considering third-party logistics providers in reverse logistics
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Considering third-party logistics providers in reverselogisticsYufang Chiu a , Po-Chao Lin a & He-Hsuan Hsu aa Department of Industrial and Systems Engineering , Chung Yuan Christian University ,200 Chung-Pei Road, Chung-Li City, Taiwan 32023, Republic of ChinaPublished online: 08 Dec 2011.
To cite this article: Yufang Chiu , Po-Chao Lin & He-Hsuan Hsu (2011) Considering third-party logistics providers in reverselogistics, Journal of the Chinese Institute of Industrial Engineers, 28:7, 512-520, DOI: 10.1080/10170669.2011.636384
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Journal of the Chinese Institute of Industrial Engineers
Vol. 28, No. 7, October 2011, 512–520
Considering third-party logistics providers in reverse logistics
Yufang Chiu*, Po-Chao Lin and He-Hsuan Hsu
Department of Industrial and Systems Engineering, Chung Yuan Christian University, 200 Chung-Pei Road,Chung-Li City, Taiwan 32023, Republic of China
(Received April 2011; revised July 2011; accepted August 2011)
Enterprises have difficulty in completing all the required operations when facing market competitionand environmental changes. In such situations, enterprises begin to explore their capacity to outsourcelogistics from external support, hence giving the existence of a third-party logistics. But in recent years,few scholars have inducted the third-party logistics to reverse logistics. This study thus explores therelationships among recycling by manufacturers, retailers, and third-party logistics providers in theframework of reverse logistics. Returned items must be disassembled, inspected, and disposed off todetermine if they can be re-manufactured in the recycling process. Thus, this study constructs amathematical model to get the maximum profit under the assumption that transfer price is induced bya third-party logistics service. From an overall supply chain standpoint of total profit, the third modelin which the third-party provider leads returned product collection before transferring back to themanufacturer for remanufacturing, is preferred. This study shows that it is feasible when a third-partylogistics provider is used in the reverse logistics system and that return rate and retail price are the maindeterminants of total profit. Therefore, the total profit increases when the retail price increases.
Keywords: third-party logistics; transfer price; reverse logistics; return rate; retail price
1. Introduction
1.1 Background and motivation of research
In recent years, global warming has damaged theenvironment, causing people to realize the limitednatural resources we have and increasingly empha-size environmental protection. Both excess produc-tion that results in wasted resources and thetreatment of used items can pollute the environ-ment. Therefore, reverse logistics becomes animportant concern today. Reverse logistics includea series of processes from returning a product to itbeing fully remanufactured or properly disposed[11]. Chung et al. [2] mentioned that manufacturersattempt to recycle used items, remanufacture them,and give them a new value to sustain the environ-ment. Lu and Bostel [11] also pointed out thatremanufacturing is one way to recover used,defective, or partial components to produce ‘‘asgood as new’’ products with new-product-likequality.
Enterprises have difficulty completing all therequired operations when facing market competi-tion and environmental change. In such situations,enterprises begin to explore their capacity tooutsource logistics to an external support eithercompletely or partially, therefore creating theexistence of third-party logistics [12]. But in liter-ature, few studies have introduced the third-partyservice to reverse logistics. Dowlatshahi [4]
mentioned that many third-party logistics providersfail to efficiently provide the service needed in thereverse logistics system due to lack of knowledge.Also, in reality, enterprises need to consider manyfactors such as the cost and strategy, beforeinvolving third-party logistics providers; therefore,much evaluation must be performed in advance.This study thus explored the influences of employ-ing third parties in the reverse logistics system.
1.2 Purpose of research
Referring to El Saadany and Jaber [5], this studyexplored the problem of considering the third-partylogistics and customer returns in the reverse logis-tics system, and investigated whether any effectiveproduction strategy exists that can maximize profitfor both manufacturer and supply chain system. Inthis study, the manufacturer must consider theproblem of the quantity and cost of returnedproducts and carefully evaluate the cost of returnedproducts and using the third-party provider. Thus,this study constructed a mathematical model tocompare the different strategies.
