Revenue and Cost Sharing Mechanism for Effective Remanufacturing Supply Chain
Tatsuya Inaba
Kanagawa Institute of Technology, Japan
Auto‐ID Labs. Japan
Tatsuya Inaba
Kanagawa Institute of Technology, Japan Auto-ID Labs. Japan
Revenue and Cost Sharing Mechanism for
Effective Remanufacturing Supply Chain
Outline
• Background
• Remanufacturing process
• Problem in remanufacturing supply chain
• Proposal
• Evaluation
• Conclusion
Background
• Sustainability, a new key word in business
– Company’s long-term success
• Required to deal with social and environmental issues
– Sustainable Supply Chain Management (SSCM)
• To all members of SCM
• Remanufacturing as a means of SSCM
– Effective in reducing waste products
– Efficient compared to making a new product
Remanufacturing process
• Remanufacturing process
– Forward supply chain
• Supplier Manufacturer Retailer End user
– Remanufactured product supply chain
• End user Collector Manufacturer Retailer End user
Supplier Manufacturer Retailer End user
Collector
Retailer End user
(Retailer)
Problem in remanufacturing supply chain
• Problem in remanufacturing supply chain
– Uncertainty exists in both used product collection and remanufactured product sales
– Leading party’s optimal quantity is too many for the other party
• Possibility of falling into a local optimum
Customer of
remanufactured products
Prefers a high transfer price to increase
expected profit
Provider of used products
Prefers a low transfer price to increase
expected profit
End userRetailer Manufacturer
Transfer price
End user
Uncertainty in sales demand
Uncertainty in collection demand
Transfer price is important to decide optimal quantity to sell/buy.
Need a mechanism to decide a transfer price to realize global optimal
Need a mechanism to decide a transfer price to realize global optimal
Proposal
• Assumption
– Two party supply chain: Retailer and Manufacturer – Leading party decides its preferable transfer price
– Penalty is charged when the retailer cannot collect committed number of used products
• Proposal: Revenue and cost sharing mechanism
– In a retailer leader case:
• Retailer lowers the transfer price than their optimal level to increase purchase quantify by manufacturer
• Revenue of the remanufactured product sales is shared afterword – In a manufacturer leader case:
• Manufacturer raises the transfer price than their optimal level to increase collection quantity by retailer
• Cost of the remanufactured product sales is shared afterward
Evaluation
• Feasibility check of the proposal
– Whether transfer price change increases profit
• Retailer leader case: Lowered transfer price
• Manufacturer leader case: Raised transfer price
– Whether feasible transfer price range exists
• Propose feasible transfer price range
• Numerical example
– Using a hypothetical scenario
Model and notation
p: The unit sales price of the remanufactured product
s: The unit salvage price of the remanufactured product
t: The unit price of the used product agreed between remanufacturer and retailer (transfer price)
r: The unit price of the used product paid to the end user
c: The unit cost incurred when collecting the used product
m: The unit cost incurred when products are remanufactured
w: The unit penalty cost imposed to the retailer when the number of collected used products is smaller than the agreed number.
x: Non-negative continuous demand of used product collection
f: Probability density function of x F: CDF of f
y: Non-negative continuous demand of remanufactured product sales
g: Probability densify function of y G: CDF of g
q: The number of used product transferred from the retailer to the remanufacturer
EPR
R: The expected profit of the retailer
EPR
M: The expected profit of the remanufacturer EPR
C: The expected profit of the channel
y q x
t r
p m c
Customer of remanufactured products
End user
Provider of used products
End user
Retailer Manufacturer
Feasibility of proposal in a retailer leader case
• Check if expected profit increase by the proposal
– Formulate manufacturer’s optimal procurement quantity (q
m*) in a retailer deciding transfer price (t
r)
– Formulate manufacturer’s procurement quantity (q
m*’) in a lowered transfer price (t
r’)
– Prove q
m* < q
m*’ under t
r’ < t
r• G() is monotonically increasing function
G()
q
mBy lowering the transfer price, both parties
can expect higher profits
Feasibility of proposal
in a manufacturer leader case
• Check if expected profit increase by the proposal
– Formulate retailer’s optimal procurement quantity (q
r*) in a manufacturer deciding transfer price (t
m)
– Formulate retailer’s procurement quantity (q
r*’) in a raised transfer price (t
m’)
– Prove q
r* < q
r*’ under t
m< t
m’
• F() is monotonically increasing function
F()
q
mBy raising the transfer price, both parties can
expect higher profits
Feasibility of proposal range of transfer price
• Condition of feasible transfer price in both cases
– Both q
m*’ and q
r*’ must be lower than global optimal quantity (q
c*)
F()
q
When a transfer price can be decided to meet
inequalities above, our proposal has feasible solution.
Evaluation by numerical example
• Parameters
– F(), G(): Normal distribution N(1200, 400 2 )
– p = 300, m = 50, s = 100, c = 20, r = 80, ω = 100
Retailer leader case
• Feasible transfer price range
Transfer price 190 200 210 220 230
EPR
C124,700 120,300 114,800 107,400 96,600
EPR
M42,400 33,300 24,800 16,900 9,700
EPR
R82,300 87,000 90,000 90,600 86,900
Transfer price 190 200 210 220 230
EPR
C124,357 120,241 114,786 107,607 96,653
EPR
M31,572 24,906 18,518 12,778 7,347
EPR
R92,775 95,335 96,268 94,829 89,306
Expected profit without proposal
Expected profit with proposal (Revenue is shared 20%)
Transfer price ≧ 168.61
Manufacturer leader case
• Feasible transfer price range
Transfer price 110 120 130 140 150
EPR
C94,200 110,400 118,600 123,400 126,600
EPR
M89,900 94,800 93,000 87,300 79,600
EPR
R6,500 15,600 25,600 36,100 47,000
Transfer price 110 120 130 140 150
EPR
C94,153 110,084 118,416 123,147 126,567
EPR
M105,194 113,439 111,450 104,450 95,535
EPR
R-11,041 -3,355 6,966 18,697 31,032
Expected profit without proposal
Expected profit with proposal (Cost is shared 20%)
Transfer price ≦ 168.61
Conclusion
• Propose a sharing mechanism to increase expected profit in remanufacturing process
– Both sales and collection demand are uncertain – Retailer leader case: Revenue sharing
– Manufacturer leader case: Cost sharing
• Future research
– Analytical solution
– Guideline for sharing percentage
References
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