Product Design and Supply Chain Coordination Under Extended Producer Responsibility

Abstract

Extended Producer Responsibility (EPR) legislation focuses on the life‐cycle environmental performance of products and has significant implications for management theory and practice. In this paper, we examine the influence of EPR policy parameters on product design and coordination incentives in a durable product supply chain. We model a manufacturer supplying a remanufacturable product to a customer over multiple periods. The manufacturer invests in two design attributes of the product that impact costs incurred by the supply chain— performance, which affects the environmental impact of the product during use, and remanufacturability, which affects the environmental impact post‐use. Consistent with the goals of EPR policies, the manufacturer and the customer are required to share the environmental costs incurred over the product's life cycle. The customer has a continuing need for the services of the product and optimizes between the costs of product replacement and the costs incurred during use. We demonstrate how charges during use and post‐use can be used as levers to encourage environmentally favorable product design. We analyze the impact of supply chain coordination on design choices and profit and discuss contracts that can be used to achieve coordination, both under symmetric and asymmetric information about customer attributes.