Description
Products at the end of life cycles that are thrown away by the consumers can be harmful to the environment, but could create additional profit as each product or part of the materials of the product can be remanu factured or refurbished and then resold in the market. In this paper, using the ink cartridge as an example, we first describe the product return process, then present the mechanisms for coordinating the customers, the retailers and the manufacturers in order to lure the customers to return the used items while simultaneously presenting potential profits for both the retailers and manufacturers.
Reverse Supply Chain Coordination and Design for Profitable Returns
? An Example of Ink Cartridge
By
Hua Bai
A Thesis
Submitted to the Faculty
of the
WORCESTER POLYTECHNIC INSTITUTE
in partial fulfillment of the requirements for the
Degree of Master of Science
in
Manufacturing Engineering
May 2009
Approved:
__________________________________
Professor Amy Z. Zeng, Major Advisor
Associate Professor
Department of Management
__________________________________
Professor Yiming (Kevin) Rong, Co?advisor
Associate Director of Manufacturing and Materials Engineering
Higgins Professor of Mechanical Engineering
ii
Abstract
Products at the end of life cycles that are thrown away by the consumers can be
harmful to the environment, but could create additional profit as each product or
part of the materials of the product can be remanufactured or refurbished and then
resold in the market. In this paper, using the ink cartridge as an example, we first
describe the product return process, then present the mechanisms for coordinating
the customers, the retailers and the manufacturers in order to lure the customers to
return the used items while simultaneously presenting potential profits for both the
retailers and manufacturers. According to characteristics of ink cartridge industry, an
alternative reverse supply chain design is proposed, where partnership is built
between OEM and 3rd party refiller to better attract ink cartridge return. Further
comparison analysis is conducted to find out which design is better under different
circumstances.
Key words?reverse supply chain, coordination, supply chain design, sustainability,
optimization
iii
Acknowledgements
It is my great pleasure to have this opportunity to thank people who have helped
me during my study at Worcester Polytechnic Institute, Massachusetts. I wish to offer
my sincerest gratitude to my advisors, Professor Yiming (Kevin) Rong and Professor
Amy Z. Zeng, who are outstanding advisors in all measures during my work with them.
I’m truly grateful for their instructions during my research and all the kind help with
life.
I’d also like to acknowledge WPI and Mr. Rashid Shaikh from Nypro Inc. for
offering me the opportunity to study and learn from both academic institute and
industry as well.
True thanks to Professor Sharon Johnson for her enthusiastic service on the
committee. Also, I would like to extend my thanks to my roommates Dr. Minfang
Huang, Dr. Jing Hou and Dr. Pin Zhuang for their encouragement and help with my
research.
iv
Table of Content
Abstract…….……… .................................................................................................... ii
Acknowledgements ................................................................................................ iii
Table of Content ..................................................................................................... iv
Chapter 1 Introduction ..................................................................................... 5
1.1 Problem Statement ............................................................................................................... 5
1.2 Methodology ......................................................................................................................... 3
1.3 Thesis Organization ............................................................................................................... 3
Chapter 2 Background / Literature Review ....................................................... 5
2.1 Reverse Supply Chain ............................................................................................................ 5
2.2 Supply Chain Contract ........................................................................................................... 7
Chapter 3 Supply Chain Coordination Design and Analysis ............................. 10
3.1 Problem Define .................................................................................................................... 10
3.2 Modeling/Optimization ....................................................................................................... 11
3.3 Numerical Examples ............................................................................................................ 20
3.4 Conclusion ........................................................................................................................... 25
Chapter 4 Ink Cartridge Reverse Supply Chain Design and Analysis ................. 26
4.1 Problem Define .................................................................................................................... 26
4.2 Reverse Supply Chain Redesign ........................................................................................... 27
4.3 Numerical Examples ............................................................................................................ 30
4.4 Conclusion ........................................................................................................................... 31
Chapter 5 Conclusion ..................................................................................... 33
5.1 Contribution ........................................................................................................................ 33
5.2 Future Work ......................................................................................................................... 34
Reference……..….. ................................................................................................. 36
v
Appendix…………. ........................................................................................... ……..40
Chapter 1 Introduction
1.1 Problem Statement
With environment protection becoming a more and more attention attracted
topic, and the business competence getting fiercer, the concept of sustainability is
widely adopted by companies who aim to be the leader in their dedicated industry.
