Reverse Supply Chain Management Through a Quantity Flexibility Contract: A Case of Stochastic Remanufacturing Capacity

Abstract

This article investigates a two-echelon reverse supply chain (RSC) where a third-party logistics provider charges customers to return outdated products. A green manufacturer refurbishes qualified returned products through the remanufacturing process. Remanufacturing capacity is considered a stochastic variable. Under the volatility of remanufacturing capacity, some likely examined, and qualified products could not be remanufactured. If a collected product cannot be processed, it should be salvaged at a lower value and be perceived as a lost profit. In such scenarios, increasing the quantity of returned outdated products is suitable if there is a strong possibility of enough capacity in the remanufacturing process. This paper develops a stochastic model to identify the optimal order quantity under diverse contracts, including wholesale price, centralized, and quantity flexibility contracts. Under the quantity flexibility contract, the green supplier might cancel its preliminary order in a restricted quantity. Additionally, third-party logistics supplier offers a restricted quantity above the initial order to minimize understocking during peak seasons. Our numerical experiments demonstrate that the suggested quantity flexibility can coordinate the examined RSC under the volatility of remanufacturing capacity. Contrary to wholesale and centralized contracts, quantity flexibility is a more practical alternative from the perspective of participants’ profitability.