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Volume 15, Number 2
February 2009

Return this?

Peter Bell uses Management Science to solve large operational problems, and also come up with new ideas

Last winter Professor Peter Bell was in Wal-Mart the day after the first really big snow storm. He was amazed to see a long line of returned snow-blowers at the service counter. They all carried the same tag: “found to be not suitable.” The experience left Bell wondering: how many of the snow-blowers were defective, and how many were used to clear the snow once and then taken back for a refund.

Returns are a huge problem for Wal-Mart, as they are with many retailers who take back product with no questions asked. Wal-Mart alone processes $6 billion of returns annually; the 30 top non-grocery retailers in the U.S. are estimated to take back $53 billion worth of merchandise.

Bell, a management scientist, uses mathematical modelling to help firms make business decisions. In one stream of his research he focuses on revenue management, such as pricing and other revenue enhancing practices. In a number of papers, he and PhD student Jenny Chen looked at the “Wal-Mart problem” - how retailers develop pricing and inventory strategies for returnable merchandise.

When a retailer decides to put a price on a product, it must take into account how the price will affect the return rate, says Bell. “The higher the price charged for a product, the more likely it is to be returned. For example, if you’re not completely happy with a $300 printer, you’ll have it back in a flash, but not necessarily a $50 printer.” In one study Bell and Chen used management science to develop a number of pricing models for retailers who get a significant volume of returns.

When Wal-Mart accepts the return of a product, it often cleans it up and puts it back on the shelf. It might also choose to return the product to the manufacturer for a credit. This can have strategic implications for how a retailer manages the supply chain for returnable product, because the manufacturer will usually insist that the retailer pay some of the cost. In a paper recently published in the European Journal of Operational Research, Bell and Chen evaluate various cost-sharing models with manufacturers, and strategies for negotiating them.

In other research, Bell and PhD student Guoren Zhang are looking at a revenue enhancing tool for the airline industry, which Bell describes as a “flight right.” This gives a traveller the right to fly for a low fare from one city to another on a certain day. If, for example, the airline provides four flights a day between Toronto and Vancouver, the holder of the flight right will be put on one, but won’t know which one until a day or two before the flight. “When every ticket has a seat, the airline has to guess which flights are going to be full to set its prices,” says Bell. “With the flight right the airline can put the holder on the plane with the most space, thereby keeping its prices up.”

Flight rights have never been used before, but Bell’s research shows that they could have huge benefits for airlines. Although his models have been developed for the airline business, Bell believes that the concept may have a number of different applications, such as car rentals and travel vacations.

Management science has been used for many years to solve large and complex operational problems. In a previous study, Bell looked at how the private sector used management science strategically to create a sustainable competitive advantage. He found many successful applications that have stood the test of time. American Airlines, for example, developed a dynamic pricing system more than 20 years ago that still gives the airline an advantage today.

A number of years ago Bell began a longitudinal study of the public sector. Although competitive advantage does not play as critical a role in the public sector, there is an increasing demand for cost benefit analyses of major public expenditures. In the study, just completed, Bell looked at 30 not-for profit management science applications that were finalists in the prestigious Franz Edelman prize competition, to see how they fared over time.

Although Bell’s study highlights many successful applications, he finds generally that the public sector has less staying power than the private. “Public sector organizations, apart from the military, tend to do something once and then forget about it,” he says. “Five years later they’ll do the same thing again starting from scratch. When private sector firms create something that works, they tend to hire people to maintain and update it over a long period of time. And they get more bang from it.”
 

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