Channel leadership, performance and coordination in closed loop supply chains

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Abstract

The business values of product remanufacturing have been well-recognized in the literature. Companies have also increasingly realized the importance of coordinating the closed-loop supply chains (CLSCs) with both manufacturing and re-manufacturing processes. In this paper, we investigate a CLSC which consists of a retailer, a collector, and a manufacturer, and examine the performance of different CLSC under different channel leadership. Through a systematic comparison, we find that the retailer-led model gives the most effective CLSC. Moreover, we analytically reveal that the remanufacturing system's efficiency is highly related to a supply chain agent's proximity to the market. Counter-intuitively, we show that the collector-led model is not the most effective model for collecting the used-product. We finally illustrate how both the serial and parallel CLSCs can be coordinated by using different kinds of practical contracts.

Introduction

Closed-loop supply chain (CLSC) management focuses on collecting the products from downstream members and reusing them to create additional values (Huang et al., 2013). CLSCs are present in virtually all kinds of industries because of its substantial economic values. For instance, it is well-known that large retailers such as Home Depot have over 10% of sales being returned (Guide and Van Wassenhove, 2009). On the other hand, under the pressure of regulations on environmental sustainability and take-back laws in nations all around the world (Toffel, 2003), many corporations have proactively taken measures in anticipation of all kinds of evolving environmental performance requirements and this also gives rise to the popularity of CLSCs. For example, a garment manufacturer Sun Hing Ltd. has been investing heavily in its own factory town in China with its own environmental-friendly measures on recycling scraps. Also, many manufacturers, such as IBM, Ford, Caterpillar, Muji, Timberland, all have established economically viable remanufacturing systems either by themselves or via outsourcing to a third party (c.f., Ferguson and Toktay, 2006, Karakayali et al., 2007).

In a simple CLSC, there will be three main types of channel participants: the retailer, the manufacturer/remanufacturer, and the third-party collector (Savaskan et al., 2004). In fact, industry provides ample examples of different channel leaderships. For instance, traditionally, it is common to see in the industry that the manufacturer acts as the channel leader which will offer supply contracts to the retailer (see Cachon, 2003); supply chains with those giant OEMs such as GM and Toyota belong to this model (e.g., Womack et al., 1990). Meanwhile, retailing giants such as Wal-Mart, Gome, A&P, ToysRus, Tesco and Hudson's Bay have great market power and it is widely observed that in the respective supply chains, many measures are driven by these retailers and the manufacturers become followers (Chiu et al., 2011). Moreover, recent years have also seen a significant increase in the power of collectors (c.f., Karakayali et al., 2007), such as SIMS Metal Management, IBM's Global Asset Recovery Services, and AER Worldwide, etc. These collecting parties are known to be taking a leadership role in the corresponding CLSCs and coordinate the operations in reverse logistics.

Interestingly, to a great extent, different channel leaderships will have a substantial effect on the acquisition efficiency and even on the performance of the whole CLSC. As Majumder and Srinivasan (2008) addressed: Such large supply chains are common in the auto and apparel industries…. Typically one particular firm acts as the leader of the supply chain, in the sense that its decisions have the largest effect on the products of the supply chain, as well as on the quantity output of the chain…. From a single firm perspective, most firms would arguably want to become the channel leaders, and get a lion share of the supply chain profit. With this argument, intuitively, if the retailer is the channel leader (R-led), it may have incentive to reduce selling price so as to enhance market demand and hence its own profit (c.f., Ertek and Griffin, 2002); in conjunction, the collector will also need to invest more on used-product collection. However, if the manufacturer has dominant bargaining power and acts as the leader in the supply chain (M-led), it may charge a higher wholesale price, which would potentially lead to a higher retail price (by retailer) and a lower collection effort (by collector). If the collector acts as the channel leader (C-led), it is believed that the collector has incentive to increase the collection effort (Karakayali et al., 2007). In addition, from an environmental and societal welfare perspective, for all the cases we considered, which leadership model is the most effective one is also a critical question which we would like to answer in this paper.

