Matching Demand and Supply - Boosting Profits from Remanufacturing

Many firms that recycle parts do so in order to comply with environmental regulations. This is particularly true for firms based in Europe, where the process of product recovery is often seen as a cost center rather than a profit center. In this working paper, Professors Van Wassenhove, Teunter, and Guide assert that the quality and availability of products, in fact, determine whether reuse activities will be economically attractive. They suggest that maximizing profits from remanufacturing requires matching demand and supply of parts.

by Luk Van Wassenhove, Daniel Guide,Ruud Teunte
Last Updated: 23 Jul 2013

In recoverable product environments, products are reused rather than discarded. This process reduces the need for virgin materials, energy consumption and landfill space. Beyond the environmental benefits, reuse can significantly contribute to the overall profitability of the firm. In 1998, for example, there were a reported 70,000 remanufacturing firms in the US employing 350,000 people with total sales of $53 billion. Surprisingly, there has been no literature on the economic analysis of the potential profitability of product recovery.

In 2001, Daniel Guide, Department of Supply Chain & Information Systems, Smeal College of Business Administration, the Pennsylvania State University, and Luk Van Wassenhove, the Henry Ford Chaired Professor of Manufacturing and Professor of Operations Management at INSEAD, created a framework that shows the relationships between the key activities in managing product returns from a business perspective. In doing so, they encouraged managers to focus on the global economic benefit and fundamental role of the product acquisition process. Whether a firm chooses to reuse products through value-added recovery (remanufacturing), material recovery (recycling), or energy recovery (incineration), they first must obtain used products to serve as inputs to the recovery system.

In this working paper, Professors Guide and Van Wassenhove, along with Ruud Teunter, Faculty of Economics, Erasmus University Rotterdam, look at how remanufacturing firms can influence quality, quantity, and timing of product returns by offering a quality dependent price incentive for used products. They also look at how firms can influence demand for remanufactured products.

Focusing on the market-driven recovery system, the authors develop an economic analysis for calculating the optimal (profit maximizing) acquisition prices and the optimal selling price for remanufactured products. They argue that it is essential to develop formal systems to support the continued growth of closed-loop supply chain systems. This is particularly timely given that the remanufacturing industry is experiencing consolidation in many segments. The authors note that, “global operations will require more sophisticated tools to exploit these global opportunities.”

After presenting an overview of remanufacturing and closed-loop supply chain literature, the authors present an economic model, a procedure for determining the optimal prices (under certain conditions), a practical procedure for determining near-optimal prices, and some computational results for a cellular phone remanufacturing company.

INSEAD 2003

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