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Optimal return policy and modular design for build‐to‐order products
Author(s) -
Mukhopadhyay Samar K.,
Setoputro Robert
Publication year - 2005
Publication title -
journal of operations management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.649
H-Index - 191
eISSN - 1873-1317
pISSN - 0272-6963
DOI - 10.1016/j.jom.2004.10.012
Subject(s) - revenue , order (exchange) , computer science , profit (economics) , build to order , modularity (biology) , new product development , product (mathematics) , industrial organization , marketing , business , economics , microeconomics , finance , geometry , mathematics , production (economics) , biology , genetics
A build‐to‐order product gives the firm the opportunity to customize the product to the requirement of the customers. The firm will see an increase in demand, but face some operational difficulties. One of these is related to the return policy which is now a recognized tool to win customer orders. This is even more true for increasingly popular Internet sales where the opportunity to physically examine the product is absent. A tremendous advantage can be gained by the Internet firm if it could offer a return policy for BTO products. We propose the use of modularity in the product design as a solution to this problem. From manufacturer's point of view, following a policy of modularization and offering a generous return policy would increase revenue, but also increase the cost due to increased likelihood of return and increased cost of design. We develop a profit maximization model to jointly obtain optimal polices for return policy and modularity level in terms of certain market reaction parameters. We obtain a number of managerial guidelines for using marketing and operational strategy variables to influence those reaction parameters so as to obtain the maximum benefit from the market.