Tamer Boyaci

Optimal Prices and Trade-in Rebates for Durable, Remanufacturable Products

Most durable products have two distinct types of customers: first-time buyers and customers who already own the product, but are willing to replace it with a new one or purchase a second one. Firms usually adopt a price-discrimination policy by offering a trade-in rebate only to the replacement customers to hasten their purchase decisions. Any return flow of products induced by trade-in rebates has the potential to generate revenues through remanufacturing operations. In this paper, we study the optimal pricing/trade-in strategies for such durable, remanufacturable products. We focus on the scenario where the replacement customers are only interested in trade-ins. In this setting, we study three pricing schemes: (i) uniform price for all customers, (ii) age-independent price differentiation between new and replacement customers (i.e., constant rebate for replacement customers), and (iii) age-dependent price differentiation between new and replacement customers (i.e., age-dependent rebates for replacement customers). We characterize the roles that the durability of the product, the extent of return revenues, the age profile of existing products in the market, and the relative size of the two customer segments play in shaping the optimal prices and the amount of trade-in rebates offered. Throughout the paper we highlight the operational decisions that might influence the above factors, and we support our findings with real-life practices. In an extensive numerical study, we compare the profit potential of different pricing schemes and quantify the reward (penalty) associated with taking into account (ignoring) customer segmentation, the price-discrimination option, return revenues, and the age profile of existing products. On the basis of these results, we are able to identify the most favorable pricing strategy for the firm when faced with a particular market condition and discuss implications on the life-cycle pricing of durable, remanufacturable products.

The effect of categorizing returned products in remanufacturing

An increasing number of companies have been implementing comprehensive recycling and remanufacturing programs. These endeavors typically involve the operation of joint manufacturing and remanufacturing systems. One of the major challenges in managing such hybrid systems is the stochastic nature of product returns. In particular, there is significant variability in the condition of the returns. This paper presents an approach for assessing the impact of quality-based categorization of returned products. Through extensive numerical studies on a continuous-time Markov chain model, we show that incorporation of returned product quality in the remanufacturing and disposal decisions can lead to significant cost savings. We find that these savings are amplified as the return quality decreases, and as the return rate increases. We also show that prioritizing higher quality returns in remanufacturing is, in general, a better strategy.

Coordinating pricing and inventory replenishment policies for one wholesaler and one or more geographically dispersed retailers

Abstract We analyze coordination issues in a supply chain consisting of one wholesaler and one or more retailers under deterministic price-sensitive customer demand. Operating costs include purchasing, setup, order processing, and inventory costs. We consider both pricing and lot sizing decisions and take special care to correctly account for the impact of transfer prices and ownership of retail-inventory. We show that a solution that maximizes channel profits can be interpreted as consignment selling. We also show that separating pricing and lot sizing decisions is near optimal when the demand rate is sufficiently large.

Retail-collection network design under deposit-refund

Abstract This paper studies the interplay between industrial firms and government concerning the collection of used products from households. The focus is on the use of a deposit–refund requirement by the government when the collection rate voluntarily achieved by the firms is deemed insufficient. We present a continuous modeling framework for designing a drop-off facility network and determining the sales price that maximize the firms profit under a given deposit–refund. The customers’ preferences with regards to purchasing and returning the product are incorporated via a discrete choice model with stochastic utilities. Through parametric analyses, we determine the net value that can be recovered from a returned product as a key driver for the firm to voluntarily engage in collection. We show that a minimum deposit–refund requirement would not achieve high collection rates for products with low return value and point out two complementary policy tools that can be used by the government.

Competitive stocking and coordination in a multiple-channel distribution system

In this paper, we study a multiple-channel distribution system in which a manufacturer sells its product through an independent retailer as well as through his wholly-owned channel. The manufacturer and the retailer stock the product solely to satisfy the final customer demand of their respective channels. We focus on the stocking levels of the manufacturers wholly-owned channel and the retail channel. We assume that each channel has a local stochastic demand, but that the products are substitutable, which means there will be spill-over customers in the event that one channel runs out of stock. We explore the channel inefficiencies induced by the presence of simultaneous vertical competition (double-marginalization) and horizontal competition (substitutability). We show that there is an overall tendency for both channels to overstock due to substitution, which intensifies under increasing substitution rates. Increasing double-marginalization, on the other hand, intensifies the tendency to overstock in the manufacturers wholly-owned channel, but induces the retail channel to understock. We find that supply chain losses are least under moderate levels of double-marginalization and or substitution. We also investigate coordination mechanisms, and show that most of the well-known, simple contracts fail to achieve coordination in this setting. An exception to this is an appropriately designed penalty contract which can indeed coordinate the supply chain, but is hard to implement. In search of practically more appealing coordination mechanisms, we design a novel two-part compensation-commission contract, whose terms depend on the retail channel sales.

