IDEAS home Printed from https://ideas.repec.org/a/bla/popmgt/v32y2023i12p4021-4048.html
   My bibliography  Save this article

OEM‐servicizing with a multiusecycle product: Model analysis and insights

Author

Listed:
  • Yinshi (Agnes) Gao
  • Saurabh Bansal
  • V. Daniel R. Guide

Abstract

Customers of many original equipment manufacturers (OEMs) in business‐to‐business markets today demand product servicizing in which instead of buying the product from the OEM they buy the use of a product during a lease. During the lease, (i) the customer uses the product and returns it to the OEM after the use reaches a specific level, (ii) the OEM remanufactures the product in a costly process and sends it back to the customer, and this usecycle is repeated multiple times. The lease terms typically involve a use‐based payment. While a greater product use by a customer brings a larger revenue to the OEM, it also increases the remanufacturing cost incurred by the OEM. We investigate this trade‐off using an analytical model for a contract that is used extensively in industry. For the case of homogeneous customers with a common use rate of the product, we optimize lease payment terms and identify market and product‐remanufacturing characteristics for which the OEM should servicize the product instead of selling it. We show that an OEM should not servicize a product when the customers' use rate exceeds a threshold. This is because, beyond this threshold, the remanufacturing cost increases disproportionably, exceeding the higher usage‐based revenue. Subsequently, we consider a market with two segments with different use rates. We consider two servicizing modes: (i) servicize both market segments or (ii) selectively servicize only one segment and sell the product to the other segment, and the default mode of selling in both segments. We develop optimal lease payment terms for these use‐based servicizing modes, identify thresholds of product and market characteristics for the optimality of these modes. Finally, we extend the results to a market with more than two segments and compare the environmental impacts of the servicizing or sell decision. Numerical results informed by empirical data show that the OEM's loss of profit from choosing a suboptimal servicizing/sell decision can be significant.

Suggested Citation

  • Yinshi (Agnes) Gao & Saurabh Bansal & V. Daniel R. Guide, 2023. "OEM‐servicizing with a multiusecycle product: Model analysis and insights," Production and Operations Management, Production and Operations Management Society, vol. 32(12), pages 4021-4048, December.
  • Handle: RePEc:bla:popmgt:v:32:y:2023:i:12:p:4021-4048
    DOI: 10.1111/poms.14076
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/poms.14076
    Download Restriction: no

