Physics

Procedía

2012 International Conference on Applied Physics and Industrial Engineering

Dynamic Models and Coordination Analysis of Reverse Supply Chain with Remanufacturing

Nina YAN

Business School Central University of Finance and Economics Beijing, China

Abstract

In this paper, we establish a reverse chain system with one manufacturer and one retailer under demand uncertainties. Distinguishing between the recycling process of the retailer and the remanufacturing process of the manufacturer, we formulate a two-stage dynamic model for reverse supply chain based on remanufacturing. Using buyback contract as coordination mechanism and applying dynamic programming the optimal decision problems for each stage are analyzed. It concluded that the reverse supply chain system could be coordinated under the given condition. Finally, we carry out numerical calculations to analyze the expected profits for the manufacturer and the retailer under different recovery rates and recovery prices and the outcomes validate the theoretical analyses.

© 22011 Published bb Elsevier B.V Selection and/or peer-review under responsibility of ICAPIE Organization Committee.

Keywords: reverse supply chain; remanufacturing; coordination; dynamic programming

1. Introduction

Environmental protection and sustainable development have become increasingly important in recent years. A new management research area, so-called reverse supply chain, has evolved to assist companies in recognizing potential benefits and overcoming challenges associated with its operations and strategies. Enterprises need to achieve from the resources of the development, production, distribution, reuse and recovery to waste management in the environment-friendly activities and treat them as a new competitive advantage (see Mehmet and Surendra, 2010; Ferguson,2008). Reverse supply chain management is one of important methods.

In terms of reverse supply chain management many researchers have conducted extensive theoretical studies and obtained a large number of results. Ferrera and Swaminathanb(2010) study a firm that makes new products in the first period and uses returned cores to make remanufactured products in future periods and analyze the monopoly environment in two-period, multi-period and infinite planning horizons,

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Physics Procedía 24 (2012) 1357 - 1363

1875-3892 © 2011 Published by Elsevier B.V. Selection and/or peer-review under responsibility of ICAPIE Organization Committee. doi:10.1016/j.phpro.2012.02.202

and characterize the optimal remanufacturing and pricing strategy for the firm. Liang et al. (2009) propose a model to evaluate the acquisition price of used products which links used products acquisition price with the sale price of used products and present a numerical example to show its applicability. Subramanian et al. (2008) from the perspective of supply chain coordination mechanism discuss the optimal decision-making problems for different EPR mechanisms and explore the coordination conditions which the closed-loop supply chain can achieve. Gu et al. (2008) present two-period price decisions for the new product and the used-product under the consideration of the relationship of the consumer market of the new products and the supply market of the used-products and carry out a numerical example to illustrate the optimal results. Karakayali et al.(2007) analyze decentralized collection and processing operations for end-of-life products in durable goods industries and develop models to determine the optimal acquisition price of the end-of-life products and the selling price of the remanufactured parts in centralized as well as remanufacturer- and collector-driven decentralized channels. Most existing studies are considered single-stage supply chain decision-making problems which deal with the recycling and remanufacturing process simultaneously. However, in this paper according to the practical operations of product recycling, remanufacturing and re-distribution we deal with the recovery process and remanufacturing process as two different stages and construct the a two-stage stochastic dynamic programming model for reverse supply chain systems.

The rest of the paper is organized as follows. In the next section, we offer a basic description of reverse supply chain with remanufacturing, including the model framework, notation and assumptions. Section 3 formulates the dynamic reverse supply chain models and analyzes the coordination condition in Section 4. Section 5 uses numerical examples to illustrate our results and a few concluding remarks are provided in Section 6.

2. Basic description of reverse supply chain with remanufacturing

2.1 reverse supply chain framework

In this paper we consider a supply chain system composed of a manufacturer and a retailer. The system framework is shown in Figure 1. In order to differentiate the recovery process and remanufacturing process of supply chain, we formulate them as two stages. The first stage is recovery process of the retailer and the second stage is remanufacturing process and redistribution process of the manufacturer. In the first stage, the retailer sells new products to the customers and also undertakes the recovery of used products from the customers. Then he sells the used products to the manufacturer with a given recovery price. In the second stage, the manufacturer produces new products with raw materials and meanwhile remanufactures some used products with the recovery. Moreover, in order to better encourage the manufacturer and the retailer for the supply chain coordination, here we use the buyback contracts as an incentive mechanism. In the end of selling season, the manufacturer will buy back some of the unsold products from the retailer with a given buyback price to encourage the retailer to better engage sales and recovery activities.

2.2 Notation and Assumption

In order to describe and analyze our quantitative models clearly, we summarize the notation and assumptions as below at first.

Q : the retailer's order quantity, the retailer's decision variable.

