Mass customization and high variety are strategies to satisfy diverse consumer taste in today’s marketplace. While they bring in additional customer demand, they are also costly to implement. When product variety segments the customer base into increasingly small buckets, the aggregate demand uncertainty is dramatically inflated, compared to a low variety retailer. This means a lot more safety stock (excessive inventory) needs to be carried to guard against the demand uncertainty. When variety is high enough – common when personalization is allowed, the inventory holding cost becomes unbearable to make the business profitable. Usually, this is when a complete overhaul of the supply chain strategy becomes necessary: an “inventory waiting for demand” strategy is gradually replaced by a “demand waiting for inventory” strategy. What the latter requires is a “quick-response” manufacturing and logistics process. Therefore, when selling high variety or mass customization products, retailers in general have two options to improve profitability: holding excessive inventory or re-engineering the supply chain for quick response.

The reverse flow of consumer returns adds further complications to this already delicate choice. In their recent publication in the journal of IEEE Transactions on Systems, Man, and Cybernetics: Systems, Dr Shu Guo (University of Liverpool) and colleagues tackle exactly this challenge. They note that a great starting point is to differentiate the salvage values of returns and excessive inventory. Through analyzing a stylized supply chain of a mass customization retailer, they show that if the salvage value of returns is high, the appeal of a quick response supply chain is reduced. Since quick response is often a long-term, effort intensive change for retailers, this result offers important strategic insights for high variety retailers at the crossroad between quick response and excessive inventory. Further details from this study can be found below:

Guo, S., Choi, T. M., Shen, B., and Jung, S. (2017). “Coordination and enhancement schemes for quick response mass customization supply chains with consumer returns and salvage value considerations” IEEE Transactions on Systems, Man, and Cybernetics: Systems, DOI: 10.1109/TSMC.2017.2766207.

¹ This recurring series provides plain-English summaries of leading academic research in the area of consumer returns. It is co-produced by Mark Ferguson (Univ. of South Carolina), Michael Galbreth (Univ. of Tennessee), and Guangzhi Shang (Florida State Univ.).

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Mark Ferguson, Guangzhi Shang, and Michael Galbreth
Mark Ferguson (U of South Carolina), Michael Galbreth (U of Tennessee), Guangzhi Shang (Florida State U)