Closed Loop Supply Chains A Critical Review, and Future Research (2013)

Decision Sciences © 2012 The Author
Volume 44 Number 1 Decision Sciences Journal © 2012 Decision Sciences Institute

February 2013
INVITED PAPER
Closed-Loop Supply Chains: A Critical

Review, and Future Research*
Gilvan C. Souza†
Kelley School of Business, Indiana University, Bloomington, IN 47405,
e-mail: gsouza@indiana.edu
ABSTRACT
In this article, I present a review and tutorial of the literature on closed-loop supply
chains, which are supply chains where, in addition to typical forward flows, there are
reverse flows of used products (postconsumer use) back to manufacturers. Examples in-
clude supply chains with consumer returns, leasing options, and end-of-use returns with
remanufacturing. I classify the literature in terms of strategic, tactical, and operational
issues, but I focus on strategic issues (such as when should an original equipment man-
ufacturer (OEM) remanufacture, response to take-back legislation, and network design,
among others) and tactical issues (used product acquisition and disposition decisions).
The article is written in the form of a tutorial, where for each topic I present a base
model with underlying assumptions and results, comment on extensions, and conclude
with my view on needed research areas. [Submitted: June 5, 2012. Revised: July 31,
2012. Accepted: August 7, 2012.]
Subject Areas: Closed-Loop Supply Chains, Remanufacturing, Reverse Lo-

gistics, and Sustainable Operations.
INTRODUCTION
In forward supply chains, the flow of material is unidirectional, from suppliers
to manufacturers to distributors to retailers, and to consumers. In closed-loop
supply chains (CLSCs) there are reverse flows of used products (postconsumer)
back to manufacturers. As an example of CLSC, consider Cummins, the original
equipment manufacturer (OEM) of diesel engines based in Columbus, Indiana,
shown in Figure 1. Forward flows consist of new engines and/or engine parts (such
as a water pump or a turbocharger), and reverse flows consist of used products,
and remanufactured products. Remanufacturing is the process of restoring a used
product, postconsumer use, to a common operating and aesthetic standard, which
may involve upgrades to the original product’s functionality. For a diesel engine
* A section of this article (“Tactical issues in CLSCs”) is adapted from a portion of an article published
by INFORMS. Reprinted by permission, Souza, G., Closed-Loop Supply chains with Remanufacturing,
Tutorials in Operations Research, 2008. Copyright 2008, the Institute for Operations Research and the
Management Sciences, 7240 Parkway Drive, Suite 300, Hanover, MD 21076 USA. The author would like
to thank the Associate and Senior Editors for valuable suggestions on a previous draft of this article.
† Corresponding author.
7
8 Closed-Loop Supply Chains
Figure 1: Closed-loop supply chain for Cummins (simplified).
Supplier A
New engine
assembly plant
Distribuon
Remanufacturing Center
Customers
plant A (engines)
Dealer
Supplier B
Used products
Remanufacturing depot
plant B (engine
modules)
Forward flows (engines / parts)
Materials Reverse flows (engines / parts)
recycling
Representave flows only
or part, remanufacturing consists of six different steps: full disassembly, thorough

cleaning of each part, making a disposition decision for each part (remanufacture it
or recycle it for materials recovery), refurbishing parts to restore their functionality
to that of a new part, reassembly, and testing.
Remanufactured engines or parts sell at a 35% discount relative to the corre-
sponding new engine or module. Upon purchasing a Cummins product, customers
receive a discount if they return their old product. Used products (also known as
cores, or returns) are shipped from dealers to Cummins’ depot for used products. At
the depot, customers are given credit for returning the used product, and products
are then shipped to one of two plants: engine remanufacturing (plant A), or module
remanufacturing (plant B). Remanufactured engines are shipped from plant A to
the main distribution center, for distribution to the dealers. Remanufactured parts
are shipped from plant B to either the distribution center, or to the engine remanu-
facturing plant A, depending on forecasts and current needs. Used parts not suited
for remanufacturing are sold to recyclers.
Figure 1 illustrates a CLSC where the main source of cores are end-of-use
returns, when the product has completed a full usage cycle but still has significant
value left. This is in contrast with end-of-life returns, which have reached the end
of their useful life, mostly due to obsolescence or substantial damage, and can only
be recycled for materials recovery. Finally, there are consumer returns, which are
products that have experienced little or no use by consumers—they are a result of
liberal return policies by retailers and are mostly not defective (Ferguson, Guide,
& Souza, 2006).
The focus of the article is thus on the management of CLSCs, which is only
a subset of the much broader field of sustainable operations. I do not provide an
Souza 9
Table 1: Examples of strategic, tactical, and operational issues in CLSCs.

Level Decisions and Issues
Strategic • Network design: location and size of collection centers,

remanufacturing facilities, etc.
• Collection strategy: should customers return products to
retailers or directly to OEMs?
• Should the OEM remanufacture?
• Leasing or selling?
• Trade-in and buy backs programs
• Supply chain coordination: contracts and incentives
• Response to take-back legislation
• Impact of recovery activities on new product design
Tactical • Acquisition of product returns—how many, when, and of
which quality ?
• Returns disposition: remanufacturing, dismantling for spare
parts, or recycling?
Operational • Disassembly planning: sequence and depth of disassembly
• Scheduling, priority rules, lot sizing, and routing in the
remanufacturing shop
exhaustive literature review of the CLSC literature—this would be too ambitious

