Investing in Product Reusability: The Effect of Remanufacturing Cost and Demand Uncertainties

Uncertainty in the supply of used products- both in terms of quantity and quality- has been identified by academics and practitioners as one of the most important challenges for firms to invest in closed-loop systems and product reusability. This article focuses on two types of uncertainties and their impact on these investments. Firstly we analyze the impact of remanufacturing cost uncertainty, which is primarily due to the variability in the quality condition of returns. Secondly, we examine the impact of uncertainty in market demand, which is among the lead causes of variability in the quantity of returns. In a 2-period setting, we optimize a monopolist’s expected discounted profits and determine the optimal level of investment in reusability as well as the market prices. We find that in the case where there is uncertainty in remanufacturing cost, the level of investment in reusability can increase with uncertainty. In addition, we identify the conditions under which higher demand uncertainty leads to reductions in the level of investment in reusability. Moreover, we find that the manufacturer’s pricing decisions will be such that the difference between the remanufacturing supply of the first period and the second period demand is minimized