Sustainable development is not a new term actually. More than a decade ago, United
Nations’ Brundtland Commission (1983) has clearly defined Sustainable development
as the way of development that “meets the needs of the present without
compromising the ability of future generations to meet their own needs”. In other
words, the concept of sustainable is a balance merging of three aspects: financial
impact, environmental impact and social impact. Green management is the
management dedicated to address the environmental impact, which focused on
reducing the company’s carbon footprint and negative impact to the environment.
Supply chains can have an enormous impact on the environment, and hence,
there is an increasing trend towards sustainable and green supply chain design and
management in today’s business world. According to New Zealand Council for
1
Business Sustainable Development, sustainable supply chain management is the
“Management of raw materials and services from suppliers to manufacturer/service
provider to customer and back with improvement of the social and environmental
impacts explicitly considered”. Green supply chain management focuses especially on
the environment and integrates even more explicitly with environmental
management and recognizes the disproportionate environmental impact of supply
chain processes in an organization.
No matter whether these companies are forced by laws and regulations or under
the purpose of financial improvement, more and more companies are putting big
effort in becoming green and sustainable. One of the popular adopted practices is to
manage the company’s reverse supply chain.
In terms of execution and practice, reverse supply chain management is an
effective way for achieving sustainability and being green. Reverse supply chain deals
with products that have reached their life cycle or the ones returned by the final
users, and then aims at best extracting their remaining values by recycling,
remanufacturing, refurbishing, reusing, or other activities in order to protect the
environment. Furthermore, reverse supply chain management can reduce the
negative environmental impacts of waste disposal and resource extraction, and
reduce production costs. Based on a former study, total value of the returned
products in the US is worth $10 billion per year. And that’s only value of products
2
passively returned by consumers, let alone products that can be collected by
manufacturers to retrieve remaining value from. Without any doubt, reverse supply
chains not only directly affect the environment, but also have profound impacts on
the economic performance of each supply chain member on a chain.
In a typical reverse supply chain, there are five major processes: product
collection, tests, reverse logistics, reprocess and remarket. Through research in both
academia and industry, we found that product collection is one of the weakest
processes which have been keeping the reverse supply chain from success. The
reason is obvious: only when the collected quantity is big enough shall the reverse
supply chain generate profit as well as reducing negative environmental impact.
Based on this understanding, this research aims at solving this bottleneck in the
reverse supply chain to enhance supply chain sustainability financially,
environmentally and socially.
In this paper, ink cartridge manufacturing business was used as an example. A
case study on Stapes and its OEM ink cartridge supplier was conducted to examine
the impact of coordination for product collection. In the case, ink cartridge
manufacturer seeks to reclaim as many used ink cartridge from consumers as
possible, so that they can recover the remaining value in the cartridge and reduce its
carbon footprint by proper disposal at the same time. As the intermediary, Staples
helps the manufacturer reclaim ink cartridges by offering 3 dollars coupon to the
3
consumer who returns a used ink cartridge back to Staples store. Goal of this
research is to find out coordination scheme between the two parties for product
collection and find out optimal incentive to offer so that profit of the two parties will
be optimized. Besides the coordination model, a partnership model was also
proposed to collect more cartridges for different market circumstances. Comparison
between the two model was discussed.
1.2 Methodology
To correctly understand reverse supply chain structure and cost distribution in
the case we are examining, interviews were conducted with Staples store manager at
several different locations. By Interviewing ink cartridge manufacturer we were able
to find out cost revenue distribution for the certain product from the manufacturer’s
standpoint and limitations as well as product flow and correct parameter to use in
the numerical analysis. Meanwhile, in order to examine market need and potential, a
survey was sent out to consumers to examine consumer preference on different
levels of incentive and their willingness to return. With above information, reverse
supply chain process was modeled and optimized. Numerical analysis and
comparison were used to illustrate modeling results.
1.3 Thesis Organization
4
In this paper, basic concepts, problem definition and methodology used in the
research are discussed in the first chapter. In the second chapter, an in?depth
literature review is introduced, discussing existing research on reverse supply chain
management. In chapter three, a reverse supply chain coordination design is
discussed with optimized solution. In chapter four, a new business partnership model
is proposed to better reclaim ink cartridge and comparison between the two designs
is analyzed. Conclusion is offered in the fifth chapter with a discussion for future
research directions under the topic.
