Published Online:https://doi.org/10.1287/msom.2017.0622

The goal of this paper is to describe, model, and optimize inventory in a reverse logistics system that supports the warranty returns and replacements for a consumer electronic device. The context and motivation for this work stem from a collaboration with an industrial partner, a Fortune 100 company that sells consumer electronics. The reverse logistics system is a closed-loop supply chain: failed devices are returned for repair and refurbishing; this inventory is then used to serve warranty claims or sold through a side sales channel. Managing inventory in this system is challenging because of the short life cycle of these devices and the rapidly declining value for the inventory. We examine an inventory model that captures these dynamics. We characterize the structure of the optimal policy for this problem for stochastic demand and introduce an algorithm to calculate optimal sell-down levels. We also provide a closed-form policy for the deterministic version of the problem, and we use this policy as a certainty-equivalent approximation to the stochastic optimal policy. Finally, using numerical experiments, we analyze the sensitivity of this system to changes in various parameters, and we also evaluate the performance of the certainty-equivalent approximation using data from our industrial partner.

The online appendix is available at https://doi.org/10.1287/msom.2017.0622.

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