Determining optimal allocation of returned consumer electronics to refurbishment and remarketing.

What is it about?

Returns of consumer electronics represent a significant cost to original equipment manufacturers (OEMs); optimally allocating returns to either remarketing for re-selling or refurbishing for the fulfillment of warranty claims can offset the costs incurred by OEMs. By utilizing numerical models we find that maximum value is realized when most of the returns are earmarked for refurbishment for warranty claims, particularly early in the product lifecycle, thus allowing OEMs to build up inventory to reduce warranty costs and hedge against warranty uncertainty. During later stages of the product lifecycle, the OEMs may switch to remarketing as most of the warranty demand uncertainty is resolved. The results of the study are driven by the warranty coverage and refund costs that remarketed consumer returns generate once re-sold along with the high warranty demand uncertainty OEMs face over the product lifecycle. Furthermore, while earmarking consumer returns for warranty claims dominates, our numerical results indicate that the optimal allocation over time depends on numerous parameters including consumer return rate, warranty demand, remarketing potential, refurbishing costs, product failure rate, salvage values, and product pricing.

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Why is it important?

Each year a significant amount of consumer electronics are returned to retailers; in the U.S. alone, approximately $200 billion dollars of consumer goods are returned each year, accounting for an average of 8.2% of all retail sales. Lenient, full-refund return policies arising from competitive pressure have led to very large volumes of consumer returns of electronic goods that often exhibit no defects. Despite their working condition, these devices require testing before they can be reallocated for sale elsewhere; due to litigation concerns and the need for testing prior to a disposition decision, they cannot be resold as new products and are usually returned to the original equipment manufacturers (OEMs). As a result, these consumer returns represent a significant cost to consumer electronic OEMs; furthermore, shipment of these returns and the potential salvaging and remanufacturing required to replace them have an environmental cost as well. Determining the optimal allocation of consumer goods to refurbishment for the purposes of fulfilling warranty claims or remarketing for re-selling allows OEMs to recover a portion of the costs associated with consumer returns.

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