for a single paper, considering the scope—and when appropriate, I point the
reader to exhaustive reviews in specific topics. Rather, I present a reasonably
comprehensive review written in the form of a tutorial, where for a specific topic I
present a base model formulation, assumptions, and key results, and then comment
on extensions. The choice of papers included here is based on my view of the more
influential research. I include only published papers, except in select topics, where
I happen to know of significant unpublished research. Other general overviews of
CLSC research are given by Guide and Van Wassenhove (2009), and Atasu, Guide,
and Van Wassenhove (2008), albeit not in a tutorial format, and in Ferguson and
Souza (2010), from a managerial perspective.
Table 1 provides an overviewof decisions in CLSCs. Strategic decisions,
such as network design, have a long-term impact (years) on the firm’s operations.
Tactical decisions, such as inventory policies, impact the firm’s operations for
weeks. Operational decisions, such as scheduling, are made daily, and have only
short term impact. I focus on strategic and tactical decisions, as these seem to be
the target of most of the recent research in the area. Strategic decisions also drive
most of the profits and environmental impacts. The reader interested in operational
issues is referred to Lambert and Gupta (2005), Pochampally, Nukala, and Gupta
(2008), and Souza (2008) for reviews.
STRATEGIC ISSUES IN CLSCs

Should an OEM Remanufacture?
Should an OEM offer a remanufactured version of its product? The basic modeling
framework to answer this question uses vertical differentiation models. I describe a
basic model formulation with the underlying assumptions; I then discuss its varia-
tions, extensions, and challenges. Consider a monopolist OEM who manufactures
a (new) product and considers the introduction of a remanufactured version of the
same product. Unit variable cost for the new product is c, and unit variable cost for
the remanufactured product is cr < c. The addition of a remanufactured product
has two implications: (i) a market expansion effect, because the remanufactured
product (priced lower) reaches a segment of consumers who are not willing to
pay for the new product; and (ii) a cannibalization effect, as some consumers who
would have previously purchased the new product switch to the remanufactured
product. Thus, pricing of the two products is critical. The price of the new product
is pn and the price of the remanufactured product is pr < pn , which are deci-
sion variables. One can equivalently work with quantities as decision variables, as
shown below. This is a single period problem, which can be thought of as a period
in an infinite horizon.
Assumption 1: Consumer willingness-to-pay (wtp) for the new product is uni-

formly distributed in the interval [0, 1]. The cumulative distribution function (cdf)
of wtp is thus F (φ) = φ.
Each consumer buys at most one unit of the product. In this model, a con-
sumer of type φ ∈ [0, 1] has a wtp of φ for a new product and her net utility
from purchasing is Un = φ − pn . If the OEM does not offer remanufactured prod-
ucts, and if the market size is normalized to M = 1, then the quantity sold is
qn = M (1 − F (pn )) = 1 − pn , which is the demand curve if there are no reman-
ufactured products. Thus, the assumption of uniform wtp implies linear demand
curves. For many products an inverted S-shaped curve for demand is more realistic:
as price increases from zero, demand decreases slowly up to a certain price level;
demand then sharply decreases with subsequent price increases; at high price lev-
els, subsequent price increases lead to a slow reduction in demand. A logit demand
curve is an example of this type of behavior, and it can be obtained if one assumes a
Gumbel wtp distribution (instead of uniform), that is F (φ) = (1 + e−φ )−1 . Linear
demand curves can be seen as an approximation of the non-linear demand curve if
prices are allowed to vary within a relatively small interval (the middle portion of
the inverted S-shaped curve).
Assumption 2: A consumer of type φ (i.e., wtp for new product equal to φ) has a
wtp for the remanufactured product equal to δφ, where 0 ≤ φ ≤ 1.
Remanufactured and new products are vertically differentiated—consumers

