Design of the Reverse Channel for Remanufacturing: Must Profit‐Maximization Harm the Environment?

Abstract

A key attribute of a remanufacturing strategy is the division of labor in the reverse channel, especially whether remanufacturing is performed in‐house or outsourced. We investigate this decision for a retailer who accepts returns of a remanufacturable product. Our formulation considers the cost structures of the two strategies, uncertainty in the input quality of the collected/returned used products, consumer willingness‐to‐pay for remanufactured product, the extent to which the remanufactured product cannibalizes demand for a new product, and the power structure in the channel. For the profit‐maximizing retailer, the differentials in variable remanufacturing costs drive strategy choice, and higher fixed costs of in‐house remanufacturing favors outsourcing. The variable remanufacturing costs and the balance of power in the prospective outsourced reverse channel are the key drivers of environmental impact, as measured by the retailer's propensity to remanufacture. While profitability and environmental goals often conflict, they align under certain conditions. These include (a) the third party has less bargaining power; or (b) the fixed cost for in‐house remanufacturing is relatively high. All else equal, when remanufacturing is outsourced, the environment fares better if the third party has leadership power. We generalize to the cases when remanufacturing achieves a quality level less than “good‐as‐new" and when used items have non‐zero salvage value. Analysis of these extensions illuminates how relative power in the reverse channel drives the firms’ preferences, as well as the end customers’ consumption experience.

Economic and Environmental Implications of Quality Choice under Remanufacturing Outsourcing

“…Sundin and Bras [14] elucidated the economic and environmental benefits and provided an argument for why products to be used for functional sales should be remanufactured. In addition, many researchers, including [3,29,30], studied outsourcing decision about economic and environmental implications related to a closed-loop supply chain. The above literature studied the economic and environmental issues under remanufacturing outsourcing, but did not pay any attention to the issue that the OEM can choose its preferred product quality.…”

Quality Recovery or Low-End Recovery? Profitability and Environmental Impact of Durable Product Recovery

“…Atasu et al investigate the impact of the collection cost structure on the optimal reverse channel choice of manufacturers [19]. Wang et al compare the remanufacturing performance under in-house and outsource strategies, considering the role of uncertain quality, cost structure, and power structure [20]. Yan et al examine the optimal pricing problem when a firm sells new and remanufactured products at the same time under make-to-order and make-to-stock policies [21].…”

Investigating remanufacturing competition with yield uncertainty on market share, profit, and consumer surplus

“…With the implementation of environmental law and enhancing public environmental awareness, more and more firms tend to choose remanufacturing (Savaskan et al., ; Kannan et al., ; Wu, ; Giovanni and Zaccour, ; Wang et al., ; Ma et al., ). The existing literature (Savaskan et al., ; Kannan et al., ; De Giovanni and Zaccour, ; Liu et al., ) on remanufacturing used to assume that the reutilization rate is deterministic, while ignoring the uncertainty during the recovery process.…”