Optimal internal channel structure decision: the case of remanufacturing operations

Abstract

How manufacturing and remanufacturing functions perform in practice would relate to the supply chain system’s channel structure, which can be decentralized or centralized (called “integrated”). Through building formal game theoretic models, we investigate in this paper the economic performance and environmental impact between these two internal channel structures. We find that the decentralized structure consistently improves the environment outcome by encouraging early entry into remanufacturing and full remanufacturing strategies. It proves advantageous in scenarios with polarized production costs (either low or high). Conversely, the integrated structure is optimal for manufacturers when new product production costs are moderate; however, this structure invariably entails worse environmental outcome for manufacturers. From the perspective of closed-loop supply chain systems, a triple-win outcome for the manufacturer, retailer, and remanufacturing division is unattainable because the retailer can never benefit from the manufacturer’s decisions made under the decentralized structure. Nevertheless, compared to the benchmark case without remanufacturing encroachment, the manufacturer’s decision to encroach into remanufacturing under both structures can have positive effects on the retailer and environment. Robustness of the main findings is checked across various extended cases, including quantity competition, changes in game sequence, customer channel preferences, and direct channel opening costs.

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