty claims demandWarranty Literature: Murthy et al. (2004); Gerner and Bryant (1980); Seitz (2007)
How many should the OEM procure from supplierLife Time Buy: Fortuin (1980) ; Teunter and Fortuin (1999); Teunter and Hansveld (1998); Bradley and Guerrero (2009)
How to design the trade-in programTrade-in: Ray et al. (2005); Bruce et al. (2006); Rao et al. (2009)
Final Purchase and End-of-Life Acquisition Decision
Policy Framework
18
Overview of Policy Analysis
•Objective: Minimize discounted cost
Full Trade-in
MatchingPolicy
ContinuousTime
DiscreteTime
Final Purchase and End-of-Life Acquisition Decision
One time, take it or leave it offer to the masses
Periodic, take it or leave it offer to a market segement
Model Development General Cost function
1 1
1 1 1 1 1 2 1 1 3 1
0
T qrt rL
wC q c q E e c d t h q D t dt E C T q E e c q D L
×
c2 = trade-in acquisition costcw = warranty service costh = holding costc3 = salvage cost
L : warranty horizonN(t) : warranty populationn(t) : warranty expirationsa : component failure rate
t t
T(q1) = trade-in acquisition costd(t) = demand rate D(t) = cumulative demand
Expected Second Stage cost
Warranty Service
Final Order component cost
Expected warranty service and holding cost
Time the component inventory reaches zero
The component demand rate at time t and the cumulative demand through D(t)
The expected cost of ordering q1 units
0
t
D t d t dt
1 1 1min min | ,T q t D t q L
19Final Purchase and End-of-Life Acquisition Decision
Consumer Choice ModelImportant Derivations
–
1 – –
n t
n t
P V c m c t
c m c t
1 n t
t t
c m c t t
– –
– 1–
t
t
m m c t
c t m
×
A firm offering a trade-in program specifies the discount off the purchase price of a new model if the customer returns the old model.
t
s t
2c t
Trade-in offer acceptance rate
Trade-in offer component return rate
Trade-in component per unit acquisition cost
20Final Purchase and End-of-Life Acquisition Decision
Full Trade-in PolicyGeneral Model
1 2 2
1 1 02 1 2 2 2 2 3 2 1
1 02 2 1 2 1 2 3 2 1
, .L L
w
t T q
w
C t q c q E c d t dt E c d t dt E c q D t
c q c E D t c E D t q c E q D t
21 22 1 2 2 1 1 2
1
02 1 1 2 2 3 2 1 1 2
, 1 n w
qC t q c m q c L t N t q
N t
c L t N t q q c q L t N t q
×
21Final Purchase and End-of-Life Acquisition Decision
1 2L t N q 2
1
1 n
qc m
N t
Expected Cost for the Full
Trade-in Policy
Matching Trade-in PolicyGeneral Model
×
1
22 1, , 1
L
w n
t
C t E t c c m d t dt
1t td t N t Ne
s t t t d t
Trade-in acceptance rate
Trade in offer rate 1 – –n tc m c t
22 1nc t t c m Component
Acquisition Cost
1
2 22 1 2, ,
Lrt
w
t
C t E e c t c d t dt
The component supply matches the component demand
Expected Cost for the Matching Trade-in Policy
22Final Purchase and End-of-Life Acquisition Decision
Full vs. Matching
Final Purchase and End-of-Life Acquisition Decision 23
The relationship between Full vs. Matching
FullTrade-in
MatchingTrade-in
Full vs. MatchingThe relationship between Full and Matching trade-in quantities
Assuming: r = h = n = 0
1 22 2q q
No Trade-in
Matching
Full
12 1
11
1q N t
x
22 11 xq e N t
11 L te
1 1
11
L t N t
L t
Full (restricted)
Matching
1 2Letting aggregate failure rate, and x L t q D t
24Final Purchase and End-of-Life Acquisition Decision
Full vs. MatchingThe relationship between Full and Matching 2nd Stage Cost
0 .0 0 .2 0 .4 0 .6 0 .8 1 .0
0 .4
0 .2
0 .0
0 .2
0 .4
A ggregate Fai lu re Rate
Seco
ndSt
age
Cos
tO p t imal Second Stage C os t
Full
No Trade-in
Matching1 2
2 2C C
1 2
2 2C C
1 2–
1xx
y ex
1 21
1x
n w
xc m c e
x
Proposition 6:
2 12 1 2 1 C t C t if and only if
25Final Purchase and End-of-Life Acquisition Decision
Project Status
26
Trade-in Policies
Full Policy
2nd Stage
(a)
(b)
1st Stage
(a)
(b)
Matching Policy
2nd Stage
(a)
(b)
1st
(a)
(b)
No Trade
2nd Stage
(a)
(b)
1st
(a)
Mo
de
ls
(C)C
on
tin
uo
us (A6) Discounting
(A7) Warrenty Expirations
(A8) Holding
(A9) Uncertainty
(D)D
isc
rete
Tim
e (A6) Discounting
(A7) Warrenty Expirations
(A8) Holding
(A9) Uncertainty
E B E B E E B B E
E E B C E E E E E B
E H E B E B B H H H H
E B E B E E B H H H H
E E E E E E E E
E E E E E E E E
E E E E E E E E
E E E E E E E E
Essay II
Questions
Final Purchase and End-of-Life Acquisition Decision 27