Regarding the return process, due to the factthat the collection center also disassembles andinspects the used items, this study also referred toMitra [13] and Pellerin et al. [14], as well asEl Saadany and Jaber [5], to supply additional
*Corresponding author. Email: [email protected]
ISSN 1017–0669 print/ISSN 2151–7606 online
� 2011 Chinese Institute of Industrial Engineers
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information regarding the inspection of used itemsto decrease consumers’ doubt regarding remanu-factured products. Based on the above process, thisstudy aims to discover the best production strategyfor the manufacturer and supply chain by exploringdifferent return prices, production costs, costs offinished products, and transfer prices with a third-party provider.
2. Literature review
2.1 Supply chain
According to Jaber and Goyal [9], supply chainconsists of a variety of product types, includingmaterials, products in the production line, productsready to sell, products in storage, and products soldout. In the supply chain, the seller and the buyermanage different operations for products in differ-ent processes. Negotiating with members in thesupply chain is essential to efficiently manage theprocess of handling materials and products. Shenand Honda [16] said that the management of supplychain is an unavoidable challenge. To survive, mostcompanies have to utilize a global supply chain tostay competitive, and upon consumer request,members of the supply chain must be flexible andactive to maintain good customer service. In thelong term, if the management of supply chain canefficiently control its cost, it would likely beprofitable.
2.2 Logistics and reverse logistics
Fundamentally, logistics can be further classifiedinto physical distribution and business logistics.Physical distribution is the logistics of deliveringfinished products to consumers, whereas businesslogistics include logistics in distribution, produc-tion, return, disposition, and sales [17]. Lu andBostel [11] considered reverse logistics to consist ofa series of activities from the process of returning aproduct to that product being fully repaired orproperly disposed off. Different from logistics, allthe materials in reverse logistics are not providedby suppliers but some of them come from recycleditems or customer returns. After remanufacturing,including the process of inspection, disassembly,and disposition, production costs are minimizedand profits achieved.
2.3 Remanufacturing and inspection
Van der Laan and Teunter [20] considered rema-nufacturing to be a production process involvingmaking old products or components usable again.Remanufacturing includes the processes of
inspection, disassembly, repair, assembly, and test-ing to ensure products meet required standards.
Inspection in remanufacturing can reveal thequality of returned products. Wang et al. [21]believed that when enterprises try to continuallyupgrade product quality under global competition,inspection can help companies understand productquality. In fact, quality control in production linehas been deemed a very effective method ofassuring quality. This study explores the proposalthat if the quality of returned products and finishedgoods meets standards through inspection, then thehigh-quality product decreases the defect rate andthus the total cost in remanufacturing.
2.4 Third-party logistics
Due to the lack of knowledge in reverse logistics,many third-party logistics providers, thoughattempting to enter the market of reverse logistics,fail to efficiently provide the required services in themarket [4]. Such providers might lack the resourcesfor such an entry or be unsure whether such anentry is feasible. Dennis and Sheu [3] confirmedthat it is possible to include third-party providers inthe reverse logistic market through a customersurvey. With respect to practicality, Arni andSkjott-Larsen [1] considered that third-party logis-tics providers must be able to integrate all the otherlogistics function providers, be flexible to fit therequirements of product owners, and plan andexecute customer service to become service partnersof customers in the supply chain. Tugba et al. [19]mentioned that third-party logistics assures thecontinuous development of supply chain becauseeffectively using reverse logistics, an enterprise candistinguish itself from the other competitors andcreate opportunities to attract new customers,increasing revenue and improving global marketposition. On the other hand, it is important toselect an effective third-party provider in reverselogistics since returned products become less valu-able when third-party providers cannot effectivelymanage them.
2.5 Return price
Guide et al. [7] mentioned that the amount ofreturned products and the uncertainty of theirquality significantly affect remanufacturing. Guideet al. [8] found that different return prices affect theamount and quality of returned products in reverselogistics; for example, when the return price is low,the number of returned products decreases, makingit difficult for companies to meet customer demand.Kaya [10] explored the strategy of making thereturn price into extra money to encourage
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customers to recycle products in remanufacturing.This study thus defines return price as a variablethat managers can use to decide between returnprice and the cost of materials.
