Reducing Product Expiration by Aligning Salesforce Incentives: A Data-driven Approach
33 Pages Posted: 22 Sep 2017 Last revised: 31 Mar 2019
Date Written: March 30, 2019
Waste generated from product expiration erodes profits and burdens the environment. Practitioners recognize misaligned salesforce incentives as a driver of waste through excessive selling. We investigate whether manufacturers can reduce product waste due to expiration by designing salesforce compensation schemes that can simultaneously improve profits.
Our study uses empirical analysis based on structural econometric modeling, game theory, and optimization. We develop an empirical model of the ordering decisions of a utility-maximizing representative in a direct-store-delivery setting. We estimate the sales representative's effort function in this model using store-product level sales and expirations, product attributes, market share, and commission data collected from a consumer-packaged-goods manufacturer. Using the estimated effort function, we solve the manufacturer's profit maximization problem to compute optimum expiration penalties for sales representatives. The solution to the optimization problem identifies the product-group and location combinations at which profit can be increased while waste can be reduced. In the studied case, the manufacturer can increase its profit by 1.4% and reduce volume of waste due to expiration by 37.7% by penalizing sales representatives, on average, 2.5 times their per unit commission for each unit of waste. We find that such opportunities exist in 21% of the product group and location combinations.
Our work contributes to the sustainable operations management literature by studying salesforce compensations considering the environmental impact. Our approach allows for-profit consumer-packaged-goods manufacturers to identify win-win opportunities for the environment and their bottom line. By appropriately penalizing the sales representatives for expired units, a manufacturer can increase its profit and reduce waste.
Keywords: food waste, sustainability, salesforce compensation, direct store delivery
Suggested Citation: Suggested Citation