On how buyback and remanufacturing strategies affect the profitability of spare parts supply chains

Abstract

The purpose of this paper is to provide a case-based framework to offer insights on the opportunity of recovering parts. We consider a two-stage spare parts supply chain, where independent repair shops are responsible for handling the repair process. There are two options to meet spare parts demand: repair shops may replace the part with a new one (ordered from the OEM) or they may use a part that they themselves repaired before. While repair shops achieve a larger profit by repairing parts, the OEM would prefer the use of new parts. However, he has no control over demand which might be obtained by offering buyback of broken parts. Furthermore, the OEM could recover these parts on a higher level, thus reducing production/procurement of new parts. The main contribution of this paper is the provision of a simple deterministic framework for answering the question whether a buyback option should be offered by the OEM to the repair shops, and which buyback price should be paid for each returned core. We further highlight the impact of remanufacturing performed at the OEM on the profitability of buyback.