Information Acquisition for Capacity Planning via Pricing and Advance Selling: When to Stop and Act?

This paper investigates a capacity planning strategy that collects commitments to purchase before the capacity decision and uses the acquired advance sales information to decide on the capacity. In particular, we study a profit-maximization model in which a manufacturer collects advance sales information periodically prior to the regular sales season for a capacity decision. Customer demand is stochastic and price sensitive. Once the capacity is set, the manufacturer produces and satisfies customer demand (to the extent possible) from the installed capacity during the regular sales period. We study scenarios in which the advance sales and regular sales season prices are set exogenously and optimally. For both scenarios, we establish the optimality of a control band or a threshold policy that determines when to stop acquiring advance sales information and how much capacity to build. We show that advance selling can improve the manufacturers profit significantly. We generate insights into how operating conditions (such as the capacity building cost) and market characteristics (such as demand variability) affect the value of information acquired through advance selling. From this analysis, we identify the conditions under which advance selling for capacity planning is most valuable. Finally, we study the joint benefits of acquiring information for capacity planning through advance selling and revenue management of installed capacity through dynamic pricing.

Technical Note---Optimal Dynamic Joint Inventory-Pricing Control for Multiplicative Demand with Fixed Order Costs and Lost Sales

The preparation of 1-(3-carboxypyridyl-2)-4-methyl-2-phenylpiperazine dihydrate and other mirtazapine intermediates are described. These compounds are particularly useful in the preparation of mirtazapine.

Serial Production/Distribution Systems Under Service Constraints

We analyze the problem of minimizing average inventory costs subject to fill-rate type of service-level constraints in serial and assembly production/distribution systems. We propose optimal and heuristic procedures to solve this problem. Our model and solution procedures can be used to manage the fill rate or fill rate within a time window service measures. We also relate our service-constrained model to the traditional model with back-order costs and show that it is possible to prespecify backorder cost rates to achieve desired service levels. We explore the inventory cost impact of such a practice, and we find that the cost penalty can be very high.

Minimizing holding and ordering costs subject to a bound on backorders is as easy as solving a single backorder cost model

Minimizing average ordering and holding cost subject to a constraint on expected backorders has required to iteratively solve the backorder cost model with different backorder penalty rates until the constraint is satisfied. Here we present a direct approach, that is as simple as solving a single backorder cost model.

United We Stand or Divided We Stand? Strategic Supplier Alliances Under Order Default Risk

We study the alliance formation strategy among suppliers in a framework with one downstream firm and n upstream suppliers. Each supplier faces an exogenous random shock that may result in an order default. Each of them also has access to a recourse fund that can mitigate this risk. The suppliers can share the fund resources within an alliance, but they need to equitably allocate the profits of the alliance among the partners. In this context, suppliers need to decide whether to join larger alliances that have better chances of order fulfillment or smaller ones that may grant them higher profit allocations. We first analytically characterize the exact coalition-proof Nash-stable coalition structures that would arise for symmetric complementary or substitutable suppliers. Our analysis reveals that it is the appeal of default risk mitigation, rather than competition reduction, that motivates cooperation. In general, a riskier and/or less fragmented supply base favors larger alliances, whereas substitutable suppliers and customer demands with lower pass-through rates result in smaller ones. We then characterize the stable coalition structures for an asymmetric supplier base. We establish that grand coalition is more stable when the supplier base is more homogeneous in terms of their risk levels, rather than divided among a few highly risky suppliers and other low-risk ones. Going one step further, our investigation of endogenous recourse fund levels for the suppliers demonstrates how financing costs affect suppliers’ investments in risk-reducing resources and, consequently, their coalition formation strategy. Last, we discuss model generalizations and show that, in general, our insights are quite robust. This paper was accepted by Serguei Netessine, operations management.