Abstract
Some manufacturers demonstrate their products so that customers can gain experience before making a purchase. We present a novel application of a closed-loop supply chain where product returns from demonstrations of high-end IT equipment are substantial and the major delay in the system is due to the long demonstration time at the client sites. In addition, the product lifecycle is short and the value erodes rapidly over time, with steep drops in the resale revenue when new product generations are introduced. We present a finite lifecycle model that captures the key trade-offs in this environment, that is, either to reuse a collected ex-demo product for a next demonstration or to salvage its residual value in the secondary market and use a new product to satisfy the next demo request. We derive two cost/revenue signals that enable us to distinguish between fast and slow value erosion. We show that the fast/slow erosion decision is dynamic and depends on the rate of value erosion and the length of the demonstration time. We analyze the optimal demo pool strategies and show that in the case of fast erosion it may be better to postpone reuse activities until later in the lifecycle. We illustrate our model using empirical data from a large IT manufacturer and formulate several guidelines so as to better manage high value ex-demonstration product returns.
Highlights
Manufacturers and retailers often demonstrate their products
The manufacturer’s financial risk of providing demo products may be limited. This is true when the demonstration cost is low, or when the demonstration time is short compared with the product lifecycle so that products can be reused in repeat presentations or tests
A key difference between the previous studies and the study we present here is that we consider a finite lifecycle model (see e.g., Atasu and Çetinkaya (2006) and Geyer et al (2007)). This is of particular importance for high-end equipment (e.g. IT, medical and industrial applications) considered here where the product lifecycle is short and the number of reuse cycles are limited. We investigate this problem in continuous time and we model it as special type of a Separated Continuous Linear Program (SCLP) (see e.g., Pullan (1996)), which we can convert into a Continuous time Transportation Problem (CTP)
Summary
Manufacturers and retailers often demonstrate their products. Through these demonstrations customers gain experience before making a purchase and reduce their uncertainty about the product’s performance and its ability to match their needs (Heiman et al, 2001). A key difference between the previous studies and the study we present here is that we consider a finite lifecycle model (see e.g., Atasu and Çetinkaya (2006) and Geyer et al (2007)) This is of particular importance for high-end equipment (e.g. IT, medical and industrial applications) considered here where the product lifecycle is short and the number of reuse cycles are limited. It is possible to order products from the returns center into the demo store (arc 8) and use these (instead of new products) to satisfy demo requests
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