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REACTOPS Report Summary

Project ID: 283300
Funded under: FP7-IDEAS-ERC
Country: Spain

Final Report Summary - REACTOPS (Reactive Operations Models for a Changing World)

The project “Reactive Operations Models for a Changing World” (REACTOPS) has studied how to manage operations in industries facing constant and unpredictable changes on demand and supply conditions. Products that suffer from shorter life cycles and uncertain market conditions and success rates, are becoming more and more numerous, e.g., apparel, food, music, movies, apps, online content and generally items with a cultural element. It is generally taken for granted that operational reactivity is beneficial in these settings, but to date only little research had been done to provide management models for them.

In this project, we have first developed empirical models that describe the evolution of demand in these very uncertain industries. We have found that the demand rate of a certain product is usually hard to forecast upfront but it can be much better predicted after a few sales observations have been collected. It typically exhibits a strong life-cycle pattern where demand decays quickly after launch. Moreover, we have identified several novel influences on demand: the availability or display quality that is given to the product, the decay in attention that is intrinsic to the product, and other external factors such as the weather. These complement more traditional demand drivers such as price or the presence/lack of substitutes.

We have then analysed how to better manage the interface between the firm and the customers, the “front office”. For this purpose, we have developed dynamic optimization models for firms to keep customers interested and thus reap high profits. One way of doing this can be to introduce new products continuously, preferably by launching longer-lasting items (in the eyes of the customers, i.e., so that the value of these items stays high as long as possible) and by then releasing shorter-lived ones scattered over time. Another way can be to selectively adjust the product quantities to actively manage the way customers substitute across products.

We have finally studied the “back office”, all the upstream supply chain activities that constrain what the firm can do at the interface with the customer. One can for example think of the type of suppliers it has, and how fast they are to adapt to market changes; or the distribution modes used by the firm, fast (air) or slow (ocean). We have developed optimization models of expediting and sourcing that allow minimizing the operational cost while keeping service level high. We also identify some risks: enhanced reactivity can increase the bargaining power of suppliers and result in higher prices for the firm.

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