New-product diffusion in closed-loop supply chains

Abstract

Problem definition: We study the sales planning problem of a producer who sells new and remanufactured versions of a durable good over a finite life cycle. We investigate whether slowing down product diffusion by choosing to partially satisfy demand might be profitable for the producer. Academic/practical relevance: We provide new insights into sales management in closed-loop supply chains by uncovering the role key market characteristics play in profitability of partial demand fulfillment as well as its optimal timing and magnitude. Methodology: We develop a dynamic model in which demand arrives as a slightly modified Bass diffusion process, and end-of-use products required for remanufacturing are constrained by earlier sales. Results: The optimal sales plan involves partial demand fulfillment when the product diffusion rate is high, the profit margin from remanufacturing is large, and the remanufactured item is in limited demand. Partial demand fulfillment extends to earlier stages of the life cycle as the diffusion rate grows, the demand for remanufactured items shrinks, or the number of consumers who return their end-of-use items increases. It is profitable to backlog more customers when the word-of-mouth effect dominates the diffusion process or when the demand for remanufactured items is lower. Finally, the benefit of delaying product diffusion tends to increase with diffusion rate. Managerial implications: Our findings suggest that deliberately backlogging some customers may be an effective lever (in the absence of flexibility to dynamically adjust prices) for durable-good producers in fast-clockspeed industries to improve their total profits from the jointly optimized sales of new and remanufactured items.