R : the recovery quantity of the used products from the customers by the retailer in the end of the first stage.

cn : unit manufacturing cost for each new product.

cr: unit remanufacturing cost for each remanufactured product, cr < cn. W: unit wholesale price in the ith stage, i = 1,2 . pi: unit retail price in the ith stage, i = 1,2 . gi: unit stockout cost in the ith stage, i = 1,2 .

b : unit buyback price of the unsold products, the manufacturer's decision variable. t: unit recovery price of the used product from the retailer.

a : the remanufacturability, the rate of used products can be remanufactured to new products, 0 < a < 1. v : unit salvage value of unsold products. X: the stochastic demand in the stage i, i = 1,2 .

f(x1), F1(x1): the probability density function and cumulative distribution function of the demand in stage1, respectively.

Fig. 1 Framework of reverse supply chain system with remanufacturing

/2(x2 |x1), F2(x2 |x1) : the probability density function and cumulative distribution function of the demand

in stage 2 if the demand in stage 1 is given.

^,/u2: the mean demand in stage 1 and stage 2, respectively.

To simplify the analysis, we suppose the demands of two stages are independent. Here, we use /3() and F3(• )to express the probability density function and cumulative distribution function of x ( x = x1 + x2), respectively.

En, En m, En are the expected profit of the retailer, the manufacturer and the supply chain system in the ith stage ( i = 1,2 ), respectively.

AssumeR = l min(x1,Q), where lis the recovery rate of the used products and 0<1< 1. Moreover, without loss of generality we assume b > v , w1 > cn and w2 > cr to be justification.

3. Dynamic models of reverse supply chain with remanufacturing

Here we use the backward algorithm for dynamic programming to solve the dynamic models of reverse supply chain. Suppose the retailer's inventory in the beginning of stage 2 is y. If we express the retailer's profit in the ith stage (i = 1,2) is n (i = 1,2), then it can be expressed respectively as following:

n 2( y) = P2 ■ min( ^ y) - W2aR + b( y - X2 )+ g2( X2 - y)+ (1)

n[ (Q) = pi ■ min(xi,Q) - wQQ + tR+v(Q - x)+ - g (x - Q)+ (2)

From eq.(1)-(2) we can get the retailer's expected profits of each stage and expressed them as eq.(3)-(4).

-En^W =f0[P2X2 + b(y - x2)]fl(x21 X)dx2 +J IPzy - g2(x2 - .^l/i (X21 X)dx2

- w2aX

Q+f( xi- Q)fi( x^dx,

Eni (Q) = -w,Q+J0 [(a + + -n2(Q - x)+v(Q - x,)]f(x,)dx

+JjPiQ+En2(0) - gfa- Q)lf1(x1)dx1 (4)

For simplicity, we use the following substitution:

qj =Pi + tX-W2aZ + g! - V - P2 - g2, Qr2=P2 + g2 - b , Qj =Pl - W1 + gl - w2a , @1 = J0 (X1 - Q)f1(x1)dx1 ,

rQ rQ-x I

@3 = Jo Jo (X1 + X2 - Q)f2(x2 IX1)f1(x1)dx2dx1 • From eq.(3)-(4), we can easily get:

dEn (Q)/sQ = -qiF1(Q) - q2F3 (Q) + q3 , d 2En[ (Q)/dQ2 = -qfQ) - QfQ) < 0 •

So there exists the sole optimal order quantity Qr* to make the retailer's expected profit be maximum if Qr* can satisfy the condition of Qr^F1(Qr*) + Qr2F3(Qr') = qj, i.e.,

Qr' = arg {q[ w) + QrF(ff *) = qj} (5)

Similarly, if we express the manufacturer's profit in the ith stage (i = 1,2) is n" (i = 1,2), then it can be expressed respectively as following:

n" (Q) = (W1 - cn )Q - tR (6)

n"(y) = (W2 - c,)aR - (b - v)(y - x2)+ (7)

As shown in Figure 1, the profit of the whole supply chain system in the ith stage ( i = 1,2 ) is the sum of the retailer's and the manufacturer's profit, i.e., nf = n™ +n[ ( i = 1,2 ). From above analyses the supply chain system profit can be expressed as eq.(8)-(9).

n(Q) = Pi • min(x,,Q) - cnQ + tR + v(Q- xi)+ - a(x -Q)+ (8)

n22(y) = P2 • min(x2,y) - craR + v(y - x2)+ - g2(x2 - y)+ (9)

So from eq.(8)-(9) the expected profit can be obtained as following:

Enn(y)^[PiX +v(y"X^l]+J" [py-ëiix-yWi(Xi\XidX

-c, a)

Q+jQ(*1-Q)f(I) dxi

^(SHfl -c„+g1 -crcd)Q+(p1 -crcd+gl -v-p2 - g2)|0Q(x — Q)f1(x1)dX fQ fQ-1 i

+P2 +g2 "v)j0 J0 (X + X2 -Q)f2(x2 Ixi)f1(xi)dx2dxi -gl/4 -glMl (11)

Similar to above analyses, we make substitutions as following: qf =p1 - craX + g1 - v - p2 - g2,

