Diffusion control in closed-loop supply chains: Successive product generations

Abstract

We consider a durable-good producer who optimizes its sales decisions for two successive product generations with refurbishing and recycling potential. Customer arrivals follow a multi-generation diffusion process that takes into account the word-of-mouth feedback spread within each customer population of successive generations as well as the substitution effect among these generations. We investigate whether the producer can profit from partially satisfying the new-generation demand to slow down the product diffusion and improve the refurbishing and recycling volumes in the long run. We derive conditions for optimality of this partial-fulfillment policy. In fast-clockspeed industries, if the producer enters the refurbishing market for both generations, the partial-fulfillment policy is optimal if (i) the profit margin ratio of the early-generation product to the new-generation product is high enough, (ii) the profit margin ratio of the refurbished item to the new item is large enough for the new-generation product, and (iii) the fraction of customers willing to buy the refurbished item is only modestly large for each generation. If the producer uses the recycled content obtained from early-generation returns in new-generation production, the partial-fulfillment policy is optimal if (i) the number of early-generation end-of-life returns and the amount of recyclable material from each such return are large and (ii) the number of customers initially attracted by the early-generation product is high. We also characterize the critical time period beyond which initiating the partial-fulfillment policy provides no improvement in the refurbishing and recycling volumes for the new-generation product.