Design investment and advertising decisions in direct-sales closed-loop supply chains

https://doi.org/10.1016/j.jclepro.2019.119552Get rights and content

Abstract

This study analyzes decision making regarding a direct-sales closed-loop supply chain that consists of an original equipment manufacturer (OEM), a remanufacturer and two advertising agents. A two-stage no cooperative game is established: the OEM determines the design investment and advertising price of new product, the remanufacturer decides the advertising price of a remanufactured product in the first stage at the same time, and the two advertising agents determine advertising level. This paper solves the game strategies backward and then analyzes the impacts of the parameters of design and advertising on equilibrium decisions and the profits of closed-loop supply chain members. The results show that (1) unit advertising cost and design cost decrease in equilibrium advertising price, design investment and advertising level, but there is a positive correlation between advertising elasticity of demand and equilibrium decisions; (2) the design investment parameter of cost-savings is positively related to the equilibrium design investment level, advertising price and advertising decisions; and (3) if the OEM’s investment budget is too small, the equilibrium results cannot be obtained. In this case, to pursue maximum profit, the OEM need to allocate capital to achieve a balance between design and advertising investment. This study can support the decision making of direct-sales closed-loop supply chain enterprises.

Introduction

Remanufacturing is a critical sustainable production model that is defined as the process of converting used products to ‘as-new-as’ products with the same functional state and quality standards, including disassembling, clean, inspecting, reassembling activities (Chakraborty et al., 2017, Ijomah et al., 2007, Östlin et al., 2008). It is becoming an important part of the circular economy and has attracted extensive attention from academia, industry and government in recent years. There exist several motives (such as profit, ethical responsibility, and legislation) encouraging the original equipment manufacturers or remanufacturers to implement production remanufacturing (Govindan et al., 2015, Seitz and Peattie, 2004). Because the production process is based on used products, remanufacturing could create environmental and social benefits by decreasing pollution, solid wastes and carbon dioxide emissions (Diallo et al., 2017, Steinhilper et al., 2011, Zhou et al., 2014). In addition, the amount of government legislation supporting green production is increasing gradually. For example, the Waste Electrical and Electronic Equipment (WEEE) directive of the European Union requires that all OEMs take responsibility for the entire product lifecycle, especially for collecting and recycling the EOL (end of life) products they produced (Cao et al., 2016, Fleckinger and Glachant, 2010, Özdemir-Akyıldırım, 2015). Compared with manufacturing, remanufacturing processes are more economical, consuming fewer materials and less energy with recycled products (used, damaged or discarded) (El Saadany et al., 2013, Giutini and Gaudette, 2003, Seitz and Peattie, 2004). Naturally, remanufacturing could implement production at a low cost to achieve high profit, which has been proven in the automotive parts and consumer electronics industries (Atasu et al., 2010, Zhu and Tian, 2016). Therefore, under the comprehensive influence of the above factors, manufacturers are widely encouraged to engage in remanufacturing (Ferguson, 2010, Martin et al., 2010).

As more legislation is enacted to support remanufacturing, economic imperatives also make it a necessity. However, when firms indulge in remanufacturing, they struggle with respect to revenue management due to severe competition in industry. In fact, several intricate factors affect remanufacturing decisions. On the one hand, consumers’ acceptance of remanufactured products is still uncertain; consumers are concerned about whether the quality and after-sales guarantee of the cheaper remanufactured products are consistent with those of new products (Wei et al., 2015). On the other hand, remanufacturers face the challenge of reducing production costs to increase the total profits. Remanufacturing involves product recycling, disassembling, inspecting and reassembling activities. In this process, product returning is uncontrollable, caused by the uncertainty of quantity and quality of used products (Guide and Wassenhove, 2001, Souza, 2013). Furthermore, the cost of remanufacturing is highly related to the complexity of the original products. The remanufacturing process is different from the positive assembly line since used products need to be disassembled, cleaned and reassembled (Guide et al., 2000). If the product disassembly is inconvenient, it will increase the production cost of remanufacturing (Teunter, 2006, Wu, 2013).

