Remanufacturing decisions and implications under material cost uncertainty

Wenbo Shi and K. Jo Min

International Journal of Production Research, 2015, vol. 53, issue 21, 6421-6435

Abstract: In this paper, for a firm of a single product, we construct and analyse how economically rational decisions on remanufacturing are made from a real options perspective under material cost uncertainty. Specifically, under the assumption that the material cost follows a Geometric Brownian Motion process, we derive the optimal condition (i.e. material cost threshold) to implement a remanufacturing system. Further analysis, analytically and/or numerically, yields numerous managerial insights and policy implications. For example, as the material cost becomes more uncertain, economically rational decision-makers will defer the implementation of the remanufacturing system. Furthermore, we also demonstrate that a product unit-based subsidy is more effective than a lump sum remanufacturing system implementation subsidy if our goal is to encourage a longer operational period of the remanufacturing system.

Date: 2015
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DOI: 10.1080/00207543.2014.932933

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