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