CLOSED-LOOP SUPPLY CHAIN MODELS WITH

PRODUCT REMANUFACTURING
(FEBRUARY 2004)

R. Canan Savaskan
Shantanu Bhattacha
Luk N. Van Wassenho

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
THREE
CLOSED-LOOP SUPPLY CHAIN
MODELS

6. IMPROVEMENTS ON THE R
MODEL