2.6 Transfer cost
El Saadany and Jaber [6] stated that transfer cost isincurred by transferring products from facility A tofacility B. Teunter and Flapper [18] believed thatthe transition from one production period to thenext affects the flexibility of production, whichresults in transfer costs. In this study, new productsare produced by the manufacturer, sold by theretailer, and recycled in three different modes.Transfer costs thus will be incurred with collectingreturned products by the retailer or the third-partylogistics. Since returned products change retailerworkstations and products, or require the thirdparty to reorganize or clean the machine, andchange the module, manufacturers must pay extratransfer costs to retailers or the third-party pro-viders for remanufacturing.
2.7 Summary
Besides considering the viewpoints already men-tioned, this study also considers using third-partylogistics to decrease the costs of reverse logistics.Although few studies have introduced third-partylogistics to reverse logistics, this study refers to themodels proposed by El Saadany and Jaber [5], andincludes the process of inspection of recycling fromMitra [13], developing a cost-related mathematicalmodel. This study aims to investigate the possibilityof outsourcing the tasks of remanufacturing andrecycling to a third-party logistics provider in orderto select a production strategy that will maximizeprofits for the manufacturer and the supply chainsystem.
3. Research methodology
3.1 Conceptual model
This study constructs and integrates the idea ofoutsourcing to third-party logistics in the supplychain model of reverse logistics, extending thestudies of Savaskan et al. [15] and El Saadany andJaber [5], which focused on third-party logistics andremanufacturing with the manufacturer, the retai-ler, and the third-party provider as members of thesystem. Since the model of El Saadany and Jaber [5]ignores the process of inspection when manufac-turers manage returned products, this studyincludes the inspection of returned products toclassify the quality of product [13]. Savaskan et al.
[15] used parameter z as the investment rate paid bythe manufacturer or the retailer when outsourcingis done to third-party logistics for remanufacturingservices. Thus, this study develops investment coston remanufacturing technology based on theinvestment rate z: specially, this study multipliesthe investment rate z by the unit price of finishedproducts sold by the manufacturer to retailer P, bythe order quantity Q, by R, and finally by theacceptable quality level q, thus yielding the invest-ment cost associated with remanufacturingtechnology invested by the manufacturer to thethird-party logistics, zPQRq.
In conclusion, this study takes into account themanufacturer, retailer, and consumers that nor-mally exist in a reverse logistics supply chain, uponthe addition of a third-party logistics provider andthe concept of returned product inspection, andproposes three different supply chain models. Thisstudy then uses the three models to explore theprofits of the manufacturer and the supply chainsystem.
3.2 Assumptions
(1) The cost of collection of returned productsincludes setup and inspection costs.
(2) When the remanufacturing service is per-formed by the manufacturer, the setup costfor remanufacturing is the same as that ofmanufacturing.
(3) The retailer buys all the products producedby the manufacturer and the customer doesthe same for the retailer.
3.3 Notations
The notations used in this study are as follow.
� customer demand per cycle timehi inventory holding cost of the retailer,
manufacturer, and third party wherei¼ 1, 2, and 3, respectively
Ai inventory setup cost for retailer, manu-facturer, and the third party where i¼ 1,2, and 3, respectively
q the fraction of usable products inreturns, where 05 q5 1
Cn unit material cost of producing newproducts
Cm unit manufacturing costCr unit remanufacturing costCd unit disposal costCin unit inspection cost for returned
productsQ order quantityR rate of return
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PM unit price paid for collecting returnedproduct
P unit price paid by retailer tomanufacturer
P0 unit retail pricet transfer price paid by the manufacturer
to the retailer or third party for collect-ing returned products
z unit investment cost paid by the manu-facturer or retailer to the third party forremanufacturing
�i the total profit that includes the profits
made by all the three members in supplychain, where i¼ 1, 2, 3 represents thethree models introduced in this study
3.4 Model formulation
In reference to Savaskan et al. [15], this studydevelops three closed-loop supply chain models: (1)the manufacturer leads the collection of returnedproducts before transferring them to a third-partyprovider for remanufacturing; (2) the retailer leadsthe collection of returned products before transfer-ring them to a third-party provider for remanu-facturing; and (3) the third-party provider leads thecollection of returned products before transferringthem to the manufacturer for remanufacturing.Figure 1 shows the flow chart of model 1.