5
Chapter 2 Background / Literature Review
2.1 Reverse Supply Chain
Reverse supply chain deals with products at the end of their lifecycle. Reverse
supply chain management aims at product value recovery at least cost possible. Not
all reverse supply chains are identical, however, they are all designed to carry out five
main processes: product acquisition, reverse logistics, inspection and disposition,
remanufacturing or refurbishing and marketing (Blackburn, J.D., 2004). To most
companies, product returns have been viewed as a nuisance; as a result, their legacy
today is a reverse supply chain designed to minimize cost (Guide Jr., D., 2003). Most
of academic researches have been focusing on reverse supply chain structure design.
As identified by Souza and Blackburn (Souza, G. Z., 2006), time value affects
commercial product return value recovery greatly, as a large proportion of the
product value usually erodes away due to long processing time. To address that, they
proposed that reverse supply chain structure should follow two fundamental
structures – efficient (centralized) and responsive (decentralized), similar to a
forward supply chain. Jayaraman (Jayaraman, V., 1999) examined the closed?loop
logistics structure using a 0?1 model, solving the location of
6
remanufacturing/distribution facilities, transportation, production and stocking of
the optimal quantities.
Due to characteristics of different products, reverse supply chain should be
managed differently. Yue Jin investigated the profitability of offering remanufactured
products for a monopoly firm and characterized a threshold for the remanufacturing
cost below which it is optimal to offer remanufactured products. Guide Jr. examined
three different cases representing Remanufacture?to?Stock, Reassemble?to?Stock and
Remanufacture?to?Order to identify reverse supply chain management
characteristics for different types of products.
Different from other people who focused on reverse supply chain structure
redesign to minimize cost, Ferguson tried to reduce cost from another direction. He
used coordination method to reduce number of false failure returns, which as a
result, reduces costs associated in the reverse supply chain. In his paper, a target
rebate contract was used to serve as an incentive to the retailer to increase her effort,
thus decreasing the number of false failure returns and potentially increase net sales.
After industry practices and further researches, people start to realize
that remanufacturing could be a profit generating process, depending on the
quantity and quality of product returns and on the demand for remanufactured
products. Guide (Guide Jr., V. D. R., 2003) used cellular telephone industry as an
7
example and examined how acquisition prices and selling prices affect profitability of
a remanufacturing process. This research is a big step in the field of reverse supply
chain management since it firstly takes acquisition management into consideration
for profit generation. However, the acquisition management discussed in this
research is not quite typical, since returned products discussed are acquired from
other parties, e.g. cell phone service providers, charitable foundations or brokers.
However, for most products, there are no such channels for getting return. We view
acquisition management as one of the most important process in a reverse supply
chain and through researches, we found that it is the bottleneck in reverse supply
chain for ink cartridge industry. As a result, the research aims to find optimal
solutions to acquire product return using the example of ink cartridge and to
generalize the acquisition management methods for other industries as well.
2.2 Supply Chain Contract
Best supply chain performance requires orchestrated efforts and actions of the
supply chain players. Unfortunately, conflicting objectives and interests often exist
among the involving supply chain members when they focus only on their own
benefits. Therefore, to align each member’s objectives with the supply chain system’s
objective, an incentive contract specifying a set of transfer payments is established to
coordinate the seller and buyer’s decisions and actions. Such contracts, which are
often called “supply contracts”, are pre?determined between the parties participating
in a transaction and specify terms of trade and a payment transfer scheme. A fairly
8
recent article by Cachon gives an in?depth review of the existing research topics and
findings on this subject.
A large body of research work has been devoted to studying the effectiveness and
performance of numerous contract formats under various conditions. Commonly
used supply contracts have multiple versions, including buy back, quantity flexibility,
revenue sharing and sales rebate contracts – to name a few . These contracts differ
on the basis of the contractual clauses between buyers and suppliers and primarily
concern quantity, time, quality, and price. Of the existing contract models,
revenue?sharing contract is relatively simple for design and administration and has
received enormous attention from many researchers in recent years. When applied
to a two?stage supply chain consisting of a single manufacturer (or supplier) and a
single retailer, the revenue?sharing contract aims to align the two parties’ interests
and courses of actions with the supply chain’s objectives by having the retailer share
a portion of its revenue with the supplier. As a result, the manufacturer’s effort and
willingness to cooperate should increase thus increasing the supply?chain wide
efficiency as well as each party’s resulted profit.
