The economics of hybrid manufacturing systems in a closed-loop supply chain

Abstract

This paper deals with the economics of a closed-loop supply chain and the decision-making in a hybrid manufacturing system. We develop analytic models and quantify the potential profits gain generated by such a hybrid system that collects, remanufactures, and remarkets the end-of-use products as perfect substitutes of brand-new products while facing a price-dependent demand function. The research objective behind developing analytic models is to investigate the following research questions: Can the hybrid system incorporating reverse logistics operate cost-effectively? Can it outperform the manufacturing-only system without reverse logistics? If not, does it persist in certain decision bias that leads to a lower profit and inefficiency? If yes, to what extent and under which conditions--lower remanufacturing cost or higher price sensitivity coefficients? We model the decision-making of the system as an appropriate optimization problem. Our analysis shows that the hybrid system does not outperform the manufacturing-only counterpart under generic settings; it only performs better under the condition with a higher price sensitivity coefficient and/or a lower remanufacturing cost. In addition, the pricing decisions for the brand-new and remanufactured products differ significantly, which is consistent with the industrial practice. In addition, numerical results suggest that it may be worth adopting such a hybrid strategy when the remanufacturing cost is low, in comparison with that of the new product manufacturing. Another favorable factor to adopt the hybrid strategy is higher completion intensity between the two versions of the same product. In such scenarios, participating in remanufacturing operations is not only an issue of being environmentally conscious but a profit-improving opportunity.