Time Value of Commercial Product Returns

Authors:
V. Daniel R. Guide;Gilvan C. Souza;Luk N. Van Wassenhove;Joseph D. Blackburn
Affiliations:
Smeal College of Business, The Pennsylvania State University, University Park, Pennsylvania 16802;Robert H. Smith School of Business, University of Maryland, College Park, Maryland 20742;INSEAD, Boulevard de Constance, 77305 Fontainebleau, France;Owen School of Management, Vanderbilt University, Nashville, Tennessee 37203
Venue:
Management Science
Year:
2006

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Abstract

Manufacturers and their distributors must cope with an increased flow of returned products from their customers. The value of commercial product returns, which we define as products returned for any reason within 90 days of sale, now exceeds $100 billion annually in the United States. Although the reverse supply chain of returned products represents a sizeable flow of potentially recoverable assets, only a relatively small fraction of the value is currently extracted by manufacturers; a large proportion of the product value erodes away because of long processing delays. Thus, there are significant opportunities to build competitive advantage from making the appropriate reverse supply chain design choices. In this paper, we present a network flow with delay models that includes the marginal value of time to identify the drivers of reverse supply chain design. We illustrate our approach with specific examples from two companies in different industries and then examine how industry clockspeed generally affects the choice between an efficient and a responsive returns network.