prefer a new unit to a remanufactured one for the same price. If δ = 0, consumers
do not consider the remanufactured product as an alternative to the new product.
If δ = 1, consumers view the new and remanufactured units as perfect substitutes.
Most products are in between these two extremes, so that 0 < δ < 1. There is
considerable evidence that consumers perceive remanufactured products to be of
lower quality than new products. Hauser and Lund (2003) report 35–55% average
discounts for a remanufactured product relative to new. Guide and Li (2010)
empirically derive δ for power tools and Internet routers using online auctions, and
they find δ ∼ 0.85. Subramanian and Subramanyam (2012) compare online prices
Souza 11
of new and remanufactured products, and find that ppnr (a proxy for δ) ranges from
0.60 (for video game consoles) to 0.85 (for some consumer electronics).
A consumer of type φ thus has a net utility Un = φ − pn for the new product
and Ur = δφ − pr for the remanufactured product. If Un > Ur > 0, the consumer
n −pr
buys the new product; solving it for φ yields qn = 1 − p1−δ . If Un < Ur and
Ur > 0, the consumer buys a remanufactured product; solving it for φ yields
n −pr
qr = p1−δ − pδr . These expressions for qn and qr are the demand curves; inverse
demand curves are easily obtained as pn (qn , qr ) = 1 − qn − δqr and pr (qn , qr ) =
δ(1 − qn − qr ). The monopolist’s problem is thus:
max = (pn (qn , qr ) − c)qn + (pr (qn , qr ) − cr )qr (1)
qn ,qr
subject to qn , qr ≥ 0.
It can be shown that the solution to Equation (1) falls into three separate
regions. If ccr ≥ δ, then qr = 0, and thus the OEM does not offer the remanufactured
product. If ccr < δ and c − cr < 1 − δ, then the OEM offers both remanufactured
and new products. If c − cr ≥ 1 − δ, then qn = 0 (but qr > 0); clearly this case is
not realistic because in steady state the firm needs to sell new products to obtain used
products for remanufacturing as one cannot remanufacture a product an infinite
number of times (Geyer, Van Wassenhove, & Atasu, 2007). If the OEM only
sells the new product, and a third-party remanufacturer offers the remanufactured
product, then we have a game where the OEM maximizes the first term and the
entrant maximizes the second term in Equation (1).
Vorasayan and Ryan (2006) use the basic demand framework above for a
monopolist selling new and remanufactured products, however, they explicitly
consider uncertainty in demand when setting the optimal prices in a capacitated
setting through the use of a queuing network model. In Debo, Toktay, and Van
Wassenhove (2005) the firm also optimizes the level of remanufacturability of a
new product (which impacts the remanufacturing cost cr ), and they use an infinite-
horizon model where sales of new products in a period constrain the amount of
remanufacturing in future periods. Ferrer and Swaminathan (2006) also consider a
multiperiod problem; they assume that the OEM’s new and remanufactured prod-
ucts are perfect substitutes (δ = 1), however, a third-party offers a remanufactured
product with an inferior quality. This same competitive scenario is analyzed by
Majumder and Groenevelt (2001) who do not model consumer behavior as above
but equivalently assume linear demand curves. Debo, Toktay, and Van Wassen-
hove (2006) introduce a life cycle perspective into the problem, so that sales of
the new product follow a Bass-type diffusion model, with remanufacturing being
constrained by the amount of new products sold. They find that remanufactur-
ing is more attractive for new products with a slower diffusion rate, due to more
overlap between the new and remanufactured product life cycles, and thus more
opportunity to sell remanufactured products.
Ferguson and Toktay (2006) consider the case where a monopolist OEM
offers remanufactured and new products, as in Equation (1), in addition to the case
where the remanufactured product is offered by a third-party remanufacturer. They
use a two-period setting where remanufacturing in the second period is constrained
by the number of cores available, which is the quantity of new products sold in
the first period (i.e., qr2 ≤ q1 ). They assume that the average cost of remanufactur-
ing increases in the quantity of products remanufactured, that is, cr = ψqr2 —this
assumption is based on convex collection costs; moreover, higher remanufactur-
ing quantities imply the need to use returns with lower quality. This assumption
becomes standard later in the literature. They show how remanufacturing can be
used as a strategic weapon by the OEM to deter the entry of third-party reman-
ufacturers. In Atasu, Sarvary, and Van Wassenhove (2008), there is an additional
green segment, which constitutes a fraction λ of the overall market, and that values
remanufactured and new products equally, so that the monopolist OEM remanufac-
tures if cr ≤ c as long as λ > 0. They also consider the case where the OEM offers
both new and remanufactured products, but competes with a low cost producer
of new products (subscript “c”). Consumers discount the value of the competitive
product by α, and they analyze the case where α ≥ δ, which is the worst case for
remanufacturing. They find that if λ > 0 and cc = αc (that is, the competitor has
no relative cost advantage), then the OEM remanufactures as long as cr is suffi-
ciently low. Focusing on consumer returns, Pince, Ferguson, and Toktay (2012)
show that the monopolist OEM always remanufactures if, in addition to selling the
product as a remanufactured product as in (1), remanufactured products can also
be used to meet demand for warranty replacements, which is common practice.
In their model, consumer returns are Rc = αqn , α < 1, and demand for warranty
replacements is Rw = γ qn + ζ , where ζ is a random variable.
Strategies for product take-back: leasing, trade-ins

The models discussed in the previous section do not explicitly model the manner by
which the firm obtains its product returns for remanufacturing. They simply con-
sider that remanufacturing is constrained by the amount of new products previously
sold by an OEM. This section explores different mechanisms for obtaining product
returns (or preventing third party remanufacturers from obtaining returns), such as
trade-in programs, leasing, and relicensing fees. There is a stream of literature that
determines the firm’s acquisition strategy—how many product returns to acquire
to support remanufacturing, given acquisition costs, demand for remanufactured
products, and other costs. This stream of literature is reviewed later, under tactical
decisions.
The CLSC literature published before 2000 typically made the assumption
that product returns were exogenous and uncontrollable. The focus was on op-
timizing operations (e.g., inventory) given a probability distribution of product
returns in a period. Guide and Van Wassenhove (2001) was one of the first pa-
pers to conceptually introduce the idea of product acquisition management where
an OEM can control the timing, quantity, and quality of product returns through
appropriate economic incentives, in order to increase the profitability of recovery
activities.
Leasing is an attractive mechanism for obtaining used products for remanu-
facturing, as well as controlling the secondary market. The durable goods literature
in economics addresses the profitability of leasing—for a review, see Waldman
(2003)—but without considering the operational decisions for products off-lease.
In the CLSC literature, I am aware of only two papers that study leasing as a
Souza 13
mechanism for take-back. Agrawal, Ferguson, Toktay, and Thomas (2012) com-
pare leasing relative to selling as strategies for the OEM, and they use Assumptions
1 and 2 to model consumer preferences between new and used products. With leas-
ing, used products are remanufactured and resold by the OEM, whereas in the case
of selling, consumers trade used products in the secondary market. They find that
the profitability and environmental impact of leasing relative to selling depends
greatly on the product durability δ and the product’s environmental impact dur-
ing the use stage of the life cycle. Robotis, Bhattacharya, and Van Wassenhove
(2012) use optimal control in a Bass-type diffusion model to determine the op-
timal leasing price and duration when both production and servicing capacities
are limited, in the presence of remanufacturing, where remanufactured and new
products are perfect substitutes, which is the case of Xerox copiers. They find that
if savings from remanufacturing are high, then the firm should offer longer leasing
contracts.
Trade-in programs as a source of returns for remanufacturing have been
explored by two papers: Ray, Boyaci, and Aras (2005), and Li, Fong, and Xu
(2011). Ray et al. (2005) assume that traded-in products can be remanufactured
(so they have a value), and that consumers also have a feel for the value of their
used product. They derive optimal trade-in discounts under three different poli-
cies: a discount dependent on the used product’s age, a discount independent of
the product age, and no trade-in discount. Li et al. (2011) provide a methodol-
ogy for forecasting trade-ins based on customer segmentation and signals (return
merchandise authorizations, or RMAs).
Oraiopoulos, Ferguson, and Toktay (2012) explore the case where an OEM
can directly affect the resale value of her product in the secondary market through
a mandatory software relicensing fee charged to the buyer of the remanufactured
product, where remanufacturing is conducted by a competing third-party firm. They
find that it is suboptimal for the OEM to charge high relicensing fees, even though
lower relicensing fees increase competition for the OEM’s products by making
the remanufactured product more attractive. This occurs because consumers are
strategic and consider the lower resale value for a product with high relicensing
fees when purchasing a new product.
Challenges to Assumptions 1 and 2