The total profit model including retailer, man-ufacturer, and third-party provider is formulatedaccording to Figure 1, and also shown as follows:
Total profits of the system
¼ total profit of manufacturer
þ total profit of retailer
þ total profit of the third party
¼ ðtotal revenue of manufacturer
�manufacturing cost
� cost paid for return items� setup cost
�holding costs�disposal cost� inspection cost
� investment cost paid for the third partyÞ
þ ðtotal revenue of retailer� setup cost
� holding costÞ
þ ðrevenue paid by manufacturer
� remanufacturing cost� setup cost
� holding costÞ
�1 ¼Pð1�RqÞQ�ðCmþCnÞð1�RqÞQ�PMQR
��ð1�RqÞ
ð1�RqÞQA2�
ð1�RqÞQ
2h2�Rð1� qÞQCd
�RQCin� zPQRqþðP0 �PÞQ��
QA1�
Q
2h1
þ zPQRq�CrQRq��Rq
RqQA3�
RqQ
2h3 ð1Þ
To solve the optimal order quantity of
Equation (1), a second derivative of the total
profit versus Q is taken and shown to be negative
as follows.
@2�1
@Q2¼ �
2�A2
Q3�2�A1
Q3�2�A3
Q35 0
Since this study assumes u, A1, A2, A3, and Q to
be positive, @2�1=@Q2 5 0 is proved. This study
then sets the derivative of Equation (1) versus Q to
zero to obtain the optimal order quantity:
Q� ¼
ffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiðA1þA2þA3Þ�
�Pð1�RQÞþ ðCmþCnÞð1�RqÞþPMRþð1�RqÞh2=2þRð1�qÞCdþRCin
�P0 þPþh1=2þCrRqþRqh3=2
0@
1A
vuuuuut
ð2Þ
In the second model, the retailer leads the
collection of returned products before transferring
them to the third-party provider for remanufactur-
ing, as shown in Figure 2.The total profit model that includes the
retailer, manufacturer, and the third party is
formulated according to Figure 2, and also shown
Retailer Customer Manufacture
Disposal
Third-party provider
Returns RQ
Q
(1–Rq)Q
R(1–q)Q
RqQRemanufacturing
Figure 2. The conceptual diagram of model 2.
Retaile CustomerManufacture
Disposal
Third-party provider
Returns RQ
Q(1–Rq)QR(1–q)Q
RqQ
Remanufacturing
Figure 1. The conceptual diagram of model 1.
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as follows:
Total profits of the system
¼ total profit of manufacturer
þ total profit of retailer
þ total profit of the third party
¼ ðtotal revenue of manufacturer�holding costs
�manufacturing cost� setup cost
� transfer cost paid for retailer
� investment cost paid for the third partyÞ
þ ðtotal revenue of retailerþ transfer cost paid
by manufacturer� cost paid for return items
� setup cost�holding cost�disposal cost
� inspection costÞ
þ ðrevenue paid bymanufacturer
� remanufacturing cost� setup cost
�holding costÞ
�2 ¼ PQ�ð1� RqÞQ
2h2 � ð1� RqÞQðCm þ CnÞ
��ð1� RqÞ
ð1� RqÞQA2 � t� zPQRqþ ðP0 � PÞQ
þ t� PMQR��
QA1 �
Q
2h1 � Rð1� qÞQCd
� RQCin þ zPQRq� CrQRq
��Rq
RqQA3 �
RqQ
2h3 ð3Þ
To solve the optimal order quantity in
Equation (3), a second derivative of the total
profit versus Q is taken and shown to be negative
as follows.
