Optimal recovery strategy of manufacturers: Remanufacturing products or recycling materials?

Abstract

Manufacturers are increasingly taking positive actions to handle used products by adopting “recycling materials” (RM), “remanufacturing product” (RP) or the hybrid strategy combining with both RM and RP (RMP). Under each strategy, in addition to the optimal quantity and price of new product, manufacturers may also face important decisions on the optimal quantity and price of remanufactured product and (or) recycling materials. To address such challenging issues, we consider a manufacturer who sells a new product to consumers, and examine the optimal recovery strategy and associated decisions by developing three models, i.e., models without incorporating recovery strategy, with considering recovery strategy and both recovery strategy and government subsidy. We further explore the impacts of product quality and government subsidy on the optimal decisions. Our results show that, neither recovery strategy including not implementing recovery strategy is always superior to the others, which depends on cost savings from remanufacturing products and benefits of recycling materials. Interestingly, the manufacturer with a higher product quality prefers to choose RP but RM otherwise. Government subsidy increases the manufacturer’s profit under each recovery strategy. In general, government subsidy helps to increase consumer surplus but reduce environment impact. However, as government subsidy increases, the manufacturer may prefer to implement RMP rather than RP, which may result in less consumer surplus and more environmental impact. Therefore, a higher subsidy unexpectedly may lead to a lower social welfare. This suggests that, the government should design an appropriate and more practical subsidy policy to dispose used products.