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Real option approach to evaluate cores for remanufacturing in service markets
Linköping University, Department of Management and Engineering. Linköping University, The Institute of Technology.
Linköping University, Department of Management and Engineering, Production Economics. Linköping University, The Institute of Technology.
2015 (English)In: International Journal of Production Research, ISSN 0020-7543, E-ISSN 1366-588X, Vol. 53, no 8, 2306-2320 p.Article in journal (Refereed) Published
Abstract [en]

Acquisition of cores is important for the success of remanufacturing business, but evaluating the value of cores is difficult due to many uncertain issues in the remanufacturing system. In this paper, we examine the value of cores using the real option valuation (ROV) approach, which well captures the production flexibility and represents different operations options in remanufacturing. First, in a system where the demand of remanufactured products is low, we focus on the uncertainty of price. We compare the cases where disposing cores occurs only at the expiration time and before that. The model also identifies under which circumstances disposing core early brings in more benefit. Furthermore, we study a remanufacturing system where demand and return are both uncertain. In this case, a spread option is used for evaluating the marginal value of obtaining additional cores. This approach also brings the advantage of linking the correlation between demand and return, which in fact is often exhibited in remanufacturing. The numerical experiments indicate that this correlation has an impact on collecting policies. This study illustrates the possibility of using ROV for core pricing modelling, and the study results also provide some managerial insights in managing returned cores.

Place, publisher, year, edition, pages
Taylor & Francis, 2015. Vol. 53, no 8, 2306-2320 p.
Keyword [en]
Remanufacturing, cores, real option valuation
National Category
Economics and Business
URN: urn:nbn:se:liu:diva-113247DOI: 10.1080/00207543.2014.939243ISI: 000349395700004OAI: diva2:779841
Available from: 2015-01-13 Created: 2015-01-13 Last updated: 2015-03-11
In thesis
1. Core Acquisition Management in Remanufacturing: Current Status and Modeling Techniques
Open this publication in new window or tab >>Core Acquisition Management in Remanufacturing: Current Status and Modeling Techniques
2015 (English)Doctoral thesis, comprehensive summary (Other academic)
Abstract [en]

Remanufacturing is an important product recovery option that benefits our sustainable development. Cores, i.e. the used products/parts, are essential resources for remanufacturing. Without cores, there will not be any remanufactured products. Challenges in the core acquisition process are mainly caused by the uncertainties of: return volume, timing and core quality. Core Acquisition Management actively attempts to reduce these uncertainties and achieve a better balance of demand and return for the remanufacturers. The aim of this dissertation is to extend the knowledge of Core Acquisition Management in remanufacturing, by investigating the current status of research and industrial practice, and developing quantitative models that assist the decision making in the core acquisition process.

In the dissertation, a literature review is firstly conducted to provide an overview about the current research in Core Acquisition Management. Possible further research interests, for example, more studies based on non-hybrid remanufacturing systems and imperfect substitution assumption are suggested. Through an industrial survey carried out in a fast developing remanufacturing market - China, environmental responsibility and ethical  concerns, customer orientation and strategic advantage are identified as the most important motives for the remanufacturers, while customer recognition is their most serious barrier at present. Suggestions for further improving the Chinese remanufacturing industry from the policy-makers’ perspective are provided. After the above investigation, mathematical models are then developed to assist the acquisition decisions in two aspects: to deal with the uncertainties of return volume and timing, and to deal with the uncertainties of core quality.

Acquisition decision about volume and timing is firstly studied from a product life cycle perspective, where the demands for remanufactured products and the core availability change over time. According to industrial observations, the remanufacturing cost decreases with respect to its core inventory. Using optimal control theory, core acquisition and remanufacturing decisions are derived to maximize the remanufacturer's profit. It is found that besides a simple bang-bang type control policy (either collecting as much as possible, or nothing), a special form of synchronizing policy (adjusting the core collection rate with demand rate) also exists. Furthermore, the acquisition decision depends greatly on the valuation of cores, and Real Option Valuation approaches are later used to capture the value of flexibility provided by owning cores when different aspects of remanufacturing environment are random. More specifically, the value of disposing a core earlier is investigated when the price of remanufactured product is uncertain, and the impact of the correlation between stochastic demand and return is also studied.

To deal with the uncertainties of core quality, refund policies with different numbers of quality classes are studied. Under the assumption of uniformly distributed quality, analytical solutions for these refund policies are derived. Numerical examples indicate that the customers’ valuation of cores is an important factor influencing the return rates and the remanufacturer’s profit. Refund policies with a small number of quality classes could already bring major advantages. Credit refund policies (without deposits) are included for comparisons. In addition, within a game theory framework, the trade-off of two types of errors of the quality inspection in a deposit-refund policy is studied. The salvage values of different cores show great influences on the remanufacturer’s policy choices. The value of information transparency about the inspection errors are studied under different conditions. Interestingly, the customer may actually return more low quality cores when the inspection accuracy is improved.

Place, publisher, year, edition, pages
Linköping: Linköping University Electronic Press, 2015. 42 + Appendix A and B p.
Linköping Studies in Science and Technology. Dissertations, ISSN 0345-7524 ; 1637
Core acquisition, remanufacturing, closed-loop supply chain, quantitative modeling, return uncertainties
National Category
Economics and Business
urn:nbn:se:liu:diva-113251 (URN)10.3384/diss.diva-113251 (DOI)978-91-7519-167-6 (print) (ISBN)
Public defence
2015-02-06, ACAS, Hus A, Campus Valla, Linköpings universitet, Linköping, 10:15 (English)
Available from: 2015-01-13 Created: 2015-01-13 Last updated: 2016-04-12Bibliographically approved

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