Will you stick to a high-quality collecting standard? order fulfillment vs. limited supply in diseconomy-cost-mattered remanufacturing operations

Abstract

Consider a remanufacturing system consisting of a brand, a new component supplier (Supplier N), and a remanufactured component supplier (Supplier R). The brand priorly purchases remanufactured components and then assembles them into final products, while Supplier R collects the end-of-life products with random residual quality and then produces them to be “as good as new” components at a diseconomy cost based on the residual quality. Supplier R has the option to provide order fulfillment commitment before production (Scenario O), or, do not provide such a commitment, reserving the right to limit the proportion of the orders to save production costs although it may drive the brand to emergently purchase the new components (Scenario L). Specifically, in Scenario L, Supplier R can set a strict residual quality standard which saves the remanufacturing cost and constrains the brand’s order quantity. We reveal that constraining the brand’s order quantity will not be the optimal choice for Supplier R, because the overreliance on the limited-supply threat will distort Supplier R’s wholesale price decision, resulting in significant profit loss. However, the supply chain system can perform better with the quantity constraint, because it concentrates the channel power in the hands of a single decision maker, which enables the decisions made more closely to the first-best level.