Product Life Cycle Optimization Models for Closed Loop Supply Chains
Open Access
- Author:
- Dhamodharan, Aswin
- Graduate Program:
- Industrial Engineering
- Degree:
- Doctor of Philosophy
- Document Type:
- Dissertation
- Date of Defense:
- May 11, 2018
- Committee Members:
- A Ravi Ravindran, Dissertation Advisor/Co-Advisor
A Ravi Ravindran, Committee Chair/Co-Chair
Soundar Kumara, Committee Member
Jose Antonio Ventura, Committee Member
Dennis Kon-Jin Lin, Outside Member - Keywords:
- closed loop supply chains
network design
optimization models
pricing strategy
product life cycle
bass model
capacity planning - Abstract:
- Supply Chain Network design is an important strategic decision that helps Original Equipment Manufacturers (OEMs) to position their supply chains for profitable reverse supply chains. We observe that between the competitors of technology products, companies such as HP and Xerox (printers) and Apple and Google (smartphones), one competitor (HP and Apple) manages the reverse supply chain to extract value in a profitable manner, while the other competitor (Xerox and Google) uses a third-party reverse logistics company to simply recycle consumer returns. In the literature, supply chain levers, such as consumer Willingness to Pay (WTP) for remanufactured products, managing the collection process of consumer returns, the quality of the consumer returns and the design of reverse logistics have been identified as key factors influencing OEM participation in reverse supply chain. In this thesis, we show that, under the same supply chain levers mentioned above, the OEM’s approach to supply chain network design can significantly impact the profitability in the reverse supply chain over the product lifecycle. To address the supply chain network design problem for an OEM, we propose an integrated multi-period optimization model called Product Life Cycle Optimization Model (PLCOM), to design the Closed Loop Supply Chain (CLSC) for the OEMs. The PLCOM is a Mixed Integer Linear Program that consists of a Demand model and a Pricing model. The Pricing model determines the optimal production quantity and the selling price computed over the product life cycle, based on a realistic customer Willingness to Pay (WTP) for new and remanufactured products. The Demand model computes the demand for new and remanufactured products based on the Extended-Bass’s diffusion model. The PLCOM also computes the cannibalization of new product sales due to the introduction of remanufactured product and the availability of product returns for remanufacturing, constrained by the collection of the returns. The Demand and Pricing models are then integrated into a Mixed Integer Program (MIP) model to design the CLSC network. The PLCOM is applied to a realistic case study using Apple’s iPhone 7 for a product life cycle of 8 years. The final MIP model has 30 binary variables, 48066 continuous variables and 3972 constraints and was solved using CPlex in 0.1619 seconds. We show that an integrated approach to design the supply chain network by the OEMs is more profitable compared to a sequential approach, where the OEM initially designs the optimal forward supply chain network and implements it. Later, when the OEM decides to participate in the remanufactured market, the OEM revisits the network design to obtain the optimal CLSC for the reverse supply chain. Using sensitivity analysis, we also show that slow diffusing products are more profitable for remanufacturing and fast diffusing products require flexibility in capacity planning, in order to avoid the fixed cost of opening additional facilities. In the case of fast diffusing products, we also observe a delayed surge in demand for remanufactured products caused by a delayed cannibalization effect on new product demand. Finally, a sensitivity analysis on the quality of the consumer returns gives an upper bound on the investment that can be made by the OEM in incentivizing the consumers to improve the quality of the returns. In the technology industry, frequent new product releases entail OEMs to concurrently manage successive generations of products. For example, Apple currently sells multigeneration iPhones, such as iPhone 6S, iPhone 7, iPhone 8 and iPhone X. Hence, we extend the integrated model to a two-generation product setting. We model the demand for the second-generation product as a substitution for the first-generation product. We identify the \textit{logit} function as the substitution function to compute demand for the second-generation product and validate total sales using the iPhone4 and iPhone 4S sales data. The extended PLCOM is again used in a realistic case study based on the consumer WTP for iPhone 7 and iPhone 8 as the successive generations of products. The extended PLCOM has 30 binary variables, 77474 continuous variables and 6470 constraints and the optimization problem was solved using CPlex and the solver took 46 seconds to solve the problem. Finally, we conduct a sensitivity analysis to determine the most profitable time to introduce the second-generation product, characterize the slow and the fast diffusing products in the two-generation product setting and analyze the impact of the quality of consumer returns on the profit.