Coordination through revenue?sharing contract is a basic strategy and applicable in a
wide range of situations. In product return management, a recent study relies on a
revenue?sharing contract as the mechanism to promote the collaboration between a
retailer and a manufacturer so that the retailer will put in more efforts in reducing
9
the number of false returns. In this paper, we adopt revenue?sharing contract and
study how this contract can be designed to coordinate the retailers and
manufacturers in managing the returned old ink cartridges for new profit opportunity.
In particular, the key question is to identify the revenue?sharing fraction that is
acceptable by both parties. In addition, since the final consumers need to be
encouraged to return the used ink cartridges, a certain type of financial incentive
must be offered. To this end, we use Staples’ practice, that is, a coupon?based reward
that can be used inside any Staples store for each returned cartridge; however, we
consider the amount of the reward as a decision variable rather than a given factor.
10
Chapter 3 Supply Chain Coordination Design and Analysis
3.1 Problem Define
As introduced in the first chapter, Stapes as the intermediary between
manufacturer and end consumers, offers a 3 dollars coupon to customers who return
a used ink cartridge back to Staples store in order to lure customers to return. The
first question to ask is: Why is Staples doing that? As a retailer, customers return
won’t affect Staples’ revenue. On the other hand, this practice generates a cost for
Staples. But why is Staples willing to do that? If we zoom out and look at the whole
supply chain, the question is not hard to be answered. The real driver in this practice
is the manufacturer itself. Although returned ink cartridges are end?of?life cycle
product, there is still remaining value in them, i.e., some cartridges can be refilled
and reused, some parts of the old cartridges can be used in manufacturing new ones
and even in the worst case, the material of the old cartridges can be recycled and
reused in the molding process for new cartridges. All of the above possibilities make
the reclaiming of used ink cartridges a value added process, which, in other words,
11
will generate revenue for the manufacturer. However, the problem for manufacturer
is that it’s very hard for it to get direct contact with end consumers, hence very hard
for it to attract consumers to return. So, manufacturer goes to retailer for help. As a
result, the end deal is that the retailer will offer incentive to lure customers to return,
and in exchange, manufacturer will share with the retailer the revenue it gained from
the practice. Till now, the first question is answered.
But what is the optimal amount of incentive that the retailer should offer to the
customers to attract enough amount of return? As we can see, if the retailer’s effort
is not big enough to collect enough ink cartridge returns, manufacturer will not be
able to generate a profit to share with the retailer. However, if the retailer’s effort is
too high, profit shared from the manufacturer won’t be able to cover its cost. And as
for the manufacturer, what is the optimal percentage of revenue that it should share
with the retailer so that the retailer is willing to offer the optimal amount of
incentive is another problem to be answered. Only if the two key decision variables
are at their optimal level can the profits for both the retailer and manufacturer
achieve their optimized quantity.
3.2 Modeling/Optimization
To solve the optimization problem raised above, we modeled the reverse supply
chain for ink cartridges. We conducted interviews with Staples store managers and
12
also managers from the manufacturer’s side to correctly locate revenue and cost
along the supply chain. The reverse supply chain for ink cartridge is as shown below:
Fig.1 Ink Caitiiuge Reveise Supply Chain
Customers return their used ink cartridges to different Staples stores. Each Staples
retail store holds the inventory for a while until it gets to a certain amount and then
ships them to the pointed manufacturer owned distribution center. Then,
manufacturer will transport all cartridges in the distribution centers back to
manufacturing facility where the cartridges will go through a series of testing, sorting
and reprocessing process until they are ready to be resold.
