Supply chain design for unlocking the value of remanufacturing under uncertainty

• Present an integrated model of marketing choices and supply chain design decisions.
• A new case on BSH closed-loop supply chain is developed, and presented in detail.
• “Remanufacture all” is optimal if customers highly value remanufactured products.
• Market size uncertainty has the most profound effect on profitability of remanufacturing.

Owing to the technological innovations and the changing consumer perceptions, remanufacturing has gained vast economic potential in the past decade. Nevertheless, major OEMs, in a variety of sectors, remain reluctant about establishing their own remanufacturing capability and use recycling as a means to satisfy the extended producer responsibility. Their main concerns seem to be the potential for the cannibalization of their primary market by remanufactured products and the uncertainty in the return stream in terms of its volume and quality. This paper aims at assisting OEMs in the development of their remanufacturing strategy, with an outlook of pursuing the opportunities presented by the inherent uncertainties. We present a two-stage stochastic closed-loop supply chain design model that incorporates the uncertainties in the market size, the return volume as well as the quality of the returns. The proposed framework also explicitly represents the difference in customer valuations of the new and the remanufactured products. The arising stochastic mixed-integer quadratic program is not amenable to solution via commercial software. Therefore, we develop a solution procedure by integrating sample average approximation with the integer L-shaped method. In order to gather solid managerial insights, we present a case study based on BSH, a leading producer of home appliances headquartered in Germany. Our analysis reveals that, while the reverse network configuration is rather robust, the extent of the firm’s involvement in remanufacturing is quite sensitive to the costs associated with each product recovery option as well as the relative valuation of the remanufactured products by the customers. In the context of the BSH case, we find that among the sources of uncertainty, the market size has the most profound effect on the overall profitability, and it is desirable to build sufficient expansion flexibility in the forward network configuration.