Q2=P2 + g2 - V , Q3 =P1 - cn + g1 - cra) , Then 5£n; (Q)ldQ = -qfF1(Q) - Q'F(Q) + q3, d2En; (Q)/<3Q2 = -qfQ) - Qf(Q) < 0 . Therefore, there exists the sole optimal order quantity Qs*to make the expected profit of the supply chain system be maximum if Qs*can satisfy the condition of QsiF1(Qr*) + Qs2F3(Qr*) = q3, i.e.,

Qs* = argtaQO + q2F3(Qs*) = q3} (12)

4. Coordination analysis of reverse supply chain with remanufacturing

Because there are multiple decision-makers existed in the reverse supply chain for the operations of logistics, capitals and information sharing, the coordination and cooperation are the important preconditions of effective and efficient for supply chain management. Similar to the traditional supply chain system, the core objective of reverse supply chain system is also coordination.

According to supply chain coordination theory, the reverse supply chain system can be perfect coordinated if the condition of Qs* = Qr* could be satisfied.

From eq.(5) and eq.(12), the coordination condition can be rewritten as Q¡/q[ = q2/Qr2 = q3/q3 , i.e.,

p1 -cî,œX+g1 -v-p2-g2 = p2 +g2-v =piZc!i+g1-Cr:al (13) When) = o , namely the retailer do not P1 + tX-w2oX+g1 - v - P2 - g2 P2 + g2 - b P1 - w + g1 - w2oX recover the used products, the coordination condition of supply chain system is b = v and w1 = cn. Under this condition the manufacturer's profit is zero. So the rational manufacturer cannot accept this condition.

When X * 0 , namely the retailer engage in recovery of the used products, the coordination condition of supply chain system is

[(w2 - cr)a-1]X = b - v = w1 - cn +tX P1 - c.aX + g1 - v - P2 - g 2 P2 + g 2 - v P2 + g 2 +v + W1 - tX

Namely, b = (w1 -c„ +tX)(P2 + g2-v) + v = [(w2 -c.)a-1]X(P2 + g2-v) + v Here, the optimal profit of the P2 + g2 + v + W1 - tX P1 - caX + g1 - v - P2- g2

manufacturer is

Enm(Qs*) = (q1 -q )©1(Qs*) + (q2-Qr1)®,(Qs") =X)(w2 -cr)a-t]©^*) + (b-v^Q") (14)

From eq.(14) it can be easily seen that if the retailer enhance the recovery rate of wasted products the manufacturer could be encouraged to increase the unit buyback price. Meanwhile the manufacturer's expected profit also could be increased to realize the win-win effect of the supply chain system.

5. Numerical studies

Suppose the supply chain system consists of one electronics manufacturer and one retailer. In this paper we set model parameters as: cn =$30, cr =$15, ^=$50, w2=$45, #=$80, p2=$75, g1=$10, g2=$8, v =$5, « =80%.

Moreover, suppose the demands of x1 and x2 in each stage are follow the uniform distribution of U[0,D] (D=1000). According to the probability theory, we can get F1(x1) = xjD, F2(x2) = x2/D ,

When the recovery rate X~(0,1) and the unit recovery price t~(0,30), we use MATLAB procedures to calculate the optimal unit buyback price and optimal expected profits for the manufacturer and the retailer, respectively. The calculation results are simulated in Fig.2 and Fig.3.

It can be found that as shown in Fig.2 the unit buyback price b would be increased with the recovery rate, but decreased with the recovery price. It is consistent with the theoretical analyses above. Particularly, when X=0.835 and t =3.78, the manufacturer's optimal buyback price b =$37.53.

Furthermore, from Fig.3 we can find that when X and t are sufficiently small the profits of the manufacturer's and the retailer's are almost unchanged and the former is slightly higher than the latter. However, with the increases in X and t both profits are increased first and then decreased. The optimal expected profit for the manufacturer is $23120, for the retailer is $21500 and for the supply chain system is $44620. Noted, when X=0.583 and t =10.25 the supply chain system could be coordinated with the optimal profit of $45130 where the manufacturer's is $22780 and the retailer's is $22350.

F3( x)

x2/2D2 (0 < x < D)

2x/D - x2/2D2 -1 (D < x < 2D)

(0 < x < D)

Fig.2 Manufacturer's unit buyback price under different recovery rate and different recovery price

Fig.3 Manufacturer's and retailer's profit under different recovery rate and different recovery price

6. Conclusions

In this paper, we construct the reverse chain system with one manufacturer and one retailer under demand uncertainties. It concluded that the buyback contract can coordinate the dynamic reverse supply chain under given conditions. However, in this paper we ignore the quality differences between the new products and the remanufactured products, which is worthy to be studied further. Moreover, how to use other supply chain contracts to coordinate dynamic reverse supply chain system is also another research direction in the future.

Acknowledgment

This paper was supported by the 3rd stage of project "211", cufe.

References

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