Optimal return policy and modular design for build-to-order products

Optimal return policy and modular design for build-to-order products

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Article ID: iaor20052900
Country: United States
Volume: 23
Issue: 5
Start Page Number: 496
End Page Number: 506
Publication Date: Jul 2005
Journal: Journal of Operations Management
Authors: ,
Abstract:

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 build-to-order (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 policies 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.

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