Product Disposition Decisions on Closed-Loop Supply Chains
10.1 Introduction
Product Disposition Decisions on Closed-Loop
Dealer 1
Dealer n Distribuon
Center
Used products warehouse New Engine Plant
Supplier 1
Remanufacturing plant A (engines)
Remanufacturing plant B (engine modules) Supplier 2
Supplier N
Customers
New engines/parts Used engines/parts Materials
recycling scrap
Remanufactured engines/parts Fig. 10.1 Closed-loop supply chain for diesel engines (simplified)
third-party processor, makes a disposition decision. Disposition decisions include incineration (for energy recovery), recycling (for materials recovery), dismantling for spare parts, and remanufacturing. Remanufacturing is a value-added operation that restores a used product to a common operating and aesthetic standard, and where the core geometry of the product is preserved.
Because the loop of materials and products is closed, a closed-loop supply chain (CLSC) is critical to a firm’s sustainability. Recycling provides a steadier source of raw materials, and avoids landfilling. Because the amount of energy and raw ma- terials necessary for remanufacturing is a fraction of the amount necessary for the production of a new product with non-used content, remanufacturing is clearly bene- ficial from an environmental standpoint (Hauser and Lund2003), although there are exceptions. For example, remanufacturing of certain appliances such as refrigera- tors is not environmentally optimal, because appliances consume about 90% of their energy, from a life cycle perspective, during the usage phase with consumers. As a result, replacing (inefficient) older refrigerators with modern, efficient ones based on newer technology is better for the environment; in this case materials recycling is optimal. However, in many cases remanufacturing is still the most sustainable disposition option, as indicated in numerous Life Cycle Assessment (LCA) studies.
An example of a CLSC is that of diesel engines and parts for Cummins, an OEM headquartered in Columbus, Indiana, which is shown in a simplified manner in Fig.10.1. New engines are manufactured and shipped to a central distribution center for further distribution to thousands of dealers. In addition to new diesel engines and parts, which do not contain any remanufactured content, Cummins also sells remanufactured diesel engines and parts at a discount (relative to the corresponding new engine or part) of about 35%. Used engines or parts, the key inputs to remanu- facturing, are obtained by Cummins as a result of customer trade-ins upon purchase of a new or remanufactured product; they are shipped from dealers to consolidation
points, and then to a central used products depot. Used engines or parts are then shipped to one of two plants: engine remanufacturing (plant A), or part (or module) remanufacturing (plant B). For a diesel engine or part, remanufacturing consists of six different steps: (i) full disassembly; (ii) cleaning (through chemical bathing, sand blasting, and other methods); (iii) making a disposition decision for each part (keep for remanufacturing or dispose the part for materials recycling); (iv) remanufactur- ing the part; (v) re-assembly; (vi) testing. Remanufactured engines are shipped from plant A to the main distribution center, joining new engines or parts for distribution to dealers. Remanufactured parts or modules are shipped from plant B to either the distribution center, or to the engine remanufacturing plant A, depending on forecasts and current needs. Used parts not suited for remanufacturing are sold to recyclers.
The flows depicted in Fig.10.1are simplified, but they convey the major flows in this CLSC. Used products are typically referred to as cores in industry.
In this chapter we focus on the optimal disposition decision for a firm in a closed- loop supply chain that processes used products; the firm could be an OEM (as Cummins) or a third-party remanufacturer. The chapter is written in a “tutorial”
format, where we introduce a first (basic) decision model, and then add refinements.
We do not provide a comprehensive review the literature in product disposition; to that end a state-of-the-art review is found in Fleischmann et al. (2010).
The available disposition decisions we consider here are: remanufacturing, dis- mantling for spare parts, and materials recycling. Although not exhaustive, this set is representative of many actual CLSCs, according to our experience. In many in- dustries, remanufacturing is more profitable than dismantling for spare parts, which is more profitable than materials recycling. Recycling may or may not be profitable;
and dismantling for spare parts may not be an option if the firm is not an Original Equipment Manufacturer (OEM), or if parts are subject to significant wear and tear during use. For the Cummins example above, the only two disposition decisions are remanufacturing and recycling, with remanufacturing being largely preferable to recycling, and recycling only occurring for products or parts not fit (or economical) for remanufacturing. For IBM, Pitney Bowes, HP, and other firms where products have electronic components not subject to significant wear and tear, dismantling for spare parts is another common disposition decision.
To make a decision into the appropriate disposition decision, the firm has to take into account several factors: time-varying demand forecasts for remanufactured products, demand for different spare parts, time-varying forecast of product returns, condition of product returns, profit margins of the different disposition alternatives, inventory holding costs, and penalty costs for unmet or backlogged demand for spare parts or remanufactured products. In particular, remanufacturing cost—and hence the profit margin of the remanufacturing disposition option—depends on the condition (quality) of the return used in remanufacturing.
This chapter is organized as follows. In Sect. 10.2, we introduce a relatively simple linear programming model for product disposition with two options: remanu- facturing and salvaging (which could in practice mean dismantling for spare parts, or recycling). This model assumes an accurate forecast of product returns, along with their qualities, and is appropriate for a firm that leases its production with recovery at the end of the lease for remanufacturing. In Sect. 10.3, we introduce uncertainty
in the quality of product returns, which results in a stochastic program. In Sect. 10.4, we introduce uncertainty in both the quantity of product returns, as well as demands for the various disposition options; the model however requires some simplifications such as unlimited capacity and a single quality grade for product returns. All pre- vious models consider the case where the firm has an incoming return stream with little control over its quantity; in Sect. 10.5 we comment on the product acquisition decision—where the firm can actively procure a sufficient number of product returns to support its remanufacturing operations.