Optimal (re)manufacturing strategies in the presence of spontaneous consumer returns

Abstract

Abstract Remanufacturing is a sustainable development strategy for recovering product value and extending original item lifetimes through collection, inspection, testing, and restoration activities. Remanufacturing activities are typically carried out on products that have been returned by consumers, and the increasingly high flow of products spontaneously returned by customers through marketing initiatives such as Money-Back Guarantee policies, false warranty claims, or end of life returns, is a growing source of products that can be easily remanufactured. In this paper, we develop a novel pricing model for a firm that produces and sells Generation 1 new products in the first period with a promise of Money-Back Guarantee on returned products regardless of reasons. Products returned in the first period can be remanufactured and sold as remanufactured products during the second period, alongside Generation 2 new products. The firm needs to determine the optimal pricing for its two generations of new products and its remanufactured products, based on demand derived from its customers' utility of purchasing either the new or the remanufactured products. We identify the firm's optimal production strategy. Numerical experiments are conducted to illustrate the key managerial insights derived from the model. This paper makes two contributions to the literature: 1) it links customer returns and closed loop supply chain management. Most studies on customer returns do not link remanufacturing with product returns, while most studies on closed loop supply chains assume that the source for remanufactured products is unlimited. 2) It is shown that although remanufacturing returned products may cannibalize new sales, it enhances overall sales, as the firm can differentiate prices for Generation 2 new products and remanufactured products in the second period to attract customers with different valuations on the products.