Thus, motivated by the importance of CLSC management in practice and the open questions on different channel leadership in CLSCs, we explore in this paper a CLSC where there is a retailer, a collector and a manufacturer. With the above models, we aim at addressing the following open research questions:

  • (1)

    How do different channel leaderships of CLSCs influence the retail price, the transfer price, the effort of “take-back” and the channel performance?

  • (2)

    Among the three types of leadership (M-led, R-led, C-led), which one is the best from the total CLSC's perspective?

  • (3)

    What incentive alignment mechanisms can be designed to coordinate the CLSCs under different channel leaderships?

Addressing the above important open questions highlight the research objectives and contributions of this paper. To the best of our knowledge, this is the first paper which specifically addresses these channel leadership related issues in a CLSC with a price-dependent demand.

The remainder of the paper is organized as follows. In Section 2, we provide a literature review. In Section 3, we introduce the research problem, and related model assumptions. In Section 4, we provide a proposed multi-tier reverse logistics channel model, and derive the optimal policies. Following the development of the model, the analytical results for the optimal CLSC structures are presented in Section 5. Section 6 examines channel coordination mechanisms with used product collection. We conclude and outline the limitations of this work and possible directions for future research in Section 7. To simplify our exposition: (i) we use the subscripts C, M and R to represent the collector, manufacturer and the retailer, respectively throughout the paper, (ii) all proofs are provided in Appendix A.

Section snippets

Literature review

First, this paper is most closely related to game theoritical analysis of the CLSC system. Under this category of research, some studies only focus on the competitive behaviors with respect to remanufacturing activity, but not the new product manufacturing part (Bakal and Akcali, 2006, Liang et al., 2009, Karakayali et al., 2007). While in general, both the manufacturing and remanufacturing parts should be considered and this gives rise to some other interesting papers. For instance, Majumder

Model assumptions

Consider a CLSC which consists of three members, namely a collector, a manufacturer (remanufacturer), and a retailer, and there are three activities among the CLSC: (1) the collector collects the used product with an effort τ; (2) the manufacturer takes back the used product from the collector at a price b, produces the new product at a cost cm and remanufactures the used product at a cost of cr, to avoid trivial cases, we consider the situation when cm>cr, which means that remanufacturing a

Multi-tier reverse logistics channel with different leadership

The primary goal of this paper is to understand the implications of different channel leaderships of the CLSCs on the incentive to invest in the used-product collection and on the supply chain performance. To this end, we study how the optimal decisions on retail price, transfer price and the effort of the take-back are affected by the channel leadership.

Comparisons among the four closed-loop supply chain models

Table B1 (in the online appendix) summarizes the major analytical results derived from Section 4, and some interesting observations on the performance of decentralized CLSC structure can be made from it. First, we have Lemma 5.1.

Lemma 5.1

The optimal transfer prices and wholesale prices under C-led, R-led and M-led models satisfy the following relationships: bC>bR=bM and wC>wM>wR.

It is apparent that the optimal transfer price is biggest when the collector is the channel leader. Besides, when the

Coordination of closed-loop supply chains

From the analysis in Section 5, it is noticed that the supply chain's performance under different leaderships differs. Given the fact that each particular channel leadership under our exploration exists in the real world, it is hence important to explore how the supply chain can be coordinated (because it can imply that, e.g., even C-led decentralized model is inferior to R-led model, the performance of the supply chain can still be optimized with some appropriate measures). According to

Conclusion, insights, and future research

Different channel leadership leads to different channel member relationships and different channel performances. This paper examines the significance of channel leadership in CLSCs. By analytically addressing the three important research questions we proposed in Section 1, this paper has made a number of important contributions as listed below.

The first contribution of this paper is to reveal (with closed-form results) how different channel leaderships influence important decisions such as

Acknowledgments

The authors sincerely thank the editor and the anonymous reviewers for their constructive and important comments on the paper. Tsan-Ming Choi's research is partially supported by RGC(HK) General Research Funding under project number of PolyU 5424/11H. Yongjian Li's research is partially supported by the Fundamental Research Funds for the Central Universities of China (No. NKZXZD1103), and National Natural Science Foundation of China, Grant no. 71372100. Lei Xu's research is partially supported

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