Applying Revenue Management to the Reverse Supply Chain

37 Pages Posted: 12 Sep 2008

See all articles by Mark Ferguson

Mark Ferguson

University of South Carolina - Department of Management Science; Georgia Institute of Technology

Moritz Fleischmann

University of Mannheim, Business School

Gilvan Souza

University of Maryland - Decision and Information Technologies Department; Indiana University - Kelley School of Business - Department of Operation & Decision Technologies

Date Written: 21 2008 8,

Abstract

We study the disposition decision for product returns in a closed-loop supply chain. Motivated by the asset recovery process at IBM, we consider two disposition alternatives. Returns may be either refurbished for reselling or dismantled for spare parts. Reselling a refurbished unit typically yields higher unit margins. However, demand is uncertain. A common policy in many firms is to rank disposition alternatives by unit margins. We show that a revenue management approach to the disposition decision which explicitly incorporates demand uncertainty can increase profits significantly. We discuss analogies between the disposition problem and the classical airline revenue management problem. We then develop single period and multi-period stochastic optimization models for the disposition problem. Analyzing these models, we show that the optimal allocation balances expected marginal profits across the disposition alternatives. A detailed numerical study reveals that a revenue management approach to the disposition problem significantly outperforms the current practice of focusing exclusively on high-margin options, and we identify conditions under which this improvement is the highest. We also show that the value recovered from the returned products critically depends on the coordination between forward and reverse supply chain decisions.

Keywords: remanufacturing, revenue management, spare parts inventory, onderdelen, revenues

JEL Classification: M11, R4, M, Q59, L1

Suggested Citation

Ferguson, Mark and Fleischmann, Moritz and Souza, Gilvan, Applying Revenue Management to the Reverse Supply Chain (21 2008 8,). ERIM Report Series Reference No. ERS-2008-052-LIS. Available at SSRN: https://ssrn.com/abstract=1267075

Mark Ferguson (Contact Author)

University of South Carolina - Department of Management Science ( email )

United States

Georgia Institute of Technology ( email )

Atlanta, GA 30332
United States

Moritz Fleischmann

University of Mannheim, Business School ( email )

University of Mannheim
P.O. Box 10 34 62
Mannheim, 68131
Germany

Gilvan Souza

University of Maryland - Decision and Information Technologies Department ( email )

Robert H. Smith School of Business
4313 Van Munching Hall
College Park, MD 20815
United States

Indiana University - Kelley School of Business - Department of Operation & Decision Technologies ( email )

Business 670
1309 E. Tenth Street
Bloomington, IN 47401
United States

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