Recently, a stream of research has empirically addressed the market for remanu-
factured products, and some of the results run counter to Assumption 2, of linear
demand curves for remanufactured products.
Ovchinnikov (2011) conducts a lab experiment to study the impact of prices
of new and equivalent remanufactured laptops on the sales of remanufactured lap-
tops, that is, the cannibalization effect. The cannibalization effect is measured by
the fraction of customers who switch from buying new to buying an equivalent
remanufactured product for a given percentage discount in the price of the reman-
ufactured product relative to the new product’s price. Assumption 2 indicates that
this fraction should be monotonically increasing in the remanufactured product’s
price discount, but Ovchinnikov finds an inverse U-shaped curve, indicating that
consumers may infer a low quality of the remanufactured products if it is priced
too low. Thus, higher price discounts may decrease cannibalization, particularly
for high-end segments.
Using a lab experiment, Agrawal, Atasu, and van Ittersum (2012) conclude
that the presence of iPods remanufactured by the OEM (Apple) decreases the
wtp for new iPods, because the remanufactured product induces consumers to
infer a lower quality for the new product. This negative impact is weakened if
the product is remanufactured by a third party; it is thus possible that third-party
remanufacturers can actually benefit the OEM. This finding is in contrast with
the research that originated from Assumptions 1 and 2, where the remanufactured
product has no impact on the wtp for the new product, which concludes that
third-party competition can only be detrimental to the OEM.
This recent stream of empirical research in the market for remanufactured
products is a welcome addition in a field that has been heavily prescriptive and
normative. One must be careful, however, about not reading too much into the
results. Behavioral studies, in particular, do not simulate exact market conditions—
there is a gap between purchasing intent and actual purchasing behavior. This is in
contrast with studies that use actual sales data (e.g., Guide & Li, 2010; Subramanian
& Subramanyam, 2012), which I believe to be ideal. In addition, studies are focused
on a particular product category (such as iPods), and that does not mean the results
can be extended to other products, such as medical equipment and automotive
parts.
Product Take-Back Legislation

