11 Closed-Loop Supply Chain Models With

Closed-Loop Supply Chain Models withProduct Remanufacturing(February 2004)

R. Canan Savaskan

Shantanu Bhattacharya

Luk N. Van Wassenhove

1. Introduction

Increasing importance of processes for sustainable manufacturing and service operations.

Proactive/anticipatory measures by companies.

Remanufacturing parallel to manufacturing of new products.

1. Introduction Assumptions/Definitions

No distinction between a remanufactured and a manufactured product.

Closed-loop supply chains - distribution systems using a combination of manufacturing and remanufacturing.

Two-echelon supply chain with single manufacturer-retailer dyad.

Goal: Understand implications of reverse channel choice on forward channel decisions and return rate.

1. Introduction Reverse channel Categorization

Consumer collection (Xerox prepaid mailboxes at no cost: 40-65% cost savings; HP; Canon) -> Model M

Retailers (single-use cameras/phones: Kodak fixed fee and transport cost reimbursement) -> Model R

Independent third parties (auto industry joint research) -> Model 3P

Centrally coordinated system -> Model C

(1) How are the wholesale price, the retail price, and the total channel profits affected by the choice of the reverse channel structure?

(2) How do the closed-loop supply chain structures influence the incentives to invest in used-product collection and the product return rates?

2. LIterature

Operations literature Fleischmann et al. (1997) and Guide et al. (2000): basic assumption central decision maker to optimize total system performance.

-> independent decision making through game-theory approach

Supply chain management literature: Pasternack (1985), Emmons and Gilbert (1998), and Donohue (2000) determine optimal product return contracts for short life-cycle products.

Supply chain management and environmental improvement: Bierma and Waterstraat (2000) and Reiskin et al. (2000)

Marketing literature, Stern et al. (1996) role of members in distribution channels

Guide and Van Wassenhove (2001) - uncertainty in the return flows. (Here homogenous quality)

3. Model assumptions

Assumption 1. Producing a new product by using a used product is less costly than manufacturing a new one, i.e., cr < cm and cr is the same for all remanufactured products.

Assumption 2. We characterize the reverse channel performance by , the return rate of used products from the customers. denotes the fraction of current generation products remanufactured from returned units, i.e., 0 1. We model as a function of the product collection effort, which is denoted by I , the investment in collection activities. Such investments can be considered as promotional expenditures undertaken by the collecting agent.

3. Model assumptions

Assumption 3. There is a variable unit cost of collecting and handling a returned unit, which is denoted by A. For remanufacturing to be economically viable, we assume that A< , i.e., the fixed payment per unit is less than the savings generated per unit from remanufacturing.

Assumption 4. We consider a two-echelon supply chain and model a bilateral monopoly between a single manufacturer and a single retailer

3. Model assumptions

Assumption 6. In all our supply chain models with remanufacturing, the manufacturer has sufficient channel power over the retailer and the third party to act as a Stackelberg leader.

Assumption 7. While optimizing their objective functions, all supply chain members have access to the same information.

Assumption 8. The closed-loop supply chain decisions are considered in a single-period setting.

4. Supply Chain Models with Remanufacturing

5. Comparison of the ThreeClosed-Loop Supply Chain Models

6. Improvements on the R Model