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Background Information

On this page you can first learn more about Closed-loop Supply Chains (CLSC) and then get a brief introduction about the theoretical model underlying the simulation tool.

CLSCs

As mentioned on the start page of this web-application, the term Closed-loop Supply Chains (CLSC) emphasizes that the reverse processes interact with the more traditional forward processes and therefore cannot be treated in isolation (Guide et al. (2009)). While the forward processes constitute the backbone of any company's operation (except for companies exclusively dealing with reverse processes) and consequently have received a lot of attention both in practice and in academia, the focus on reverse processes is a rather recent phenomenon and triggered mostly by environmental legislation.

On a very general level the three main processes are

Acquisition of used products

The acquisition process relates to all the effort and logistics associated with obtaining products the consumers no longer need/want. To allow for product take back a logistics network has to be set up, where consumers can dispose of their end-of-use products. A well-known example is the Ö3 Wundertüte where consumers are sent special envelopes to put in their old cellphones and donate them for caritative purposes. Another example is the case of specialized dealers that buy second hand cellphones for resale. These two examples nicely highlight the different possibilities for the reverse logistical system. While the former is more convenient (since the Ö3 Wundertüte is delivered home) there is no financial benefit for the consumer (since the cellphone is donated). Further the collector has no information about the used product until it reaches the collection facility (after all the phone could be broken and completely useless). Conversely, the latter system is less convenient for the consumer (since she has to go to the dealers' shop). However, the dealer can check the phone before buying it and the price paid to the consumer will reflect the quality of the used phone.

Besides the logistical setup, these two examples also provide some insight into some other aspects of the acquisition process namely the issues of cost and quantity of returns. Similar as in the forward supply chain prices and quantities are closed interlinked. By paying higher prices a dealer can increase the amount of returned products (e.g. think about a car dealer offering you some money for your used car, the higher the price the more likely you are to actually sell the car). However, this increased cost for the dealer has to be reflected by some additional anticipated gain associated with the product returns. This gain is directly associated with the disposition options available for the dealer to handle the returns.

Disposition of returned products

Possibilities can include recycling to recover the resource value of the product (e.g. due to metals like gold, copper, aluminum,...), parts recovery to extract components of the product that are still functionable and could be used as spare parts for other products, remanufacturing, refurbishing or re-use. These last three options refer to alternatives that extend the product life cycle. The term remanufacturing emphasizes that some significant rework is needed before the product can be used again. Refurbishing refers to less severe actions like cleaning, exchange of some components or re-packaging, while re-use reflects a situation where the product is sold as it is. Obviously the profitability of these different disposition options will be different, such that there is a tradeoff whether or not to exhibit the extra effort of e.g. remanufacturing over re-use. Clearly, this trade-off is influenced by the revenues associated with recycling or re-selling products of different quality levels, but also depends on the quality of the returned products per se. The quality is typically highly heterogeneous between different returned units. While one consumer may return a product after just a couple of days (think of a duplicate christmas or birthday present) in the unopened package, another consumer may have used the returned product for a long time. Even products that have been used for the same time period by different clients may have very different quality (think of used cars of the same age with very different mileage).

Quality management

This quality heterogeneity is dealt with by the so called grading process which is typical for reverse processes (and does not exist in traditional forward processes since the quality of new inputs is much more homogeneous). The grading process tries to categorize returns according to their quality and establish which disposition a returned product of a certain quality should face. Clearly, there is another trade-off here, since a more accurate grading while improving the disposition decisions is also more costly since it may require more thorough testing of the returned product. Besides this close interaction with the disposition decision, the grading is also linked with the aquisition (logistics). As mentioned in the example of the cellphone dealer, the acquisition price will in general depend on the product quality. However, since the customer needs to be refunded essentially immediately, there is once again a limit on the quality checks that can be performed. Moreover, in other settings (like the Ö3 Wundertüte) the logistics may be such that a grading only takes place after collection/acquisition. This will typically lead to a wider array of quality levels to be dealt with in the disposition process.

