Read the working paper
INSEAD Working Paper 2015/44/TOM
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 due to 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 both deterministic and stochastic demand. In addition, we introduce two heuristics: (i) a certainty-equivalent approximation, which leads to a simple closed-form policy; and (ii) a dual-balancing heuristic, which results in a fairly tractable policy. We also develop a robust version of this model in order to obtain bounds for the overall performance of the system. We test the performance of these heuristics using data from our industrial partner.