Importance of closed-loop supply chain relationships for product remanufacturing

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Abstract

Remanufacturing is an industrial process where used products are restored (remanufactured) to useful life. In comparison to manufacturing, remanufacturing has some general characteristics that complicate the supply chain and production system. For example, a company must collect the used products from the customers, and thus the timing and quality of the used products are usually unknown. Remanufacturing companies are dependent on customers to return used products (cores). In this paper, seven different types of closed-loop relationships for gathering cores for remanufacturing have been identified. The relationships identified are ownership-based, service-contract, direct-order, deposit-based, credit-based, buy-back and voluntary-based relationships. Building theory around these different types of relationships, several disadvantages and advantages are described in the paper. By exploring these relationships, a better understanding can be gained about the management of the closed-loop supply chain and remanufacturing.

Introduction

Remanufacturing is an industrial process where worn-out/broken/used products referred to as cores are restored to useful life. During this process, the core passes through a number of remanufacturing operations, e.g. inspection, disassembly, component reprocessing, reassembly,and testing to ensure it meets the desired product standards. This could sometimes mean that the cores need to be upgraded and modernised according to the customer requirements (Seaver, 1994; Lund, 1996; Sundin, 2004).

During the Second World War the remanufacturing industry spawned, especially in the United States since many manufacturers were focusing on military production. Remanufacturing is still a rather large business in the United States (Lund, 1996), but also in Europe, where the industry has been growing lately due to its profitable business and environmental legislative pressure from the European Union (EU), such as the launching of the Waste of Electric and Electronic Equipment (WEEE) and End of Life Vehicle (ELV) directives. These directives are currently being implemented in the EU member countries in either an “industry collective” or “company individual” manner. From an institutional viewpoint, the effects of theses directives can become a significant driver for the remanufacturing industry. How these directives are implemented will have a significant effect on the remanufacturing industry. According to Webster and Mitra (2007) a collective implementation, the specific industry branch are collectively responsible, would make a structural change to the industry—creating an environment where remanufacturing becomes profitable if not already profitable without a take-back law. On the other hand, if these directives are implemented company individually, i.e. each company will be responsible for their own products, the companies will get better control of their own remanufacturing business.

There are various motives for product remanufacturing e.g. increased profitability, ethical responsibility, legislation, secured spare part supply, increased market share and brand protection (Seitz and Peattie, 2004). Furthermore, remanufacturing has also been shown to be environmentally preferable in comparison with other end-of-life treatments, since the geometrical form of the product is retained and its associated economic and environmental values preserved (Sundin, 2004; Bras and Hammond, 1996; Kerr and Ryan, 2001).

Material flows are an important factor for the overall remanufacturing system (Guide, 2000). A traditional view on these closed-loop supply chains is that they encompass two distinct material supply chains: the forward and the reverse. Generally, the forward chain concerns the flow of physical products from the manufacturer to the customer, while the reverse chain describes the flow of used physical products from the customer, then acting as supplier, to the remanufacturer. These flows are then “closed” by, for example, the remanufacturing operation. One of the major differences between the “forward” and the “closed” supply chain is that the customer frequently acts both as a customer for remanufactured products and as a supplier of cores to the remanufacturing company (Krikke et al., 2004).

Compared to manufacturing, remanufacturing has some general characteristics that complicate the supply chain. For example, a company retrieves used products (a.k.a. cores) from the suppliers of cores, these suppliers are normally the end customers but it can also be scrap yards, core brokers or incurrence companies. As for end customers there is a major difficulty to assess the number and the timing of the returns. Another complicating issue is that the quality of the used products is usually not known (Guide, 2000; van Nunen and Zuidwijk, 2004; Guide and Jayaraman, 2000; Geyer and Jackson, 2004).