Take-back legislation is based on the concept of extended producer responsibility
(EPR), which holds manufacturers physically and financially responsible for tak-
ing back used products at the end of their useful life, and disposing of them in
an environmentally friendly manner. Take-back legislation exists for automobiles,
appliances, packaging, and electronics, in different parts of the world. Because
of the exponential increase in electronic waste (e-waste) generation, however,
the bulk of the research has focused on take-back legislation for e-waste. The
Waste Electrical and Electronic Equipment (WEEE) directive in the European
Union is an early and important example of take-back legislation, as it regu-
lates 11 different product categories as diverse as lamps, medical equipment, cell
phones, and large household appliances. There are over 25 states in the U.S. with
some form of take-back legislation for e-waste, and some are narrowly targeted to
computers.
An advance recycling fee (ARF) is a fee collected from consumers or pro-
ducers at the time of sale. The fees are used to subsidize recycling of obsolete
products collected by municipalities. An example of such legislation is the state
of California. In contrast, the WEEE directive, along with the majority of the
other U.S. states’ legislation, stipulates collection targets (a minimum amount to
be collected as a percentage of sales) and recycling targets (a minimum percentage
of products to be recycled for materials or energy recovery, from the amount col-
lected). In the WEEE directive, the overall collection rate for a given year is 65%,
in weight, of the average amount sold in the previous two years, starting in 2016.
Souza 15
The recycling rate for IT and telecommunications is 70%, and the total recovery
rate (recycling plus energy) is 80%. For details on take-back legislation around the
world, as well as a comprehensive literature review, the reader is referred to Atasu
and Van Wassenhove (2012), and Atasu and Van Wassenhove (2010), respectively.
I illustrate this stream of research with a base model, and commment on extensions
and variations.
Atasu, Van Wassenhove, and Sarvary (2009) consider the design of take-
back legislation that maximizes society welfare W . The policy maker’s decision
variables are the collection rate τ (defined as the fraction of products sold that
are collected), the recycling rate ω (defined as the fraction of products collected
that are recycled), and a subsidy σ given to each manufacturer per unit that is
collected and recycled. There are n identical manufacturers competing Cournot-
style on a market of size normalized to one. Each manufacturer’s expected profit is
πM = q(p(q) − c − ϕ(ω, τ ) + σ ωτ ), where p(q) is the equilibrium price, c is the
unit production cost, ϕ(ω, τ ) is the take back cost per unit (convex increasing in ω
and τ ), and σ is the per unit subsidy. The equilibrium price is determined through
p(q) = 1 − nq, which yields the profit maximizing output for each manufacturer
q = 1−c−ϕ(ω,τn+1
)+σ ωτ
, and so nq is the total output. The total profit across all manu-
facturers is M = nπM . Consumer surplus is C = nq(1−p(q)) 2
. The environmental
impact of such legislation is proportional to the number of products not recycled,
or E = −(1 − ωτ )nq, where is the environmental impact per unit. Thus, the
policy maker solves the following problem:
max W = M + C + E − σ ωτ nq − ατ 2 (2)
ω,τ,σ
subject to 0 ≤ ω, τ ≤ 1,
where ατ 2 is the advertising cost incurred by the policy maker in order to achieve
a collection rate τ (collection is typically done by municipalities). They find
that the policy maker’s optimal collection rate is decreasing in collection and
recycling costs ϕ, and increasing in the degree of competition n and the cost to
the environment . This shows that the design of take-back legislation should take
into consideration a product’s environmental impact, as well as industry structure,
in order to achieve better societal outcomes.
EPR laws typically require the brand manufacturer (OEM) to have full re-
sponsibility for reverse logistics and recycling costs, so other members of the sup-
ply chain (e.g., the OEM’s suppliers) are not typically directly impacted. Jacobs
and Subramanian (2012) study the impact of τ and ω on supply chain profits and
environmental impacts when responsibility for product take-back is shared across
supply chain members. They use a two-echelon model, with a single manufacturer
and a single supplier, and a linear demand curve p(q) = a − bq. They model the
flows of virgin and recycled materials in the supply chain, for given τ and ω set by
legislation, however the manufacturer or supplier may elect to recycle at a higher
rate than the minimum mandated rate ω, if that is more economical than using
virgin materials. Collection cost is convex increasing in the collected quantity, but
recycling cost is concave in the recycled quantity, reflecting economies of scale;
there is also a disposal cost for units collected but not recycled that is linear in
the disposed quantity. They show that implementing regulation that requires some
level of sharing for product take-back responsibility, such as a shared collection
rate between supplier and manufacturer, may increase profits for all supply chain
parties, resulting in increased society welfare W . That, however, may come at the
expense of increased virgin material consumption.
Another stream of research has modeled a more granular reverse supply chain
for recycling e-waste. Nagurney and Toyasaki (2005) propose a network-based
modeling framework and algorithm for the numerical computation of equilibrium
prices and product flows in a reverse supply chain with four tiers: e-waste sources,
collectors, processors of e-waste (e.g., smelters), and demand nodes for the re-
cycled materials. Hammond and Beullens (2007) extend the model by Nagurney
and Toyasaki (2005) by incorporating the forward supply chain (for newly manu-
factured products), and hence their model includes the entire CLSC. Their model
is in the context of the WEEE directive for e-waste. Limited numerical examples
indicate that legislation that sets minimum recovery levels for product take-back
(like the WEEE) can increase recycling and recovery activities, and thus can create
economic growth. Toyasaki, Boyaci, and Verter (2011) present a model of a CLSC
with two manufacturers, two recyclers, and a market for recycled material, in
the context of take-back legislation. The manufacturers compete in the consumer
market, and they assume linear demand curves with substitution effects so that
demand for the product sold by manufacturer j is qj (p1 , p2 ) = aj − pj + ξp3−j
for j = 1, 2. Recyclers compete with one another, and charge profit-maximizing
recycling fees. There are economies of scale in recycling, so the recycling cost for
recycler i is ηi qi − θqi2 . They analyze two schemes: in a monopolistic scheme, a
third-party NGO receives the used products collected by the manufacturers, con-
tracts with the two recyclers, and allocates e-waste among them; it then charges
recycling costs back to manufacturers according to their respective market share.
This is similar to the e-waste take-back system used in Belgium or Sweden. In
a competitive scheme, there is no third-party NGO, and manufacturers contract
with recyclers directly for their own collected e-waste mandated by the legislation.
They analytically show that the average recycling fee charged in the monopolistic
scheme is always higher than in the competitive scheme, and if economies of scale
in recycling are not too strong (θ not too high), then recyclers are also better off in
a competitive scheme.
Another stream of literature analyzes the key question as to whether take-
back legislation provides incentives for manufacturers to design greener products.
Take-back legislation can be in the form of collective producer responsibility (CPR)
or individual producer responsibility (IPR). In CPR there is a collective collec-
tion target (across all manufacturers), whereas in IPR each manufacturer is only
responsible for its own waste. Although the WEEE directive was originally de-
signed as IPR, it was implemented as CPR in practice, due to logistical difficulties
associated with sorting e-waste at collection points. Plambeck and Wang (2009)
show that IPR legislation indeed results in manufacturers designing products with
higher recyclability. In addition, they show that an ARF decreases the frequency
of new product introductions, and consequently decreases the amount of e-waste,
benefiting the environment. Using different model setups, Atasu and Subramanian
Souza 17
(2012) and Esenduran and Kemahlioglu-Ziya (2012) also demonstrate that IPR re-
sults in greener products (more easily recyclable) than CPR because manufacturers
have incentives to free-ride on other manufacturers greener products under CPR.
However, CPR may provide better operational cost efficiency, due to the impact of
economies of scale in recycling costs.
The literature on take-back legislation is alive and well, although most of it
is based on relatively simple economic models that overlook some of the details.
I agree with Atasu and Van Wassenhove (2012), who indicate the need for more
research into implementation of take-back legislation (the WEEE directive was
implemented differently in the member states), and producer response. In other
words, details matter. In addition, I believe that any modeling effort in this area
should take a life cycle assessment (LCA) perspective, and report on environmental
impacts of producers’ choices, not only in terms of virgin material consumption
(a standard metric reported in the literature), but manufacturing, distribution, use
with consumers, and end-of-life. Examples of papers using LCA include Atasu
and Souza (2012), and Raz, Druehl, and Blass (2012); both papers focus on new
product design, as we discuss next.
Impact of Product Recovery on New Product Design

