A model to evaluate acquisition price and quantity of used products for remanufacturing

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Abstract

In this paper, an analytical model is proposed to evaluate optimal acquisition price and quantity policy based on the quality of returned used products that are subsequently used for remanufacturing. The model is developed from the perspective of a consolidation center, which facilitates the collection of used products in various collection centers by offering an acquisition price based on the quality of used products, receive all of the collected used products and consolidate them with replacement parts before sending the consignment to the remanufacturer. It is assumed that the consolidation center receives an order from the remanufacturer for a set quantity and an associated price for used products in a quality level. The consolidation center then evaluates optimal acquisition price and quantity policy for used products based on the available information on stochastic return quantity and quality, and the cost of predefined set of replacement parts. The policy so obtained is offered to the collection centers to initiate the collection of used products in their respective area of operation. The impact of the model is studied through a numerical study. The authors believe that the model developed here is the first such pricing model in a reverse logistics setting.

Introduction

Recovery of materials and parts from used products has been in practice for quite some time now but considering it as an important business activity to increase profitability is reasonably recent (Thierry et al., 1995, Ayres et al., 1997). In a review by Pokharel and Mutha (2009), reverse logistics research has been grouped into various aspects of product recovery such as redesign, collection, reuse, recycle and remanufacture. As product remanufacturing has been gaining momentum over a decade now due to legislation and the potential to capture economic value (Li et al., 2009), the opportunity to reallocate material and parts obtained from used products would increase in the future (Guintini and Gaudette, 2003). Rahman and Subramanian (2011) mention that even for recycling of the products, government legislation, consumer demand, incentives to returned products, and availability and quality of products are important factors.

Bostel et al. (2005) mention that for high value and complex products, the reuse of parts and modules obtained from used products have been found to potentially halve the production cost. Successful remanufacturing simultaneously provides environmental benefits, enhances profitability and reduces production costs (Ferrer and Whybark, 2000). Products developed through remanufacturing incur 40–65% less cost and reduces energy needs by about 85% than those for new products (Guintini and Gaudette, 2003). Remanufacturing also requires a fewer intermediary steps (Ferrer and Ayres, 2003), which may be the reason for lower production cost. Current recovery levels of material and parts from used automobiles, electronic items and consumer appliances are given in Kumar and Putnam (2008). The authors mention that due to environmental legislation, higher recovery levels will be attained in the future.

Remanufacturing facility needs a continuous supply of quality used products (Guide and Jayaraman, 2000, Guide and van Wassenhove, 2001). Wei et al. (2011) mention that product return process should be integrated with remanufacturing process for a finite planning horizon. That means, not only the potential for material recovery, but also the quality of recoverable parts are important considerations in remanufacturing. The process becomes profitable, if it results in the products that are as-good-as-new ones (Teunter and Vlachos, 2002).

Four parties can be considered as the main players in remanufacturing—users, who hold the products that can be returned; collection centers, which receive used products from the users; a consolidation center, which receives used products from the collection centers within a pre-specified time interval, and; a remanufacturer, which receives a consolidated supply of used products and replacement parts (as shown in Fig. 1).

In this paper, the focus is on the evaluation of price and quantity policy for transaction between a consolidation center and collection centers. All collection centers are assumed to receive the same demand and price information irrespective of their location. It is further assumed that each of the collection centers has the same potential to supply used products.

In the following section, related research in the area of acquisition of used products for remanufacturing is discussed. Then the assumptions for model formulation are discussed followed by the development of the model itself. The impact of the model is shown through a numerical study. Further research in this area is discussed at the end.

Section snippets

Related research

The practice of remanufacturing and its associated economics are discussed by Ferrer, 1997a, Ferrer, 1997b for computer and tire remanufacturing, respectively. Similarly, Klausner and Hendrickson (2000) have analyzed economic feasibility of remanufacturing and recycling power tools. Ferrer, 1997a, Ferrer, 1997b have mentioned that price of the remanufactured product depends on the price of the components, date and the cost of remanufacturing. Date is important for products like computer, whose

Development of model

In this section, the framework, assumptions, the proposed model for acquisition of used products are presented.

Numerical study

We assume a particular type of used product with K=6. The remanufacturing company requires d=2000 and offers a quality based fixed purchase price Pn to the consolidation center, which in turn has a fixed bn, ro=$10, Po=$100 and historical (or forecast) return data. The probability distribution of returned (or forecast) used product of each quality level is assumed to follow a normal distribution. The values for Pn as offered to the consolidation center by the remanufacturing company and bn as

Conclusions

This paper fills the gap in literature by providing a quantitative model to jointly establish the quantity and price of used products based on their quality levels. The model developed here provides an opportunity to examine various price levels so that appropriate acquisition price can be set to attract the required quantity of used products. Therefore, it is expected to be useful to companies in remanufacturing business.

In this paper, managerial aspects and the users' utility for the

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