Rent, sell, and remanufacture: The manufacturer's choice when remanufacturing can be outsourced

Abstract

Manufacturers have increasingly started offering rental options for the products they sell. Renting products offers an opportunity: segmenting consumers. However, this also raises a challenge: what to do with the returned products? One solution is to remanufacture these products and then rent or resell them. Subsequently, should remanufacturing be outsourced to a third-party firm that can remanufacture at a lower cost? Here, we use a multi-period setting and examine the optimal decisions for different selling and renting constellations. Importantly, we allow the manufacturing costs of the sales and rental products to differ, as they seem to be critical in determining the manufacturer's renting and selling decisions and remanufacturing strategies. For example, under integrated (i.e. in-house) remanufacturing, when the new rental product's manufacturing cost is sufficiently high, no remanufacturing happens. Under both remanufacturing strategies—integrated and outsourced—the manufacturer does not rent new products in the second period if the manufacturing costs of the sales and rental products are identical. If the rental product's manufacturing cost is either sufficiently low or high, then integrated remanufacturing is more profitable; when this manufacturing cost is within a moderate range, the manufacturer outsources remanufacturing to an independent remanufacturer. Surprisingly, in some situations, the production quantity of the new sales product may even increase with its manufacturing cost. This is because the manufacturer may extract an even higher margin compared with the new rental product. Finally, we also consider several extensions such as uncertainty regarding the quality of the returned goods, simultaneous selling and renting of remanufactured goods, and longer horizons and the product's life cycle.