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Three essays on product design: incorporating capacity, remanufacturing, and environmental friendliness

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Title: Three essays on product design: incorporating capacity, remanufacturing, and environmental friendliness
Author(s): Gu, Wenjun
Director of Research: Chhajed, Dilip
Doctoral Committee Chair(s): Chhajed, Dilip; Petruzzi, Nicholas
Doctoral Committee Member(s): Liu, Yunchuan; Yalabik, Baris
Department / Program: Business Administration
Discipline: Business Administration
Degree Granting Institution: University of Illinois at Urbana-Champaign
Degree: Ph.D.
Genre: Dissertation
Subject(s): Product Design Product Quality Cannibalization Capacity Environmental Friendliness Reverse Logistics
Abstract: A product line design problem studies the optimal product line and corresponding quality and price for each product. This problem is critical for the success of businesses in both manufacturing and service sectors, and has been an important research focus for decades in both areas of marketing and operations management. To contribute in this line of discussion, this dissertation comprises of three essays in which we investigate how product line design problem interacts with such operations issues as capacity, remanufacturing, and reverse logistics, and examine how the results of these interactions affect the environment. Throughout this dissertation, we focus on the design of product quality, a single dimensional vertical differentiation which represents all more-is-better attributes of a product. In the first essay, we investigate how “back-end" capacity constraint interacts with “front-end" pricing decisions. Specifically, we assume capacity is consumed in both fixed (depends on the length of a product line) and variable (depends on product quality) ways. A product design model for segmented market is used to derive and analyze the optimal product line strategy. We find that lower capacity introduces operations cannibalization which reduces the length of the optimal product line. We also show that if longer product line consumes more fixed capacity (e.g., for changeover or setup), then the resulting economy of scale could make offering a standard product optimal, which completely contradicts the classic product line design results. In the second essay, we study remanufacturing and its environmental con sequences within the context of product design. In particular, production costs and consumer valuations are considered as functions of quality and are differentiated based on whether the product is non-remanufacturable, remanufacturable, or remanufactured. Given this, the firm maximizes its profit by determining whether or not to remanufacture and, if so, how much to remanufacture. Correspondingly, we examine the environmental consequences of these optimal remanufacturing decisions using a quality-dependent measure which focuses on resource extraction and waste disposal. We show that true “green" consumers should not only value remanufacturable products but also value remanufactured products. We also find that consumers' higher willingness-to-pay and the firm's low production cost can potentially lead to worse environmental consequences in addition to higher profit. In the final essay, we extend the model in the second essay by incorporating an exogenous collection rate and by considering social and environmental welfare in the decision making process. Examining the collection rate, we confirm that an increase in the collection rate generally benefits both the firm and the environment. We also find that there exists a threshold of collection rate above which collecting more units yields no effect on either profitability or environmental friendliness. Examining social and environmental welfare, we find that considering environmental welfare benefits the environment due to both lower quality and a smaller sales volume. In contrast, considering consumer welfare hurts the environment due to a much larger sales volume. This once again underscores that it is consumption that hurts the environment.
Issue Date: 2012-06-27
URI: http://hdl.handle.net/2142/31975
Rights Information: Copyright 2012 Wenjun Gu
Date Available in IDEALS: 2012-06-27
Date Deposited: 2012-05
 

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