Closing the loop

Finally, and this closes the loop of this short introduction, all of these reverse processes are closely linked with forward processes. Clearly, the logistical network for the reverse processes will have at least some overlap with the logistical network of the associated forward processes (think of the cellphone dealer, whose shop is also the location for product returns). The acquisition process of used products depends on the sales of the new product through the forward supply chain. The more new products are sold the larger is the potential for re-use. Similarly, the price payable for product returns will depend on the price of the new product (think of the used car market, where the Eurotax list explicitly states reference prices with respect to make and year of production). On the other hand, the disposition processes, particularly in case of remanufacturing will require some production capacity which could also be used in some other way (e.g. for new production or quality control). Thus, also the grading and disposition decisions in the reverse chain are linked with their associated forward processes and a responsible company will jointly organize and operate its CLSC to achieve true sustainability.

Many well-known companies already implemented at least parts of the above-mentioned theory: In 2011, Hewlett-Packard (HP) reused 26,700 tons of electronic products directly, and recycled 133,900 tons of electronic equipment. IBM is another example: In 2011, IBM reprocessed 37,950 tons of electronic products, from which 6.5% were reused directly, 38.6% were sold to reprocessing companies, and 52.4% were recycled.

The Newsvendor Model

The newsvendor model is based on the problem of selling newspapers: The price for the newspaper is fixed, but the demand is unknown. As the newspaper is worthless after a certain period (e.g., a daily newspaper loses its value on the next day), overproduction leads to production costs without additional sales. Vice versa, printing too little newspapers results in suboptimal profits due to unfulfilled demand. Consequently, the trade-off between production costs (overstock) and potential sales (understock) has to be considered.

In detail, the newsvendor problem is defined by the following characteristics. Firstly, the sales price and the production costs per unit are fixed. The demand for the product is stochastic, but with a known probability distribution. Finally, the production quantity for the period has to be determined. Each demand realization below the production quantity results in worthless overstock which can not be sold, while any demand higher than the production quantity implicates lost potential selling opportunities. (The Newsvendor Model on Wikipedia)

The model employed in this simulation is a two-period newsvendor model. It extends the above mentioned setting by linking the second period supply to the first period sales. Specifically, the more is sold in the first period, the more potential units for collection and remanufacturing are available. Thus, besides the trade-off between over- and underproduction in the single-period setting, this model extension allows the study of the intertemporal profit tradeoff. By accepting a smaller profit in the first period (thourgh increased overproduction), a larger second period profit (through the use of remanufacturing) might be achieved. Overall, these models are simple tools to study the effect of uncertainty on decision making.

Further reading

CLSC research

Geyer, R., Van Wassenhove, L. N., Atasu, A., The economics of remanufacturing under limited component durability and finite product life cycles, Management Science 53, 88--100 (2007).

Guide Jr., V. D. R., Van Wassenhove, L.N., The evolution of closed-loop supply chain research, Operations Research 57, 10–18 (2009).

Guide, V. D. R. Jr., Teunter, R. H., Van Wassenhove, L. N., Matching demand and supply to maximize profits from remanufacturing, Manufacturing & Service Operations Management 5, 303--316 (2003).

Acquisition of used products

Galbreth, M. R., Blackburn, J. D., Optimal acquisition quantities in remanufacturing with condition uncertainty, Production and Operations Management 19, 61--69 (2010).

Teunter, R. H., Flapper, S. D. P., Optimal core acquisition and remanufacturing policies under uncertain core quality fractions, European Journal of Operational Research 210, 241--248 (2011).

Quality management

Ferguson, M., Guide, V. D. R. Jr., Koca E., Souza G. C., The value of quality grading in remanufacturing, Production and Operations Management 18, 300--314 (2009).

Tagaras, G., Zikopoulos, C., Optimal location and value of timely sorting of used items in a remanufacturing supply chain with multiple collection sites, International Journal of Production Economics 115, 424--432 (2008).

Disposition of returned products

Ferguson, M. E., Fleischmann, M., Souza, G. C., A profit-maximizing approach to disposition decisions for product returns, Decision Sciences 42, 773--798 (2011).

Ferrer, G., Swaminathan, J. M., Managing new and differentiated remanufactured products, European Journal of Operational Research 203, 370--379 (2010).

Newsvendor models (and remanufacturing)

Khouja, M., The single-period (news-vendor) problem: literature review and suggestions for future research, Omega 27, 537--553 (1999).

Reimann, M., Lechner, G., Production and Remanufacturing Strategies in a Closed-Loop Supply Chain: A Two-Period Newsvendor Problem, in: Choi, T.-M. (Ed.): Handbook of Newsvendor Problems: Models, Extensions and Applications, Springer, NY, 219--247 (2012).

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