The bright side of manufacturing–remanufacturing conflict in a decentralised closed-loop supply chain

Abstract

Researchers and managers broadly agree that original equipment manufacturers (OEMs), which have opportunities to produce both new and remanufactured products, are better off by centrally controlling their manufacturing and remanufacturing activities. Thus, OEMs should not remanufacture used products until the remanufacturing cost is sufficiently low to overcome the negative impact of new product cannibalisation. In this paper, we present a contrasting view of the manufacturing–remanufacturing conflict: OEMs sometimes benefit from the decentralised control mode under which they ignore the internal cannibalisation rather than the remanufacturing option. We consider a decentralised closed-loop supply chain in which one OEM can purchase new components from one supplier to produce new products and collect used products from consumers to produce remanufactured products. The key feature of our model is that the OEM can select a centralised or decentralised control mode to manage its manufacturing and remanufacturing activities before the supplier prices the new component. In a steady state period setting, we analyse the players’ optimal decisions and compare the OEM's profits under centralised and decentralised control modes. Our analytic results reveal that the decentralised control within the OEM can outperform the centralised control when the cost structure of producing new and remanufactured products satisfies certain conditions. Finally, the key findings are distilled in a conceptual framework and its managerial implications are discussed.

Keywords:

• closed-loop supply chain
• remanufacturing
• internal conflict
• strategic decentralisation

Acknowledgements

We thank H.K. Chan and S.H. Chung (the guest editors), and the reviewers for their detailed comments and many valuable suggestions that have significantly improved the quality of this paper. This research has been supported by British Academy (SG090839), the National Natural Science Foundation of China (71201070 and 71271225), Chongqing's Natural Science Foundation (cstc2012jjA1404), and the Open Fund of Chongqing Key Laboratory of Logistics (CQKLL12001).

Notes

Notes

1. It is worth noting that a centrally well-controlled OEM achieves a higher profit when it is the only player in the market.

2. We also refer the reader to a similar proof in Appendix B of this paper, which demonstrates the players’ strategic decisions when the OEM adopts the decentralised control mode.