There is a small but growing stream of literature that studies the impact of product
recovery (remanufacturing and/or recycling) on the design of new products. This
stream of literature uses predominantly stylized analytical models, and to keep
tractability, several papers capture product design in a uni-dimensional variable s
called product quality. Quality can be interpreted as a key performance measure for
which consumers are willing to pay. As an example, for a printer it could be printing
speed; for a digital camera it could be the quality of the picture as measured in
megapixels. Assumption 1 is slightly modified such that a consumer of type φ has a
net utility for a product of quality s with price level p equal to U = φs − p (Mussa
& Rosen, 1978; Moorthy, 1984). Another common assumption is that the product’s
variable production cost is quadratic in quality cs 2 . Thus, a monopolist not engaged
in product recovery solves the problem maxp,s (1 − ps )(p − cs 2 ), where 1 − ps
is the quantity sold for a market with size normalized to one (product is sold
to all consumers with positive net utility, U > 0). This yields s ∗ = 1/3c, and
p ∗ = 2/9c.
Atasu and Souza (2012) introduce product recovery, so that a fraction τ of
total demand q is taken back at a collection cost α(τ q)2 , either as a result of
take-back legislation or as a profitable activity, and used in the production of the
new product as recycled material, or remanufactured components. The production
cost for q units is ((c − rτ )s 2 )q + ντ q. Here r is the per unit cost saving from
recovery and reuse of components that are quality inducing, and ν is the unit
processing cost (for used products) plus the cost of recycling components that are
not quality inducing; if there is profitable recovery then ν < 0. They show that, in
general, the monopolist designs a product with higher quality than in the case of
no recovery: s ∗ ≥ 1/3c. These results also hold when recovery is in the form of
remanufacturing, and remanufactured and new products are imperfect substitutes
(Assumption 2). Using a similar modeling framework, but a two-period model,
Orsdemir, Kemahlioglu-Ziya, and Parlakturk (2011) study a situation where an

OEM has a new product (offered in both first and second periods) that competes
with a remanufactured product offered by a third-party remanufacturer (3PR),
which is offered only in the second period. The remanufactured product’s quality
level (and hence its cost) is dependent on the quality level of the OEM’s new
product. In addition, the OEM—through its pricing and quality choices in the first
period, which impact sales—can limit the number of cores that the 3PR can access
for remanufacturing in the second period. They show that the OEM can deter the
3PR by serving high valuation segments with a higher quality product (which
implies a higher price), because this strategy limits the amount of cores available
for remanufacturing by the 3PR in the second period.
In Subramanian, Ferguson, and Toktay (2012), an OEM has an existing
product line with two products: a high-end product with quality sh , and a low-end
product with quality sl . Qualities are given; the decision variable here is binary:
whether to implement component commonality in the product line or not. Com-
monality impacts the valuation of new products due to consumers’ perception of
similarity between high and low end products: a consumer’s perceived valuation
for the high and low quality products with commonality are sh − and sh +
respectively. Following Assumption 2, a consumer’s perception of quality for a
remanufactured product is δsh without commonality, but δ(sh − ) with common-
ality. Commonality also impacts the marginal production costs for the high and low
quality products as ch − m and ηcl − m, respectively, where m indicates the cost
savings attributed to commonality, and η > 1 is the overdesign penalty, as com-
mon components are over designed for the low-end product. Finally, commonality
lowers unit remanufacturing cost to αcr , α < 1. The authors compare the firm’s
profit with and without commonality for two cases: one where the firm remanufac-
tures, and one where remanufacturing is conducted by a third-party. Among other
findings, they conclude that a firm may not decide to introduce commonality in its
product line if α is low and remanufacturing is done by a third party, because the
third party firm reaps the commonality savings.
Yenipazarli and Vakharia (2012) consider a monopolist seeking to tap into a
growing segment of green consumers. The firm has an existing product with some
green features, but these are not advertised to consumers. Their model follows the
quality choice setup of Moorthy (1984), but where s is now interpreted as the prod-
uct’s green quality. To tap the green segment, the firm has a choice of two strategies:
(i) under the accentuate strategy, the firm advertises the existing product’s green
quality s1 at an advertising cost γ s12 /2, or (ii) under the architect strategy, the firm
redesigns the product to a green quality level s2 at a cost τ s22 . The potential market
for a product of green quality si is βi si , where βi is a strategy-specific parameter.
They find that the choice between the accentuate and architect strategies depends
critically on the ratio between marginal cost and demand elasticity parameters β1
and β2 .
In Galbreth, Boyaci, and Verter (2012), a monopolist sells a product that
undergoes steady innovation over time, such that in each period a fraction β < 1
of the product must be redesigned (β is given). The product is sold in three ver-
sions: new, upgraded (used products remanufactured to the same functionality
Souza 19
as new products, incorporating the redesign), and remanufactured (used products