To model the process, we simplify the process and make the analysis under the
assumption that there is one retailer, one distribution center and one manufacturer,
as shown below:
13
Fig.2 Simplifieu Reveise Supply Chain Stiuctuie
Factors considered in the model:
From consumer/market side
• r: reward offered to customers that return the item by the retailer, $/unit;
• A: the amount of ink cartridge sold in the market per year, units/year;
• f(r): a customer’s willingness to return, 0
Products at the end of life cycles that are thrown away by the consumers can be harmful to the environment, but could create additional profit as each product or part of the materials of the product can be remanu factured or refurbished and then resold in the market. In this paper, using the ink cartridge as an example, we first describe the product return process, then present the mechanisms for coordinating the customers, the retailers and the manufacturers in order to lure the customers to return the used items while simultaneously presenting potential profits for both the retailers and manufacturers.
Reverse Supply Chain Coordination and Design for Profitable Returns
? An Example of Ink Cartridge
By
Hua Bai
A Thesis
Submitted to the Faculty
of the
WORCESTER POLYTECHNIC INSTITUTE
in partial fulfillment of the requirements for the
Degree of Master of Science
in
Manufacturing Engineering
May 2009
Approved:
__________________________________
Professor Amy Z. Zeng, Major Advisor
Associate Professor
Department of Management
__________________________________
Professor Yiming (Kevin) Rong, Co?advisor
Associate Director of Manufacturing and Materials Engineering
Higgins Professor of Mechanical Engineering
ii
Abstract
Products at the end of life cycles that are thrown away by the consumers can be
harmful to the environment, but could create additional profit as each product or
part of the materials of the product can be remanufactured or refurbished and then
resold in the market. In this paper, using the ink cartridge as an example, we first
describe the product return process, then present the mechanisms for coordinating
the customers, the retailers and the manufacturers in order to lure the customers to
return the used items while simultaneously presenting potential profits for both the
retailers and manufacturers. According to characteristics of ink cartridge industry, an
alternative reverse supply chain design is proposed, where partnership is built
between OEM and 3rd party refiller to better attract ink cartridge return. Further
comparison analysis is conducted to find out which design is better under different
circumstances.
Key words?reverse supply chain, coordination, supply chain design, sustainability,
optimization
iii
Acknowledgements
It is my great pleasure to have this opportunity to thank people who have helped
me during my study at Worcester Polytechnic Institute, Massachusetts. I wish to offer
my sincerest gratitude to my advisors, Professor Yiming (Kevin) Rong and Professor
Amy Z. Zeng, who are outstanding advisors in all measures during my work with them.
I’m truly grateful for their instructions during my research and all the kind help with
life.
I’d also like to acknowledge WPI and Mr. Rashid Shaikh from Nypro Inc. for
offering me the opportunity to study and learn from both academic institute and
industry as well.
True thanks to Professor Sharon Johnson for her enthusiastic service on the
committee. Also, I would like to extend my thanks to my roommates Dr. Minfang
Huang, Dr. Jing Hou and Dr. Pin Zhuang for their encouragement and help with my
research.
iv
Table of Content
Abstract…….……… .................................................................................................... ii
Acknowledgements ................................................................................................ iii
Table of Content ..................................................................................................... iv
Chapter 1 Introduction ..................................................................................... 5
1.1 Problem Statement ............................................................................................................... 5
1.2 Methodology ......................................................................................................................... 3
1.3 Thesis Organization ............................................................................................................... 3
Chapter 2 Background / Literature Review ....................................................... 5
2.1 Reverse Supply Chain ............................................................................................................ 5
2.2 Supply Chain Contract ........................................................................................................... 7
Chapter 3 Supply Chain Coordination Design and Analysis ............................. 10
3.1 Problem Define .................................................................................................................... 10
3.2 Modeling/Optimization ....................................................................................................... 11
3.3 Numerical Examples ............................................................................................................ 20
3.4 Conclusion ........................................................................................................................... 25
Chapter 4 Ink Cartridge Reverse Supply Chain Design and Analysis ................. 26
4.1 Problem Define .................................................................................................................... 26
4.2 Reverse Supply Chain Redesign ........................................................................................... 27
4.3 Numerical Examples ............................................................................................................ 30
4.4 Conclusion ........................................................................................................................... 31
Chapter 5 Conclusion ..................................................................................... 33
5.1 Contribution ........................................................................................................................ 33
5.2 Future Work ......................................................................................................................... 34
Reference……..….. ................................................................................................. 36
v
Appendix…………. ........................................................................................... ……..40
Chapter 1 Introduction
1.1 Problem Statement
With environment protection becoming a more and more attention attracted
topic, and the business competence getting fiercer, the concept of sustainability is
widely adopted by companies who aim to be the leader in their dedicated industry.