    File URL: https://libkey.io/10.1111/poms.14076?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Vishal V. Agrawal & Mark Ferguson & L. Beril Toktay & Valerie M. Thomas, 2012. "Is Leasing Greener Than Selling?," Management Science, INFORMS, vol. 58(3), pages 523-533, March.
    2. Akshay Mutha & Saurabh Bansal & V. Daniel R. Guide, 2016. "Managing Demand Uncertainty through Core Acquisition in Remanufacturing," Production and Operations Management, Production and Operations Management Society, vol. 25(8), pages 1449-1464, August.
    3. Kanatlı, Mehmet Ali & Karaer, Özgen, 2022. "Servitization as an alternative business model and its implications on product durability, profitability & environmental impact," European Journal of Operational Research, Elsevier, vol. 301(2), pages 546-560.
    4. Ramandeep S. Randhawa & Sunil Kumar, 2008. "Usage Restriction and Subscription Services: Operational Benefits with Rational Users," Manufacturing & Service Operations Management, INFORMS, vol. 10(3), pages 429-447, December.
    5. Preyas S. Desai & Devavrat Purohit, 1999. "Competition in Durable Goods Markets: The Strategic Consequences of Leasing and Selling," Marketing Science, INFORMS, vol. 18(1), pages 42-58.
    6. Sreekumar R. Bhaskaran & Stephen M. Gilbert, 2005. "Selling and Leasing Strategies for Durable Goods with Complementary Products," Management Science, INFORMS, vol. 51(8), pages 1278-1290, August.
    7. Mahmood Pedram & Subramanian Balachander, 2015. "Increasing Quality Sequence: When Is It an Optimal Product Introduction Strategy?," Management Science, INFORMS, vol. 61(10), pages 2487-2494, October.
    8. Preyas S. Desai, 2001. "Quality Segmentation in Spatial Markets: When Does Cannibalization Affect Product Line Design?," Marketing Science, INFORMS, vol. 20(3), pages 265-283, August.
    9. James A. Shaunty & Van Court Hare, Jr., 1960. "An Airline Provisioning Problem," Management Science, INFORMS, vol. 0(2), pages 66-84, December.
    10. K. Sridhar Moorthy & I. P. L. Png, 1992. "Market Segmentation, Cannibalization, and the Timing of Product Introductions," Management Science, INFORMS, vol. 38(3), pages 345-359, March.
    11. Laurens G. Debo & L. Beril Toktay & Luk N. Van Wassenhove, 2005. "Market Segmentation and Product Technology Selection for Remanufacturable Products," Management Science, INFORMS, vol. 51(8), pages 1193-1205, August.
    12. Sreya Kolay & Greg Shaffer, 2013. "Contract Design with a Dominant Retailer and a Competitive Fringe," Management Science, INFORMS, vol. 59(9), pages 2111-2116, September.
    13. V. Daniel R. Guide, Jr. & Ruud H. Teunter & Luk N. Van Wassenhove, 2003. "Matching Demand and Supply to Maximize Profits from Remanufacturing," Manufacturing & Service Operations Management, INFORMS, vol. 5(4), pages 303-316, October.
    14. Preyas Desai & Devavrat Purohit, 1998. "Leasing and Selling: Optimal Marketing Strategies for a Durable Goods Firm," Management Science, INFORMS, vol. 44(11-Part-2), pages 19-34, November.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Yu, Yugang & Dong, Yuxuan & Guo, Xiaolong, 2018. "Pricing for sales and per-use rental services with vertical differentiation," European Journal of Operational Research, Elsevier, vol. 270(2), pages 586-598.
    2. Erzurumlu, S. Sinan, 2013. "The compatibility of durable goods with contingent generic consumables," Omega, Elsevier, vol. 41(3), pages 574-585.
    3. Vishal Agrawal & Atalay Atasu & Sezer Ülkü, 2021. "Leasing, Modularity, and the Circular Economy," Management Science, INFORMS, vol. 67(11), pages 6782-6802, November.
    4. Tianqin Shi & Dilip Chhajed & Zhixi Wan & Yunchuan Liu, 2020. "Distribution Channel Choice and Divisional Conflict in Remanufacturing Operations," Production and Operations Management, Production and Operations Management Society, vol. 29(7), pages 1702-1719, July.
    5. Feng, Yixuan & Tan, Yinliang (Ricky) & Duan, Yongrui & Bai, Yu, 2020. "Strategies analysis of luxury fashion rental platform in sharing economy," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 142(C).
    6. Chen Jin & Luyi Yang & Cungen Zhu, 2023. "Right to Repair: Pricing, Welfare, and Environmental Implications," Management Science, INFORMS, vol. 69(2), pages 1017-1036, February.
    7. Li, Kate J. & Xu, Susan H., 2015. "The comparison between trade-in and leasing of a product with technology innovations," Omega, Elsevier, vol. 54(C), pages 134-146.
    8. Michael K. Lim & Ho-Yin Mak & Ying Rong, 2015. "Toward Mass Adoption of Electric Vehicles: Impact of the Range and Resale Anxieties," Manufacturing & Service Operations Management, INFORMS, vol. 17(1), pages 101-119, February.
    9. Lingfei Cai & Xuan Shi & Jingrong Zhu, 2019. "Quality Recovery or Low-End Recovery? Profitability and Environmental Impact of Durable Product Recovery," Sustainability, MDPI, vol. 11(6), pages 1-37, March.
    10. Lacourbe, Paul, 2016. "Durable goods leasing in the presence of exporting used products to an international secondary market," European Journal of Operational Research, Elsevier, vol. 250(2), pages 448-456.
    11. Jian Li & Huan Wang & Zhiwen Deng & Wen Zhang & Guoqing Zhang, 2022. "Leasing or selling? The channel choice of durable goods manufacturer considering consumers’ capital constraint," Flexible Services and Manufacturing Journal, Springer, vol. 34(2), pages 317-350, June.
    12. Haitao Chen & Qiang Xu & Zhaohui Dong & Hetian Zhao, 2023. "Recycling Versus Leasing in Closed-Loop Supply Chain: A Comparative Analysis Anchored on Consumer Ownership Perceptions," SAGE Open, , vol. 13(4), pages 21582440231, December.
    13. Alegoz, Mehmet & Karaer, Özgen, 2024. "Compound effect of closing the loop and servitization in supply chains," International Journal of Production Economics, Elsevier, vol. 270(C).
    14. Vishal V. Agrawal & Stylianos Kavadias & L. Beril Toktay, 2016. "The Limits of Planned Obsolescence for Conspicuous Durable Goods," Manufacturing & Service Operations Management, INFORMS, vol. 18(2), pages 216-226, May.
    15. Lin Tian & Baojun Jiang & Yifan Xu, 2021. "Manufacturer’s Entry in the Product-Sharing Market," Manufacturing & Service Operations Management, INFORMS, vol. 23(3), pages 553-568, May.
    16. Adem Örsdemir & Vinayak Deshpande & Ali K. Parlaktürk, 2019. "Is Servicization a Win-Win Strategy? Profitability and Environmental Implications of Servicization," Manufacturing & Service Operations Management, INFORMS, vol. 21(3), pages 674-691, July.
    17. Pangburn, Michael S. & Stavrulaki, Euthemia, 2014. "Take back costs and product durability," European Journal of Operational Research, Elsevier, vol. 238(1), pages 175-184.
    18. Oded Koenigsberg & Rajeev Kohli & Ricardo Montoya, 2011. "The Design of Durable Goods," Marketing Science, INFORMS, vol. 30(1), pages 111-122, 01-02.
    19. Vibhanshu Abhishek & Jose A. Guajardo & Zhe Zhang, 2021. "Business Models in the Sharing Economy: Manufacturing Durable Goods in the Presence of Peer-to-Peer Rental Markets," Information Systems Research, INFORMS, vol. 32(4), pages 1450-1469, December.
    20. Yan, Xiaoming & Zhao, Wenhan & Yu, Yugang, 2022. "Optimal product line design with reference price effects," European Journal of Operational Research, Elsevier, vol. 302(3), pages 1045-1062.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:popmgt:v:32:y:2023:i:12:p:4021-4048. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://onlinelibrary.wiley.com/journal/10.1111/(ISSN)1937-5956 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.