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How Optimized Remarketing and Refurbishment Can Help Grow Revenue and Improve Circularity

Authors:
Çerağ Pinçe, Mark Ferguson, L. Beril Toktay

Research Questions Addressed:
How should manufacturers allocate refurbished consumer returns between remarketing and warranty fulfillment to extract maximum value for the manufacturer?

How does the optimal allocation of returns to remarketing and warranty fulfillment change over the product life cycle?

How do return rates, remarketing potential, refurbishing costs, failure rates, and product pricing affect optimal allocation?

Primary Findings:
Original Equipment Manufacturers (OEMs) of consumer electronics should use returns primarily for remarketing and warranty fulfillment and rarely scrap them.

The value of earmarking refurbished consumer returns to fulfill warranty claims is typically larger than the value of remarketing them. This is especially true for products with significant warranty coverage and refund costs.

OEMs of consumer electronics should strategically emphasize earmarking of consumer returns at the early stages of the life cycle to build up inventory for the future warranty demand, whereas they should consider remarketing at the later stages of the life cycle after enough earmarked inventory is accumulated or most of the warranty demand uncertainty is resolved.

The optimal level of remarketed returns increases towards the end of the product life cycle but rarely surpasses the level of returns earmarked to fulfill warranty claims.

Relevant Sectors:
Manufacturing, Retail

Keywords:
Circular economy, Closed-loop supply chains, Consumer electronics, Consumer returns, Refurbishing, Remarketing, 
Warranty

Firms/Industries Appearing in Research (partial list):
Apple Inc., Durable goods, Electronic goods, Manufacturing, Retailing

Highlights:
In the U.S. market, consumer returns have been estimated at $200 billion per year and average 8.2% of total retail sales.

Consumer returns depend on recent sales while warranty claims occur throughout the product life span. This leads to greater uncertainty in warranty demand (2% to 30% of sales) than in consumer returns (8% to 12% of sales).

The research found that, on average, consumer electronics OEMs should refurbish about 30% of returns for remarketing and 65% of returns for warranty claims. Few returns should be salvaged.

Topic Overview:
Retailers cannot resell returned consumer electronics as new, so they typically return the items to OEMs. Rather than simply scrapping the returned goods, OEMs can refurbish returns and set them aside for meeting warranty claims or remarketing, both of which offset the costs generated by the returns. Using refurbished returns for warranty claims reduces costs at the expense of revenue loss, as the refurbished products could be resold at a discount. However, when manufacturers remarket refurbished goods, they risk reducing sales of new products, though they may also expand the OEM’s share on the secondary market.

Implications for Sustainable Business:
Manufacturers can refurbish returned products to reduce the financial and environmental costs generated by consumer returns. The incentive to refurbish returned goods is greatest when OEMs can identify the proper balance between remarketing refurbished goods and using them for warranty fulfillment. Refurbishing not only reduces the environmental cost associated with discarding or processing returns but also minimizes the financial cost that returns impose on manufacturers.

Link to Academic Paper:
Pinçe, Ç.,Ferguson, M., & Toktay, B. (2016). Extracting maximum value from consumer returns: Allocating between
remarketing and refurbishing for warranty claims. Manufacturing & Service Operations Management, 18(4), 475-492.

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Courtney Lasker
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