The economics of a closed-loop supply chain with remanufacturing

Abstract

This study deals with joint decisions on pricing and production lot-sizing in a closed-loop supply chain consisting of manufacturing and remanufacturing operations. This study emphasizes the economic analysis of this hybrid system with substitution between the new and the remanufactured versions of the same product. We develop analytical models under a newsvendor framework bearing the following questions in mind. Can a hybrid system operate cost-effectively? Can it outperform the manufacturing-only system? If yes, to what extent and under what conditions? If not, what are the key factors that cause underperformance? This study formulates a multi-variable optimization problem and performs mathematical and numerical analysis. Results show that the hybrid system does not outperform the manufacturing-only system under a generic setting, but achieves better performance under conditions with a higher degree of substitution and/or a lower remanufacturing cost. In this scenario, participating in remanufacturing is not only an issue of environmental responsibility, but a profit-boosting option.

Keywords:

• decision analysis
• logistics
• closed-loop supply chain
• remanufacturing
• newsvendor

Acknowledgements

The authors would like to thank the three anonymous reviewers for their insightful comments and suggestions that have significantly improved the article. This research was partially supported by the National Science Council (Taiwan) under Grant NSC98-2410-H-008-009-MY3.