Sustainable development is not a new term actually. More than a decade ago, United
Nations’ Brundtland Commission (1983) has clearly defined Sustainable development
as the way of development that “meets the needs of the present without
compromising the ability of future generations to meet their own needs”. In other
words, the concept of sustainable is a balance merging of three aspects: financial
impact, environmental impact and social impact. Green management is the
management dedicated to address the environmental impact, which focused on
reducing the company’s carbon footprint and negative impact to the environment.
Supply chains can have an enormous impact on the environment, and hence,
there is an increasing trend towards sustainable and green supply chain design and
management in today’s business world. According to New Zealand Council for
1
Business Sustainable Development, sustainable supply chain management is the
“Management of raw materials and services from suppliers to manufacturer/service
provider to customer and back with improvement of the social and environmental
impacts explicitly considered”. Green supply chain management focuses especially on
the environment and integrates even more explicitly with environmental
management and recognizes the disproportionate environmental impact of supply
chain processes in an organization.
No matter whether these companies are forced by laws and regulations or under
the purpose of financial improvement, more and more companies are putting big
effort in becoming green and sustainable. One of the popular adopted practices is to
manage the company’s reverse supply chain.
In terms of execution and practice, reverse supply chain management is an
effective way for achieving sustainability and being green. Reverse supply chain deals
with products that have reached their life cycle or the ones returned by the final
users, and then aims at best extracting their remaining values by recycling,
remanufacturing, refurbishing, reusing, or other activities in order to protect the
environment. Furthermore, reverse supply chain management can reduce the
negative environmental impacts of waste disposal and resource extraction, and
reduce production costs. Based on a former study, total value of the returned
products in the US is worth $10 billion per year. And that’s only value of products
2
passively returned by consumers, let alone products that can be collected by
manufacturers to retrieve remaining value from. Without any doubt, reverse supply
chains not only directly affect the environment, but also have profound impacts on
the economic performance of each supply chain member on a chain.
In a typical reverse supply chain, there are five major processes: product
collection, tests, reverse logistics, reprocess and remarket. Through research in both
academia and industry, we found that product collection is one of the weakest
processes which have been keeping the reverse supply chain from success. The
reason is obvious: only when the collected quantity is big enough shall the reverse
supply chain generate profit as well as reducing negative environmental impact.
Based on this understanding, this research aims at solving this bottleneck in the
reverse supply chain to enhance supply chain sustainability financially,
environmentally and socially.
In this paper, ink cartridge manufacturing business was used as an example. A
case study on Stapes and its OEM ink cartridge supplier was conducted to examine
the impact of coordination for product collection. In the case, ink cartridge
manufacturer seeks to reclaim as many used ink cartridge from consumers as
possible, so that they can recover the remaining value in the cartridge and reduce its
carbon footprint by proper disposal at the same time. As the intermediary, Staples
helps the manufacturer reclaim ink cartridges by offering 3 dollars coupon to the
3
consumer who returns a used ink cartridge back to Staples store. Goal of this
research is to find out coordination scheme between the two parties for product
collection and find out optimal incentive to offer so that profit of the two parties will
be optimized. Besides the coordination model, a partnership model was also
proposed to collect more cartridges for different market circumstances. Comparison
between the two model was discussed.
1.2 Methodology
To correctly understand reverse supply chain structure and cost distribution in
the case we are examining, interviews were conducted with Staples store manager at
several different locations. By Interviewing ink cartridge manufacturer we were able
to find out cost revenue distribution for the certain product from the manufacturer’s
standpoint and limitations as well as product flow and correct parameter to use in
the numerical analysis. Meanwhile, in order to examine market need and potential, a
survey was sent out to consumers to examine consumer preference on different
levels of incentive and their willingness to return. With above information, reverse
supply chain process was modeled and optimized. Numerical analysis and
comparison were used to illustrate modeling results.
1.3 Thesis Organization
4
In this paper, basic concepts, problem definition and methodology used in the
research are discussed in the first chapter. In the second chapter, an in?depth
literature review is introduced, discussing existing research on reverse supply chain
management. In chapter three, a reverse supply chain coordination design is
discussed with optimized solution. In chapter four, a new business partnership model
is proposed to better reclaim ink cartridge and comparison between the two designs
is analyzed. Conclusion is offered in the fifth chapter with a discussion for future
research directions under the topic.
