On the Tradeoff Between Remanufacturing and Recycling

For a firm, the dual goals – induced by the drive on Extended Producer Responsibility – of meeting environmental regulations and positioning itself as a socially-responsible entity, necessitate the understanding of supplyand demand-side implications as well as product design characteristics. These, in turn, result in a healthy tradeoff between feasible sustainability measures, thus making the implementation of an appropriate option critical for long-term survival. Motivated by our interactions with two Dallas-based reverse-logistics firms, we analyze the tradeoff between two well-known product-recovery approaches: recycling and remanufacturing. Our setting is that of a manufacturer who produces and markets a product with the objective of maximizing profit. A unit of the product consists of two modules – Module A and Module B – that could each be either remanufactured or recycled. Module B incurs a higher per-unit production cost and is also priced higher than Module A. Once a module is recovered via a take-back mechanism, it can be either used in a remanufactured unit or can be further disassembled and recycled to recover its raw material, which can then be used to produce (albeit with different yields) new units of either Module A or Module B. Any unused units of either the complete product, Module A, or Module B, can be disposed. Under this setting, we investigate three options: (i) recycling of Module A, (ii) remanufacturing of Module B, and (iii) recycling of Module A and remanufacturing of Module B. We first provide a complete theoretical characterization of the regions of optimality of each option. Next, we study the impact of choosing an option in an ad-hoc manner on the manufacturer’s profit and analyze the sensitivity of this impact to changes in the supply-demand gap and the take-back fraction. Recognizing that emerging governmental regulations render the disposal cost particularly vulnerable to dis-economies of scale, we examine the impact of non-linear disposal cost on the (i) optimal amount recycled or remanufactured and (ii) choice of an optimal operational strategy. To obtain richer managerial insights, we introduce the concept of “ability of sustainability,” defined as a joint measure of the fraction of green consumers in the market, the take-back fraction, and product design characteristics such as the degree of substitutability of material, and examine its influence on the optimal option. Useful insights are developed on the sensitivity of the optimal choice to the relative profitabilities of the remanufacturing and recycling operations. Finally, based on the demand for the remanufactured product, we also analyze the cases when green consumers are flexible and when they are dedicated.