@2�2
@Q2¼ �
2�A2
Q3�2�A1
Q3�2�A3
Q35 0
Since this study assumes u, A1, A2, A3, and Q to
be positive, @2�2=@Q2 5 0 is proved. The first
derivative of Equation (3) versus Q is then set to
zero to obtain the optimal order quantity:
Q� ¼
ffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiðA1þA2þA3Þ�
ð1�RqÞh2=2þð1�RqÞðCmþCnÞ�P0
�PMRþ h1=2þRð1� qÞCdþRCin
þCrRqþRqh3=2
0@
1A
vuuuuut
ð4Þ
In the third model, the third-party provider
leads the collection of returned products before
transferring them back to the manufacturer for
remanufacturing, as shown in Figure 3.The total profit model that includes the retailer,
manufacturer, and third-party provider is
formulated according to Figure 3, and also shown
as follows:
Total profits of the system
¼ total profit of manufacturer
þ total profit of retailer
þ total profit of the third party
¼ ðtotal revenue of manufacturer� holding costs
�manufacturing cost� setup cost
� remanufacturing cost
� transfer cost paid for the third partyÞ
þ ðtotal revenue of retailer� setup cost
� holding costÞ þ ðrevenue paid by manufacturer
� disposal cost� setup cost� holding cost
� cost paid for return items� inspection costÞ
�3 ¼ PQ�Q
2h2� ð1�RqÞQðCmþCnÞ �
�
Q2A2
�CrQRq� tþðP0 �PÞQ��
QA1�
Q
2h1þ t
�Rð1� qÞQCd�RqQ
2h3�PMQR�RQCin
ð5Þ
To solve the optimal order quantity in
Equation (5), a second derivative of the total
profit versus Q is taken and shown to be negative
as follows.
@2�3
@Q2¼ �
4�A2
Q3�2�A1
Q35 0
Since this study assumes u, A1, A2, and Q to be
positive, @2�3=@Q2 5 0 is proved. Then, set the first
derivative of Equation (5) versus Q to zero to
obtain the optimal order quantity:
Q�¼
ffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffið2A2 þ A1Þ�
h2=2þ ð1� RqÞðCm þ CnÞþCrRq� P0
þ h1=2þ Rð1� qÞCd þ PMRþ RCin
� �vuuut
ð6Þ
Retailer Customer Manufacturer
Disposal
Third-party provider
Q(1–Rq)Q+R
R(1–q)
Remanufacturing Returns RQ
Figure 3. The conceptual diagram of model 3.
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The above three mathematical models wereused to obtain the optimal order quantities and themaximum total profits. The Section 4 demonstratesthe solutions for these three models by plugging innumbers to find the optimal order quantities, andthen using that to obtain the total profit and thesensitivity analysis exhibited in each model,respectively.
4. Model analysis
4.1 Numerical example
This study employs the data from Mitra [13], ElSaadany and Jaber [5], and Savaskan et al. [15] fornumerical example and model analysis. The param-eters are h1, h2, h3, A1, A2, A3, q, Cr, Cm, Cn, Cin, Cd,R, P, P0, PM, t, and z, and their values are 2, 1, 0.3,25, 100, 50, 0.8, 3, 5, 10, 2, 1, 0.75, 50, 60, 0.2, 100,and 0.2. Table 1 lists the profits and optimal orderquantities.
4.2 Sensitivity analysis
To investigate the effect of each parameter on theoptimal order quantity and profit in the models,this study extends the range of each parameter to�30% and þ30% while holding all other param-eters constant.
From the manufacturer point of view, h1, h3,A1, and P are positively correlated with profit in allthree models. From the retailer point of view, h2,h3, A3, Cr, Cm, Cd, and P are positively correlatedwith profit in all three models. From the third-party provider point of view, no parameter canincrease profit in any of the three policies.Regarding the total profit of supply chain, A1, A2,and P0 are positively correlated with the totalprofit. Furthermore, h1, h2, h3, A1, A2, Cr, Cm, Cn,Cin, and Cd are positively correlated with theoptimal order quantity for all three models.Figures 4–6 show the results of sensitivity analysisof A1, A2, and P0 regarding the total profit ofsupply chain for each model accordingly.