5
Chapter 2 Background / Literature Review
2.1 Reverse Supply Chain
Reverse supply chain deals with products at the end of their lifecycle. Reverse
supply chain management aims at product value recovery at least cost possible. Not
all reverse supply chains are identical, however, they are all designed to carry out five
main processes: product acquisition, reverse logistics, inspection and disposition,
remanufacturing or refurbishing and marketing (Blackburn, J.D., 2004). To most
companies, product returns have been viewed as a nuisance; as a result, their legacy
today is a reverse supply chain designed to minimize cost (Guide Jr., D., 2003). Most
of academic researches have been focusing on reverse supply chain structure design.
As identified by Souza and Blackburn (Souza, G. Z., 2006), time value affects
commercial product return value recovery greatly, as a large proportion of the
product value usually erodes away due to long processing time. To address that, they
proposed that reverse supply chain structure should follow two fundamental
structures – efficient (centralized) and responsive (decentralized), similar to a
forward supply chain. Jayaraman (Jayaraman, V., 1999) examined the closed?loop
logistics structure using a 0?1 model, solving the location of
6
remanufacturing/distribution facilities, transportation, production and stocking of
the optimal quantities.
Due to characteristics of different products, reverse supply chain should be
managed differently. Yue Jin investigated the profitability of offering remanufactured
products for a monopoly firm and characterized a threshold for the remanufacturing
cost below which it is optimal to offer remanufactured products. Guide Jr. examined
three different cases representing Remanufacture?to?Stock, Reassemble?to?Stock and
Remanufacture?to?Order to identify reverse supply chain management
characteristics for different types of products.
Different from other people who focused on reverse supply chain structure
redesign to minimize cost, Ferguson tried to reduce cost from another direction. He
used coordination method to reduce number of false failure returns, which as a
result, reduces costs associated in the reverse supply chain. In his paper, a target
rebate contract was used to serve as an incentive to the retailer to increase her effort,
thus decreasing the number of false failure returns and potentially increase net sales.
After industry practices and further researches, people start to realize
that remanufacturing could be a profit generating process, depending on the
quantity and quality of product returns and on the demand for remanufactured
products. Guide (Guide Jr., V. D. R., 2003) used cellular telephone industry as an
7
example and examined how acquisition prices and selling prices affect profitability of
a remanufacturing process. This research is a big step in the field of reverse supply
chain management since it firstly takes acquisition management into consideration
for profit generation. However, the acquisition management discussed in this
research is not quite typical, since returned products discussed are acquired from
other parties, e.g. cell phone service providers, charitable foundations or brokers.
However, for most products, there are no such channels for getting return. We view
acquisition management as one of the most important process in a reverse supply
chain and through researches, we found that it is the bottleneck in reverse supply
chain for ink cartridge industry. As a result, the research aims to find optimal
solutions to acquire product return using the example of ink cartridge and to
generalize the acquisition management methods for other industries as well.
2.2 Supply Chain Contract
Best supply chain performance requires orchestrated efforts and actions of the
supply chain players. Unfortunately, conflicting objectives and interests often exist
among the involving supply chain members when they focus only on their own
benefits. Therefore, to align each member’s objectives with the supply chain system’s
objective, an incentive contract specifying a set of transfer payments is established to
coordinate the seller and buyer’s decisions and actions. Such contracts, which are
often called “supply contracts”, are pre?determined between the parties participating
in a transaction and specify terms of trade and a payment transfer scheme. A fairly
8
recent article by Cachon gives an in?depth review of the existing research topics and
findings on this subject.
A large body of research work has been devoted to studying the effectiveness and
performance of numerous contract formats under various conditions. Commonly
used supply contracts have multiple versions, including buy back, quantity flexibility,
revenue sharing and sales rebate contracts – to name a few . These contracts differ
on the basis of the contractual clauses between buyers and suppliers and primarily
concern quantity, time, quality, and price. Of the existing contract models,
revenue?sharing contract is relatively simple for design and administration and has
received enormous attention from many researchers in recent years. When applied
to a two?stage supply chain consisting of a single manufacturer (or supplier) and a
single retailer, the revenue?sharing contract aims to align the two parties’ interests
and courses of actions with the supply chain’s objectives by having the retailer share
a portion of its revenue with the supplier. As a result, the manufacturer’s effort and
willingness to cooperate should increase thus increasing the supply?chain wide
efficiency as well as each party’s resulted profit.
