Recycling or Remarketing: Optimal Strategies for Outsourcing Remanufacturing

Abstract

Remanufacturing outsourcing creates the cannibalisation for the original equipment manufacturers' (OEMs') new products sales. In dealing with the cannibalization from the third-party remanufacturer (3PR), many OEMs such as ATK, Canada Engines, Ford and Land Rover, undertake used cores collecting or remanufactured products remarketing. Motivated by examples from industry, we develop two models in which an OEM produces new products but outsources remanufacturing operations to a 3PR according to two potential strategies in dealing with the cannibalization from remanufactured products: 1) collecting used cores from consumers or 2) remarketing all remanufactured products to consumers. Among other results, we find that, if the collection cost coefficient is not pronounced, the OEM would prefer remarketing remanufactured products than undertaking used cores collection, though the former creates fiercer cannibalization problems for new products sales. Further, as the collection cost coefficient is moderate, remarketing remanufactured products can create a win-win result for both parties. As such, we suggest that, practicing managers should focus both on the cost of collecting used cores and the cannibalisation problems of remanufacturing. This complements existing results which show that when remanufacturing is outsourced, the OEM equate minimising cannibalisation with maximizing profits.