remanufactured to their original functionality). Building on Assumption 2, a con-
sumer of type φ has net utility φ − pn for a new product, δφ − pu for an upgraded
product, and δ(1 − β)φ − pr for the remanufactured product. Unit production
costs are c = c0 + β(c1 − c0 ) + K(1 − β) + d, cu = βc1 , and cr = βc0 for the
new, upgraded, and remanufactured products, respectively. Here, c0 is the unit
manufacturing cost if β = 0, c1 is the unit manufacturing cost if β = 1, K is
an extra variable cost of making a product with entirely reusable components
(β = 0), and d is unit cost of disposal. Similarly to Equation (1), the firm decides
on the profit-maximizing quantities for each of the products in a single period. A
key finding is that the optimal amount of product reuse (remanufacturing and/or
upgrading) decreases as the rate of innovation β increases.
In Raz et al. (2012), the firm can invest effort in designing a product to
improve environmental performance (decrease energy consumption) in both the
manufacturing (e1 ) and use (e2 ) stages of the life cycle. There is a quadratic cost
of effort. Improving environmental performance in manufacturing also decreases
unit manufacturing cost (c(e1 ) = co (1 − γ e1 )), whereas improving environmental
impact in use increases product quality, which increases mean demand in the
period (D(e2 , ) = a − k(1 − be2 )p + , where is a random variable). Using a
newsvendor framework, the firm decides upon the production quantity q and efforts
e1 and e2 , where leftover units can be recycled with a positive salvage value. Due
to the cost reduction impact of the effort e1 , the firm produces more than if it does
not invest in design for environment (e1 = e2 = 0), and as a result, there can be
a higher environmental impact overall, despite the lower environmental impact
per unit in manufacturing and use. Raz et al. (2012) does not focus, however, on
designing for remanufacturability or recyclability. Other papers in this stream of
research discussed in previous sections include Debo et al. (2005), who introduces
a remanufacturability design variable that impacts the remufacturing cost cr , and
Plambeck and Wang (2009) who investigate the impact of take-back legislation on
the frequency of new product introductions.
I believe this stream of research overall has significant potential, due to
its importance; based on my own experience with firms such as Volkswagen
and Cummins, companies do design products with CLSC considerations, such
as remanufacturability. Some design protocols place a high weight on recyclabil-
ity, such as Cradle to Cradle (www.mbdc.com). More generally, though, firms
design products with sustainability considerations, such as materials choice (tox-
icity, availability, recyclability, etc.), energy consumption, ease of disassembly,
packaging, and so forth. Yet, research here—from a business, not engineering,
perspective—has only started to scratch the surface. Most of the research, as seen
above, uses a single abstract parameter or variable to indicate a product’s recycla-
bility or quality, and it is for the most part an extension of traditional marketing
models of quality choice. Although it is easier said than done, I believe that higher
impact research would need to either take a more empirical approach, or use more
flexible and comprehensive choice models, such as discrete choice, or both. This is
because designing a product involves trade-offs along multiple design dimensions,
but that is not captured in existing research.
CLSC Network Design

In forward supply chains, facility location models provide the optimal configuration
for the chain. A typical location model determines the optimal number, location,
and size of warehouses that minimizes distribution and fixed costs, for a given
network and size of customers. In a CLSC, the firm also locates consolidation
centers for returns and recovery facilities (remanufacturing, recycling, or disposal).
Consolidation centers aggregate returns from various sources, test them and route
them to recovery facilities.
Exhaustive reviews of CLSC network design models are provided by Aras,
Boyaci, and Verter (2010), and Akcali, Cetinkaya, and Uster (2009). I illustrate
this stream of research with the general formulation presented by Fleischmann,
Beullens, Bloemhof-Ruwaard, and Van Wassenhove (2001). It includes four sep-
arate levels: (i) plants, where new products are manufactured and/or recovery
takes place; (ii) warehouses, for distribution of new and/or recovered products;
(iii) consolidation centers; and (iv) customers. The flow is as follows: new and/or
recovered products are shipped to customers via warehouses while returns are
shipped to recovery facilities (or disposal) via consolidation centers. For exam-
ple, Hewlett-Packard has a returns consolidation and testing center in Tennessee
(Guide, Souza, Van Wassenhove, & Blackburn, 2006), to which all consumer
returns across the U.S. are sent. After testing, returns are shipped to different
remanufacturing facilities.
Indexes
i Plant locations, i ∈ I ; I0 = I {0}, where i = 0 is the disposal option
j Potential warehouse locations, j ∈ J
k Fixed customer locations, k ∈ K
l Potential consolidation center locations l ∈ L
Variables
f
Xij k Fraction of customer k’s demand served from plant i through warehouse j
r
Xkli Fraction of customer k’s returns returned to plant i through consolidation center l
Uk Unsatisfied fraction of customer k’s demand
Wk Uncollected fraction of customer k’s returns
p
Yi Indicator variable for opening plant i (Yjw and Ylr similarly defined)
Costs
f
cij k Unit cost (transportation, production, handling) of serving k from i via j
r
ckli Unit cost of returns (transportation, handling) from k to i via l
r
ckl0 Unit disposal cost (including collection, transportation, handling) for k via l
cku Unit penalty cost for not serving customer k’s demand
ckw Unit penalty cost for not collecting customer k’s returns
p
fi Fixed cost for opening plant i (fjw and flr similarly defined)
Parameters
Dk Demand for customer k
Rk Returns from customer k
γ Minimal disposal fraction
Souza 21
The firm solves the following mixed-linear integer program (MILP) to opti-
mally design its CLSC:
p p f f
T C = min fi Yi + fjw Yjw + flr Ylr + cij k Dk Xij k
i∈I j ∈J l∈L i∈I j ∈J k∈K