Advertising has been proved to increase consumers’ confidence in remanufactured products and expand sale incomes (Li et al., 2002, Tang et al., 2016). Product advertising is conducive to enhancing market demand (Li and Ouyang, 2016), which also plays a particular role in the marketing of green products (including remanufactured products) (Chan et al., 2012). Advertising campaigns could effectively stimulate consumer demand for green products if environmental concerns, utilitarian benefits, and psychological brand benefits are well communicated to consumers (Hartmann and Apaolaza-Ibáñez, 2012). In other words, consumers are educated through advertising to be sustainable and responsible, meanwhile green products may satisfy consumers’ environmental protection needs and help companies to achieve extra profits (Lin and Huang, 2012, Tang et al., 2016). Improving the remanufacturability of products in the product design process can also be another effective way to reduce the production cost of remanufacturing (Debo et al., 2005, Yang et al., 2015). Design investment associated with an original equipment manufacturer’s new product can influence the remanufacturing process in a closed-loop supply chain (CLSC) (Fang et al., 2016, Gray and Charter, 2008). If an OEM decreases the level of interchangeability to prevent remanufacturers from remanufacturing a product, the OEMs’ costs will increase as a result (Wu, 2013). Therefore, design investment and advertising may have significant impact on manufacturers’ revenue by affecting customer demand and the costs of new and remanufactured products. As a result, research on design investment and advertising decisions in the CLSC is necessary. However, in the current literature, seldom research has both taken these two factors into consideration. To address this gap, this study focuses on the influence of design investment and advertising on CLSC’s decisions and profits. Two research questions are developed:

  • What are the optimal design investment, advertising decisions and profits in the CLSC model?

  • How does budget constraint affect OEM’s profits?

To answer the two research questions, a two-stage cooperative game theoretic model is established. To the best of our knowledge, this is the first attempt to consider both design investment and advertising decisions in the same CLSC model. Moreover, it explores the impact of budget constraint on OEM’s profits, which has not been considered in existing studies and more complies to the real practical business scenario.

The remainder of this paper is organized as follows. In Section 2, relevant streams of literature are reviewed. Section 3 illustrates scenarios and assumptions and formalizes advertising sensitive market demands and profit functions. In Section 4, the chain members’ equilibrium decisions are acquired in the scenario. Section 5 analyses the impact of the related parameters on the chain members’ equilibrium decisions. Section 6 presents numerical studies that explore the effects of related parameters on the chain members’ equilibrium profits. Further discussion about the impacts of budget constraint on the chain members’ equilibrium profits is presented in Section 7. The conclusions follow in Section 8.

Section snippets

Literature review

According to the hypothesis of economic man (Hollis and Edwar, 2006), supply chain members choose strategies and make decisions based on their optimal revenues. Revenue management is concerned with demand management decisions that contribute to maximizing firms’ profits (Talluri and van Ryzin, 2005). Remanufacturing enterprises should make demand management and cost minimization decisions together for new and remanufactured products to pursue their profits (Kumar and Ramachandran, 2016). In

Scenario description

With the rapid development of information technology and express delivery industry, there has been a sharp increase in direct sales of electrical products to customers over the internet. Meanwhile, manufacturers can recycle products through the network for reuse. Different from the traditional supply chain, which depends on retailers, online e-retailers or both (He et al., 2016, Yi et al., 2016), this paper proposes a direct-sales CLSC without any retailer. That means manufacturers directly

Equilibrium results

According to the demand and profit functions, we use backward induction to obtain equilibrium results in the two-period game. In the second stage, agent A decides new product’s advertising level An, and agent B decides remanufactured product’s advertising level Ar.Then, the agents’ profit functions satisfy the profit’s maximum as follows:ΠA=maxAn(SnDnmaAn22)ΠB=maxAr(SrDrmbAr22)

According to the first-order optimal conditions, we can get functions of advertising investment level for new product

Analysis of equilibrium results

In this section, we analyze equilibrium decisions from both cost and demand perspectives. Meanwhile, we discuss the influence on the competition between two products and get several propositions below.

Numerical experiments

Thus far, we have analyzed the impacts of parameters on equilibrium decisions and competition between two products. According to previous studies (Li and Ouyang, 2016, Wu, 2013), we choose parameters and discuss the impacts of design investment and advertising on equilibrium demand and equilibrium profit.

Discussion

In the former section, we have discussed the impacts of design investment and advertising on equilibrium demand and equilibrium profit. Notably, there is no limitation to the budget of OEM, which is used to invest in design and advertising activities in the proposed scenario. However, for any manufacturer, the budget for these is limited in the actual business world. For example, Wang et al. (2017) argue that manufacturing/remanufacturing decision issues that involve the optimal production

Conclusions

In this study, we draw on an important gap in the literature, which we attempt to fill by comprehensively considering design investment and advertisement impact in the manufacturing and remanufacturing systems. We develop a two-echelon direct-sales CLSC structure to explore the optimal decisions of design investment and advertisement by using the two-stage Stackelberg game. We then provide some decision-making assistance for the chain members to analyze the effect of design investment and

Data availability

The data used to support the findings of this study are provided in the text.

Declaration of competing interest

The authors declare that they have no known competing financial interests or personal relationships that could have appeared to influence the work reported in this paper.

Acknowledgements

This study was partially supported by National Natural Science Foundation of China (71540002; 71601074; 71971078; 71673077); Natural Science Foundation of Hunan Province (2019JJ40042).

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