Abstract
We analytically explore in this paper the consumer return policy under fashion mass customization (MC) program. To be specific, we model the stochastic fashion MC program with the consideration of consumer demand uncertainty. If a consumer return policy is implemented, we further consider return uncertainty. By modeling the optimization objective of the risk averse MC fashion brand via a mean-variance approach, we derive the closed-form optimal solution under each case. We then conduct both analytical and numerical sensitivity analyses. For the scenario with full refund and return, we reveal the analytical conditions under which the optimal retail price and the optimal number of options available for customization (called the “optimal modularity level”) vary monotonically with respect to the salvage value and the return service charge. For the scenario when there is no refund and return, we show that the optimal retail price and the optimal modularity level are decreasing in the MC fashion brand's degree of risk aversion, the demand uncertainty, and the price-demand sensitivity coefficient. In addition, our numerical analysis indicates that whether the risk averse MC fashion brand would prefer offering consumer return with full refund to no return depends heavily on the demand-return correlation (DRC) parameter.
Highlights
Mass customization (MC) is an industrial practice which helps to manufacture customized products to satisfy consumers’ needs with a cost close to mass production [1,2,3,4,5,6,7] in a timely manner [8,9,10]
For the scenario with full refund and return, we reveal the analytical conditions under which the optimal retail price and the optimal number of options available for customization vary monotonically with respect to the salvage value and the return service charge
For the scenario when there is no refund and return, we show that the optimal retail price and the optimal modularity level are decreasing in the MC fashion brand’s degree of risk aversion, the demand uncertainty, and the price-demand sensitivity coefficient
Summary
Mass customization (MC) is an industrial practice which helps to manufacture customized products to satisfy consumers’ needs with a cost close to mass production [1,2,3,4,5,6,7] in a timely manner [8,9,10]. Liu et al [28] develop a three-dimensional optimization problem and analytically derive the optimal decisions on retail price [29], modularity level [30,31,32], and refund rate (under consumer return [33]) From both analytical and numerical analyses, they obtain several important findings and insights. In light of the above industrial observation and based on the prior studies in the literature, we examine in this paper the optimal retail pricing and modularity level decisions for a risk averse MC fashion brand (p.s.: an MC fashion brand is a fashion brand which is offering MC.) for both scenarios with and without consumer return.
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