Coordination through revenue?sharing contract is a basic strategy and applicable in a
wide range of situations. In product return management, a recent study relies on a
revenue?sharing contract as the mechanism to promote the collaboration between a
retailer and a manufacturer so that the retailer will put in more efforts in reducing
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the number of false returns. In this paper, we adopt revenue?sharing contract and
study how this contract can be designed to coordinate the retailers and
manufacturers in managing the returned old ink cartridges for new profit opportunity.
In particular, the key question is to identify the revenue?sharing fraction that is
acceptable by both parties. In addition, since the final consumers need to be
encouraged to return the used ink cartridges, a certain type of financial incentive
must be offered. To this end, we use Staples’ practice, that is, a coupon?based reward
that can be used inside any Staples store for each returned cartridge; however, we
consider the amount of the reward as a decision variable rather than a given factor.
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Chapter 3 Supply Chain Coordination Design and Analysis
3.1 Problem Define
As introduced in the first chapter, Stapes as the intermediary between
manufacturer and end consumers, offers a 3 dollars coupon to customers who return
a used ink cartridge back to Staples store in order to lure customers to return. The
first question to ask is: Why is Staples doing that? As a retailer, customers return
won’t affect Staples’ revenue. On the other hand, this practice generates a cost for
Staples. But why is Staples willing to do that? If we zoom out and look at the whole
supply chain, the question is not hard to be answered. The real driver in this practice
is the manufacturer itself. Although returned ink cartridges are end?of?life cycle
product, there is still remaining value in them, i.e., some cartridges can be refilled
and reused, some parts of the old cartridges can be used in manufacturing new ones
and even in the worst case, the material of the old cartridges can be recycled and
reused in the molding process for new cartridges. All of the above possibilities make
the reclaiming of used ink cartridges a value added process, which, in other words,
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will generate revenue for the manufacturer. However, the problem for manufacturer
is that it’s very hard for it to get direct contact with end consumers, hence very hard
for it to attract consumers to return. So, manufacturer goes to retailer for help. As a
result, the end deal is that the retailer will offer incentive to lure customers to return,
and in exchange, manufacturer will share with the retailer the revenue it gained from
the practice. Till now, the first question is answered.
But what is the optimal amount of incentive that the retailer should offer to the
customers to attract enough amount of return? As we can see, if the retailer’s effort
is not big enough to collect enough ink cartridge returns, manufacturer will not be
able to generate a profit to share with the retailer. However, if the retailer’s effort is
too high, profit shared from the manufacturer won’t be able to cover its cost. And as
for the manufacturer, what is the optimal percentage of revenue that it should share
with the retailer so that the retailer is willing to offer the optimal amount of
incentive is another problem to be answered. Only if the two key decision variables
are at their optimal level can the profits for both the retailer and manufacturer
achieve their optimized quantity.
3.2 Modeling/Optimization
To solve the optimization problem raised above, we modeled the reverse supply
chain for ink cartridges. We conducted interviews with Staples store managers and
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also managers from the manufacturer’s side to correctly locate revenue and cost
along the supply chain. The reverse supply chain for ink cartridge is as shown below:
Fig.1 Ink Caitiiuge Reveise Supply Chain
Customers return their used ink cartridges to different Staples stores. Each Staples
retail store holds the inventory for a while until it gets to a certain amount and then
ships them to the pointed manufacturer owned distribution center. Then,
manufacturer will transport all cartridges in the distribution centers back to
manufacturing facility where the cartridges will go through a series of testing, sorting
and reprocessing process until they are ready to be resold.
To model the process, we simplify the process and make the analysis under the
assumption that there is one retailer, one distribution center and one manufacturer,
as shown below:
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Fig.2 Simplifieu Reveise Supply Chain Stiuctuie
Factors considered in the model:
From consumer/market side
• r: reward offered to customers that return the item by the retailer, $/unit;
• A: the amount of ink cartridge sold in the market per year, units/year;
• f(r): a customer’s willingness to return, 0