Remanufacturing strategies under product take-back regulation

Abstract

We consider a profit-maximizing original equipment manufacturer (OEM) that produces a new product for the primary market. At the end of the first stage of product use, the OEM collects the used products (cores) and remanufactures them if they are eligible for remanufacturing; otherwise, the OEM sends them to material recycling. In the US and most European countries, the product take-back regulation mandated by the government holds the OEM accountable for the proper and safe treatment of end-of-life products in order to reduce their harmful environmental effects, and sets a collection rate target. In this paper, we take the collection rate of used products as an endogenous variable satisfying the set target and consider the uncertainty of the amount of collected cores qualified for remanufacturing. We formulate the problem and derive several optimal remanufacturing strategies for the OEM, depending on the inverse operating cost and new product manufacturing cost with and without the take-back regulation. Our major findings are: (i) The OEM should adopt the maximum (minimum) collection rate when the inverse operating cost is extremely low (high). (ii) A combination of the inverse operating cost and new product manufacturing cost leads to the optimal collection rate, thereby determining the new and remanufactured product prices, and remanufacturing quantity. (iii) A comparison between the cases with and without the take-back regulation indicates that, counter-intuitively, regulating the collection rate may not necessarily hurt the OEM.