Original equipment manufacturer with remanufacturing: Outsourcing strategy and organizational structure

Abstract

We consider an original equipment manufacturer (OEM) with two divisions: one manufacturing and selling new products, and the other remanufacturing used products for sale. The OEM can choose between centralizing or decentralizing its manufacturing and remanufacturing divisions. The OEM’s product contains a key component that cannot be reused in the remanufactured product. Each unit of the new/remanufactured product requires one unit of this new component. The OEM may either produce this component in house or outsource its production to a supplier. By developing game-theoretic models, we investigate the impact of the OEM’s internal organizational structure on its outsourcing decision, and the impact of the OEM’s outsourcing strategy on its choice of internal organizational structure. For a given internal organizational structure, we show that the levels of the supplier’s cost advantage and the cost saving from remanufacturing are the primary drivers in the OEM’s outsourcing decision. Moreover, the OEM’s internal organizational structure has significant implications for its choice of outsourcing strategy. Specifically, when the cost saving from remanufacturing is moderately low or sufficiently high, the decentralized OEM is more likely to choose outsourcing, while the centralized OEM is more likely to outsource when the cost saving from remanufacturing is moderate. For a given outsourcing strategy, we show that the OEM’s choice of internal organizational structure is significantly influenced by its outsourcing strategy. While the insourcing OEM always prefers a centralized structure, the outsourcing OEM may strategically decentralize its internal organizational structure, depending on the level of cost saving from remanufacturing and the degree of consumer acceptance of the remanufactured product.