Collection Strategy Choice and Network Design

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Collection Strategy Choice and Network
Design with Financial Incentives for Product
Recovery
Tamer Boyaci (with R. Wojanowski V.
Verter) Faculty of Management, McGill University
Symposium on Closed Loop Supply Chains Faculty of
Management, McGill University September 16, 2005
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• Product Acquisition
• Financial incentives given to product holders
• Accessibility of collection network
• Economic model of product holder collector
  interaction
• Product
• Remaining recoverable value
• End-of-life/use (TV, PC, carpets), reusable
  packaging (alucans, glass bottles)
• Product Holder
• End-user of the product consumer or industrial
  clients
• Collector
• Integrated decision-maker (profit maximizer) who
  is responsible for collection activities and
  facilities.
• Third-party firm, industrial manufacturer, or
  industry

Introduction Model Insights Conclusions
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Collector
Product holder
Introduction Model Insights Conclusions
Collector-Product Holder Interaction
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Pick-up

• Represent used products in the market by a
  continuous function
• Product density ? is constant or slowly varying
  in the market area
• Market area sufficiently large
• Design boils down to selecting size of
  each collection area
• Circular regions of radius d

Introduction Model Insights Conclusions
Drop-off

• Approximate collection cost
• Fixed Cost (same for pick-up drop-off)
• Vehicle Routing Cost (for pick-up)
• Line-Haul cost to the start and end of pick-up
  tours (for pick-up)

Continuous Approximation for Collection N. Design
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• Any product holder that is located at a distance
  x from the collection center compares the utility
  of returning

Introduction Model Insights Conclusions
to reservation utility u0
Choice Model for Product Returns
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Introduction Model Insights Conclusions
Drop-off Pick-up Profit (per area)
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• Drop-off Strategy
• Higher financial incentives ? less number of
  facilities

Introduction Model Insights Conclusions

• Pick-up Strategy
• Higher financial incentives ? more number of
  facilities

Analytical Insights
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• Fixed costs and variable (transportation/logisti
  cs) collection costs
• Fixed Cost F for both strategies
• Pick-up collection costs Trans. cost/vehicle cd
  and vehicle cap. v
• Drop-off indirect collection costs It costs
  k/ h for the collector to make a product holder
  indifferent to travel a unit distance.
  
• Used-product density f
• Environmental awareness
• The magnitude ? / u0 captures the overall
  willingness in the market
• Higher reservation utililty u0 ? less willingness
  to return

Introduction Model Insights Conclusions
Operating/Market Characteristics Studied
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Pick up Drop off
s d s d Fixed Cost F - Collection
Costs k N/A N/A - cd - - N/A
N/A v N/A N/A Reservation
Utility u0 Product Density f
- - - These results are not shown
analytically, but verified numerically
Introduction Model Insights Conclusions
Impact of Parameters on Optimal Decisions
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subsidy

• Av. Line-haul cost /product
• Av. cost of obtaining a return
• Critical collection cost ratio

Introduction Model Insights Conclusions
Fixed costs F
0
50000
Impact of Fix Cost Collection Costs
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Introduction Model Insights Conclusions
Impact of Product Density
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Introduction Model Insights Conclusions
Impact of Using a Fixed Subsidy Scheme
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u0
Introduction Model Insights Conclusions
u0
Impact of Reservation Utility
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• Framework for analyzing incentive based
  collection strategies
• Incorporate individual decisions to return and
  the collectors costs
• Determine the optimal collection area and the
  subsidy
• Sensitivity wrt cost, market and product
  characteristics
• Bring out the salient interaction between
  financial incentives and accessibility of the
  collection network
• Strategic substitutes under the drop-off strategy
• Strategic complements under the pick-up strategy
• Preference for drop-off or pick up strategy
• Depends critically on the relative cost of
  collection incurred by the collector and the
  product holder
• Increasing population density favors pick up
  strategy
• Environmental awareness does not play a
  discriminatory role in the preference of a
  strategy
• The same is true for return value (p)

Introduction Model Insights Conclusions
Summary
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• Alternative objective functions (reaching a
  mandatory recovery rate at minimum cost)
• Hybrid model of collection (e.g. pick-up close to
  collection centers and drop-off for further away)
• Apply methodology to develop a product
  classification system and position real product
  categories
• The profitability of recovery operations
• Relative level of subsidy to be given
• Collection strategy to be used
• Incorporation of the regulator and other recovery
  incentive mechanisms (deposit-refund, disposal
  taxes)

Introduction Model Insights Conclusions
Extensions and Future Research
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• Extend the stochastic utility model to model
  different choices (buy return buy not
  return not buy at all)
• For a given retail price, deposit-refund,
  drop-off network, determine the expected sales
  return rates and collector profit
• Retail facilities are fixed, the firm determines
  collection areas
• Retail and collection facilities are coupled
• Collector-initiated (voluntary) deposit-refund
• It is suboptimal to add the deposit to the retail
  price collector subsidizes a portion of the
  deposit to exploit price discrimination
• High recovery rates achieved only when return
  product value is high
• Government-initiated (mandatory) deposit-refund
• A minimum deposit-refund not sufficient to
  improve recovery rates
• Additional accessibility restrictions can achieve
  higher recovery rate, but collector might still
  prefer no deposit-refund

Introduction Model Insights Conclusions
Collection N. Design under Drop-off
Deposit-Refund