Design of the Reverse Channel for Remanufacturing: Must Profit‐Maximization Harm the Environment?
Lan Wang , Gangshu (George) Cai, Andy A. Tsay Asoo, J. Vakharia
Abstract:
A key attribute of a remanufacturing strategy is the division of labor in the reverse channel, especially whether remanufacturing is performed in鈥恏ouse 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鈥恡o鈥恜ay 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鈥恗aximizing retailer, the differentials in variable remanufacturing costs drive strategy choice, and higher fixed costs of in鈥恏ouse 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鈥恏ouse 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 鈥済ood鈥恆s鈥恘ew" and when used items have non鈥恴ero salvage value. Analysis of these extensions illuminates how relative power in the reverse channel drives the firms鈥 preferences, as well as the end customers鈥 consumption experience.