TECHNICAL NOTE—Optimal Product Acquisition, Pricing, and Inventory Management for Systems with Remanufacturing

Abstract

Acquisition of used products (cores) is central to the success of remanufacturing programs for companies. At the same time, dynamic pricing strategies have been adopted in various industries to better balance supply and customer demand. In this paper, we study the integration of these two aspects of operations together with inventory management for a production/remanufacturing firm. We develop a periodic-review single-product inventory system with price-dependent customer demand. The product return in each period is random but can be actively controlled by the firm's acquisition effort. The firm aims to maximize its total discounted profit over a finite planning horizon by implementing optimal production, remanufacturing, product acquisition, and pricing strategies. We first show that with an exogenous selling price, the optimal production-remanufacturing-disposal policy is simple and characterized by three state-independent parameters. The optimal acquisition effort is decreasing in the aggregate inventory level of serviceable product and cores. Nevertheless, when pricing is an endogenous decision, we find that the optimal policy becomes much more complicated, and its control parameters are state dependent. The optimal selling price is decreasing, whereas the optimal acquisition effort is increasing in the serviceable product inventory level, and both decisions decrease with the aggregate inventory level.

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