4.3 Hypothesis tests
In the sensitivity analysis, the rate of return R andthe unit product retail price P0 have larger effectson the total profit than the other parameters do inall models; therefore, this study performs a hypoth-esis test to check whether these two parametersreally impact the total profit statistically in asignificant manner. Since the statistical approachis not feasible due to failure to meet the assumptionof normality, this study employed a non-parametricmethod, the Kruskal–Wallis test. The result showsthat both R and P0 significantly affect the totalprofit.
5. Concluding remarks and future research
This study aims to investigate the effect of threedifferent policies of the supply chain system ontotal profit by employing the third-party logisticsprovider in the reverse logistics system. From anoverall supply chain perspective of total profit, thethird model, in which the third-party provider leadsreturned product collection before transfer back tothe manufacturer for remanufacturing, is preferred.From the manufacturer point of view regardingprofit, the third model is also preferred. From the
Sensitivity analysis - unit price
0
1000
2000
3000
4000
42 48 54 60 66 72 78
Unit retail price
Tot
al p
rofi
t Model 1
Model 2
Model 3
Figure 4. Sensitivity analysis – unit retail price.
Table 1. The profits and order quantities.
Model 1 Model 2 Model 3
Profit ofmanufacturer
195.6244 1540.5473 1862.563
Profit of retailer 500.8664 400.2926 414.4638Profit of the thirdparty provider
164.7023 98.2310 10.3261
Maximal orderquantity
60.2613 48.8196 51.4504
Total profit 861.1933 2039.0709 2287.35
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perspective of retailer, the first model, in which themanufacturer leads the collection of return prior totransferring the remanufacturing job to the third-party provider, is preferred. Meanwhile, from theperspective of the third-party provider, the firstmodel is preferred. Finally, this study performs ahypothesis test using the Kruskal–Wallis method,and the result shows that the rate of return R andthe unit retail price of product p0 significantlyinfluence total profit. This study also demonstratesthe feasibility of introducing the third-party servicein reverse logistics toward management.
In order for the models to smoothly work,greater effort should be put into the followingareas.
(1) Product defects may occur duringmanufacturing; so, future models mustinclude costs associated with defects, suchas rework costs.
(2) Manufacturing capacity or the lack ofmaterials may cause shortages of finalproducts; so, future studies should discussthe inventory costs associated withshortages.
(3) The preferred strategies recommended inthis study are selected from the standpoint
of total profit for the supply chain; so,
dealing with the advantages of individual
member could be a focus for future studies.
Acknowledgment
The authors express their gratitude to the NationalScience Council, Taiwan (NSC 99 – 2221 – E – 033 – 041)for providing financial support for this study.
Notes on contributors
Yufang Chiu is currently an assistant professor inDepartment of Industrial and Systems Engineering ofChung Yuan Christian University, Taiwan. He receivedhis PhD and MS in Industrial Engineering from TexasTech University and a BS IE from Chung YuanChristian University. His research interests include pro-duction and operations management, reverse logistics,total quality management, and engineering management.
Po-Chao Lin is currently the graduate student inDepartment of Industrial and Systems Engineering ofChung Yuan Christian University, Taiwan.
He-Hsuan Hsu is currently the graduate student inDepartment of Industrial and Systems Engineering ofChung Yuan Christian University, Taiwan.
Sensitivity analysis - Setup cost of retailer
0
500
1000
1500
2000
2500
17.5 20 22.5 25 27.5 30 32.5
Setup cost of retailer
Tot
al p
rofi
t Model 1
Model 2
Model 3
Figure 5. Sensitivity analysis – setup cost for retailer.
Sensitivity analysis - setup cost for manufacturer
0
500
1000
1500
2000
2500
70 80 90 100 110 120 130Setup cost for manufacturer
Tot
al p
rofi
t Model 1
Model 2
Model 3
Figure 6. Sensitivity analysis – setup cost for manufacturer.
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