Revenue Management In Remanufacturing

Abstract

The pace of development in the world has increased over the years and with it, the use of hitech gadgets, consumer durables, automobiles etc. has also gone up. In this context, as resources become more and more scarce, there are multiple challenges that emerge both from a sustainable development perspective, and from the perspective of meeting profitability objectives of a firm. Remanufacturing has come up in a big way as an answer to sustainable development challenges, but firms are struggling with respect to revenue management of this nascent area. Remanufacturing as an area is fast becoming an important field as more legislations come in to support it on one hand, and on the other, economic imperatives make it an absolute necessity. We assess the current literature and distil the key factors that firms need to consider as they assimilate remanufacturing in their operations and revenue management strategy. We summarize the key factors that firms need to look into while dealing with remanufactured products from a revenue management perspective into product related, supply chain related and modelling related issues. We establish the current research gaps in this upcoming area and address three of them in our work. Remanufactured products have features similar to new products but are sold at comparably lower prices. This leads to cannibalization of sales of new products from price sensitive customers and affects new product market. However the margins on remanufactured products are higher than new products due to lower material and manufacturing costs. Hence a company would like to meet more of the market demand using remanufactured products. Remanufacturing of used products, unlike new product manufacturing is dependent on supply of used products called cores, as raw material. Supply of used products can become very critical both from perspective of quantity of products available as well as their quality. One of the strategies that can help control the supply of these used products is to consider whether to go for waste stream or market driven used product acquisition. Availability and quality of used products can be severely impacted by choosing one method over the other. Although both cannibalization and market driven used product acquisition have been studied separately by researchers, they have not been dealt with together. First, we address this research gap through our work and derive analytical results for optimal prices and quantities in such a scenario. The problem becomes analytically intractable in this case and we solve it using numerical methods. We show that there are thresholds on willingness to pay for remanufactured products, costs of remanufacturing and new manufacturing which are critical for manufacturers to decide whether they should remanufacture or not. Next we look at the issue of capacity constraints while dealing with new and remanufactured products. We develop models to analyse optimal revenue management policies in the presence of demand cannibalization between new and remanufactured products and a constraint on manufacturing capacity jointly shared by the two product types. We find the situations under which the capacity constraints are binding. We develop optimal policies in this scenario and show that the firm can charge higher prices for both new and remanufactured products in capacitated cases. We also show that as preference for remanufactured products increases, the prices of both the new and remanufactured products increase in the capacitated case. Lastly, we look at lifecycle dynamics while dealing with remanufactured and new products. We consider a firm which has to deal with demand cannibalization as well as lifecycle dynamics of products. We develop models to calculate product returns over all of the previous time periods and incorporate it in a multi-time period profit maximization problem and solve it using dynamic programming. Using computational experiments we show that when preference for remanufactured products is higher, then profitability of firm is very sensitive to products returning from previous periods. Hence the firm should focus on incentivising the quantity as well the quality of returns in such cases. We also show that optimal prices and quantities are very different in initial phases of the lifecycle than the end-of-life phases. We show that the OEM should generally decrease the prices of remanufactured products over the lifecycle and the decrease should be sharper towards the end of life of the product. We also show that when the overall lifecycle length increases, the optimal profits increase sharply with increasing length, and then reaches an upper bound. Thus a firm needs to be more sensitive about shorter lifecycle products.