The Remanufacturing Newsvendor Problem

Abstract

As companies have synchronized and streamlined their traditional supply chains to improve customer service while reducing costs, many firms have begun to consider the impact of end-of-life unit flows on their overall profitability. Many companies have begun to accept end-of-life items from their customers for corporate social responsibility or customer service reasons, and they must develop processes to handle this large volume of units. Some firms have chosen to capture value from these flows by remanufacturing them and selling the units in a secondary market. The quality of the end-of-life items acquired from customers, however, is quite variable, and some items may not be in good enough condition to remanufacture. Thus, the items must be inspected either one by one (discrete) or in a batch to assess their condition. We have developed newsvendor models to assist firms in making the inspection decision to yield maximum expected profit when faced with a fixed number of end-of-life items. Both inspection processes generate the same target inventory level to sell in the secondary market. We examined the difference between the batch and discrete inspection processes using simulation and found that the batch process yields a higher average profit because it can allow the firm to take advantage of large demands with higher than expected inspection yields.