For the performance of the remanufacturing system, the question of acquiring cores is an important issue for the remanufacturer in order to be able to satisfy the demand for remanufactured products. “The challenge within the industry is not just how to manage irregular reverse flows, but how to obtain them in the first place” (Seitz and Peattie, 2004). To illustrate the importance of a close relationship, Seitz et al. gives an insight from a vehicle manufacturer:

For vehicle manufacturers, a crucial issue is to maintain a relationship with customers so that when an engine fails, the customer returns to the retail network for a replacement. If the customer goes elsewhere, then the loop will not be closed and the manufacturer will not get access to the cores they need. Unfortunately, loyalty to OEM service schemes decreases noticeably over time.

Here, the management of different types of relationships with the customer and suppliers is an important factor for the performance of the remanufacturing system. As Seitz and Peattie (2004) put it, “reverse logistics and remanufacturing are a customer relationship management challenge”. A main conclusion form their study is that remanufacturing is typically discussed as a production and logistical challenge added on to a conventional system of consumption. To develop further, remanufacturing also needs to be considered in a customer perspective. For example, customers who demand remanufactured engines are typically car users who generate high mileage during short periods, such as those who drive taxis or vehicles for mail-order firms. These are customers who depend on their vehicles and are unlikely to accept delays in obtaining a replacement engine. These may also be longstanding and loyal customers.

The aim of this research is to identify what kind of relationships exist between remanufacturers and their customers/suppliers of cores, and how these relationships can be managed. Furthermore, in this paper we will explore how customer/supplier relationships perspective can support product take-back for remanufacturing with focus on the supply of cores. When considering the supply of cores to the remanufacturing process, the focus is on the relationships with the customers/suppliers of cores and how the supply of cores to the remanufacturer can be managed in the remanufacturers’ perspective.

This research also aims at contributing to previous research by theory building. This aim is pursued through case study research at remanufacturing companies; this is further elaborated on in the next paragraphs called “previous research” and “research methodology”.

Section snippets

Previous research

Previous research has reported different systems and techniques for gathering cores for remanufacturing. A common observation is that off-lease and off-rent products are an important source of used products for remanufacturing. Thierry et al. (1995) have come to the conclusion that this type of return is more predictable than other types of returns due to the additional information that is available to the remanufacturing company. In the automotive industry, there is widespread use of “exchange

Methodology

The purpose of the design of a research methodology is to support the purpose and the research questions of a study (Yin, 1994). The research made for this study is based on empirical data gathered linked to several case studies of different remanufacturing companies as well as previously documented research in the area of remanufacturing. The research has its foundation in empirical data and links are made to the existing theoretical base. Hence, it follows an inductive reasoning. Inductive

Closed-loop supply chain relationships for remanufacturing

In the remanufacturing industry there are many different types of relationships with customers and core suppliers. Some relationships are very close, such as where the amount of trust, commitment and collaboration is high; in other relationships, the linkage is rather weak. Even in the latter case, the relationship still exists and constitutes an important issue for the remanufactures as well as the customers. In this study, seven different types of structural relationships have been

Discussion

Previous research has highlighted that there is some major difference between the “normal–forward” supply chains and the closed-loop supply chain with remanufacturing (Guide et al., 2003). In previous research the characteristic of the closed-loop supply chain are explained and the implications of these characteristics have been modelled. Although in a management perspective it is important to go one step further, not only to realise that it is a problem to be handled but also on how to reduce

Conclusions

This research has been building theory based on case study research. By identifying the closed-loop supply chain relationships, a higher understanding can be gained about the structure of the remanufacturing industry and the characteristics of the relationships. The identified relationships are ownership-based, service-contract, direct-order, deposit-based, credit-based, buy-back and voluntary-based relationships. These individual relationships have different characteristics and are suitable in

Acknowledgements

The authors wish to thank the companies that have contributed to this knowledge of this paper. Furthermore, the authors would like to give gratitude to the Swedish Governmental Agency for Innovation Systems (VINNOVA) for partly sponsoring this research.

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