Inventory model for sustainable operations of a closed-loop supply chain: Role of a third-party refurbisher

Abstract

This paper investigates the joint decision on inventory and refurbishing strategies in a closed-loop supply chain, consisting of a manufacturer responsible for the production and first-market sales and a third-party refurbisher responsible for the refurbishment and second market. Based on a game-theoretic model, we investigate the effects of supply chain structures on the production operations, sales price of a refurbished product, profits and environmental performance. Through numerical analyses, we reveal that the integrated system yields higher first-market sales and a larger production lot size, while the decentralized one shows higher second-market sales and a larger refurbishing lot. Interestingly, the integrated system sets the higher price for the refurbished item due to channel conflict issues. Efforts to increase the second-market sales can harm the overall supply chain profit by leading to the decrease in the higher-margin first-market sales. We also show that the difference in pricing decisions and inventory holding cost components allows a better operational performance of the third-party refurbisher's process in the decentralized system. Then, it leads to the better environmental performance in the decentralized system, enhancing the refurbishing rate and sales of refurbished items while reducing scrap costs. By investigating the overall performance of integrated and decentralized supply chains, we offer important implications to practicing supply chain managers by revealing how the third-party refurbisher can help the sustainable operations of a closed-loop supply chain. We also contribute to the body of knowledge by incorporating pricing and lot sizing issues into the context of closed-loop supply chain management.