Abstract
Critical raw materials like rare-earth elements are essential inputs for the production process of many electronic products, but also for environmentally-friendly green-energy technology products. The market for these materials faces high uncertainty associated with their supply. The use of recovered raw materials can help to mitigate the risk and simultaneously pave the way towards a circular economy. We investigate a sourcing strategy faced by a manufacturer considering the possibility to source critical raw materials from a supplier offering recycled material. As the recycling efficiency of these materials is still an ongoing research, and return flows from end-of-life products are highly volatile, we also rely on virgin material. We develop a single-period inventory model with procurement from a supplier offering recycled material according to a capacity reservation contract and a reactive supplier (spot market) offering virgin material. We consider uncertainties of demand, prices and recycling quantities as well as potential dependencies, in particular dependencies between prices for virgin and recycled materials and prices and demand. We provide results on the optimal policy structure and obtain a closed-form solution as a bound of the optimal procurement quantity. Our analysis gives us first insights on the effect of different economic parameters on the ordering decision. In an extensive numerical analysis we then study the impact of correlation on our results in order to derive managerial implications. We show that considering correlation when using such a sourcing strategy is especially important in environments with high demand uncertainty, high virgin material prices and yield uncertainty.
Highlights
Electric-vehicle production heavily depends on the supply of critical materials, for instance cobalt, as essential material for high-end rechargeable batteries
We show that considering correlation when using such a sourcing strategy is especially important in environments with high demand uncertainty, high virgin material prices and yield uncertainty
We develop a single period inventory model under uncertain demand in order to derive optimal reservation quantities from a proactive contract supplier offering recycled materials with uncertain yield according to capacity reservation contract and a reactive supplier offering virgin materials at an uncertain price reflecting the price volatility at the spot market
Summary
Electric-vehicle production heavily depends on the supply of critical materials, for instance cobalt, as essential material for high-end rechargeable batteries. Rogetzer et al (2018) show exemplarily by means of critical and conflict materials how a manufacturer can adapt its sourcing strategy by including some recycled material in its production process to contribute to the transition towards circular economy. We use a scenario setting where recycling processes for critical materials are assumed to be already quite mature (similar to other materials like, for instance, aluminum) and demonstrate the impact of recycling on economy and environment. A manufacturer taking into account secondary material from a recycler as input source contributes to environmental sustainability and the objectives of the circular economy, which are, according to the EU action plan (European Commission, 2015), (i) to optimize the use of virgin resources, (ii) to reduce pollution by increased recycling activities and (iii) to manage waste .
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