The Value of Quality Grading in Remanufacturing

TLDR

Remanufacturing costs rise as return quality falls, while unused returns can be salvaged for a value that also rises with quality. The study addresses tactical production‑planning for remanufacturing with returns of varying quality and evaluates the benefit of a nominal quality‑grading system. The authors formulate a period‑by‑period remanufacturing model with quality‑specific decision variables, derive analytic properties and a greedy heuristic, and validate the approach with data from Pitney‑Bowes and numerical experiments on profit gains and capacity constraints. The model predicts that firms remanufacture exactly the demand each period, and that implementing a nominal quality‑grading system raises profits by about 4% on average, with gains growing with return volume and persisting even under capacity constraints.

Abstract

In this paper we consider a tactical production‐planning problem for remanufacturing when returns have different quality levels. Remanufacturing cost increases as the quality level decreases, and any unused returns may be salvaged at a value that increases with their quality level. Decision variables include the amount to remanufacture each period for each return quality level and the amount of inventory to carry over for future periods for both returns (unremanufactured), and finished remanufactured products. Our model is grounded with data collected at Pitney‐Bowes from their mailing systems remanufacturing operations. We derive some analytic properties for the optimal solution in the general case, and provide a simple greedy heuristic to computing the optimal solution in the case of deterministic returns and demand. Under mild assumptions, we find that the firm always remanufactures the exact demand in each period. We also study the value of a nominal quality‐grading system in planning production. Based on common industry parameters, we analyze, via a numerical study, the increase in profits observed by the firm if it maintains separate inventories for each quality grade. The results show that a grading system increases profit by an average of 4% over a wide range of parameter values commonly found in the remanufacturing industry; this number increases as the returns volume increases. We also numerically explore the case where there are capacity constraints and find the average improvement of a grading system remains around 4%.