Interplay Between Servicizing and Remanufacturing: Economic and Environmental Implications

Abstract

Problem definition: To investigate the interplay between servicizing and remanufacturing, two widely used strategies in the circular economy, and its impact on firms’ economic and environmental performance, we consider a profit-maximizing manufacturer who explores the possibility of jointly adopting the two strategies. Methodology and results: We develop optimization models that capture the main attributes for servicizing (pay-per-use, demand pooling) and remanufacturing (lower production costs, higher operating costs). We show that the presence of remanufacturing always makes servicizing less attractive to adopt, and having servicizing may discourage the adoption of remanufacturing if the remanufacturing cost reduction effect is not sufficiently large. The joint adoption of servicizing and remanufacturing is preferred when the remanufacturing cost is neither too high nor too low and the range of the remanufacturing cost that favors the joint adoption is further moderated by the firm’s pooling level and the operating cost of remanufactured products. Lastly, we find that when the firm adopts servicizing in the presence of remanufacturing with relatively high remanufacturing costs, it can reduce the number of remanufactured products with low environmental impact in the market and, thus, harm the environment, resulting in a misalignment between economic and environmental goals. Managerial implications: Our findings suggest that managers considering jointly adopting servicizing and remanufacturing must balance their competition on the low-usage end of the market with the potential complementarity due to remanufacturing cost reduction. Further, by showing the win-win conditions under which the joint adoption of servicizing and remanufacturing improves firms’ economic and environmental performance, we demonstrate that there are no one-size-fits-all circular economy strategies and call for caution when promoting these strategies across industries. Supplemental Material: The electronic companion is available at https://doi.org/10.1287/msom.2022.0379 .