+ r
ckli r
Rk Xkli + (cku Dk Uk + ckw Rk Wk ) (3)
k∈K l∈L i∈I0 k∈K
s.t.
f
Xij k + Uk = 1 ∀k (4)
i∈I j ∈J

r
Xkli + Wk = 1 ∀k (5)
l∈L i∈I0
f
r
Rk Xkli ≤ Dk Xij k ∀i (6)
k∈K l∈L j ∈J k∈K

γ r
Xkli ≤ Xkl0
r
∀k, ∀l (7)
i∈I0
f p
Xij k ≤ Yi ∀i, ∀k (8)
j ∈J
f
Xij k ≤ Yjw ∀j, ∀k (9)
i∈I

r
Xkli ≤ Ylr ∀k, ∀l (10)
i∈I0
p
Yi , Yjw , Ylr ∈ 0, 1 ∀i, ∀j, ∀l (11)
f
0 ≤ Xij k , Xkli
r
, Uk , Wk ≤ 1 ∀i, ∀j, ∀k (12)
The objective (3) minimizes the CLSC’s fixed and variable costs. Flow bal-
ancing constraints for demand and returns at each customer are given in Equations
(4) and (5). Constraint (6) represents flow balancing constraints at each plant; the
gap between outgoing and incoming products represents new production. Con-
straint (7) requires that disposal be a minimum percentage of all returns; this
is a technical requirement because not all returns can be recovered. Constraints
(8)–(10) ensure that flows from a facility only happen if the facility is open.
This formulation is quite general and captures many different scenarios. For
example, if the firm decides on two separate networks for reverse and forward
chains, it solves two different problems: one where Rk = 0 and the other where
f
Dk = 0. Through the value of cij k relative to cklir
and cku , plants can be dedicated
solely to recovery or to new product manufacturing (e.g., Barros, Dekker, &
Scholten, 1998). If there are no legislative constraints on collection quantities
(Jayaraman, Guide, & Srivastava, 1999; Realff, Ammons, & Newton, 2004), then
ckw = 0; otherwise it can be made as large as desired (Spengler, Puechert, Penkuhn,
& Rentz, 1997). Sahyouni, Savaskan, and Daskin (2007) propose an efficient
Lagrangian relaxation-based algorithm to solve this problem. Future research in
this area could address specific applications, for example, how take-back legislation
impacts network design for a particular industry.
CLSC network design approaches other than the MILP optimizaton model
have also been used. Guide et al. (2006) use queuing networks to demonstrate the
value of speed in recovery—which is not captured in the MILP models above—
on profitability for time-sensitive consumer returns such as consumer electronics.
Their paper is based on data from two firms, Hewlett-Packard and Bosch. Wo-
janowski, Verter, and Boyaci (2007) use a continuous model for network design
(where population is represented by a density) to study the effectiveness of a
deposit-refund scheme in increasing a firm’s collection rate. Increasing the collec-
tion rate is important when there are mandatory minimum collection targets as in
take-back legislation. They show that a deposit-refund scheme increases the firm’s
collection rates for products with a high return value. Collection strategy is another
example of a network design problem: should used products be collected by the
OEM, the retailer, or by a third party? This coordination issue is analyzed next.
Incentives and Coordination in CLSCs

This stream of literature considers problems arising from the interaction of par-
ties with non-aligned objectives in CLSCs. I illustrate the model that addresses
“false failures” consumer returns by Ferguson et al. (2006). False failures are
non-defective consumer returns, returned to the manufacturer due to liberal return
policies (“no questions asked”) by powerful retailers. For example, about 80% of
returned Hewlett-Packard printers in the U.S. are false failures. Ferguson et al.
suggest that a considerable number of false failure returns can be avoided through
increased retailer effort during the sales process, such as spending more time with
the customer to suggest a product that best fits his or her needs, however, most
of the benefits of reduction accrue to the manufacturer, who incurs most reverse
logistics costs.
Specifically, consider a CLSC comprised of a manufacturer and a retailer
under a single-period setting. If the retailer exerts a (sales) effort ρ ≥ 1 at a
2
cost aρ2 then the number of false failure returns is X(ρ), a random variable with
E[X(ρ)] = βρ ; ρ = 1 is the baseline effort level such that β is the baseline expected
number of false failures in the period. Avoiding one false failure return (through
some retailer effort ρ) implies a profit increase to the manufacturer πm , which
is a combination of the return’s processing costs (logistic cost, refurbishing if
necessary, and remarketing cost). For the retailer, avoiding a false failure implies a
profit increase of πr < πm , which is a combination of the retailer’s processing cost
and the expected foregone margin (there is a probability that the consumer walks
Souza 23
away after returning the product). If the retailer and manufacturer are vertically
integrated (i.e., a centralized supply chain), the retailer’s optimal effort level is
found by solving:

β aρ 2
max (ρ) = (πr + πm ) β − − . (13)
ρ ρ 2
The solution to this problem is ρ C = [ (πr +π

1
m )β 3
a
] . If the retailer and manu-
facturer are separate parties, then the retailer’s optimal effort is given by solving
Equation (13) under πm = 0, which yields ρ D < ρ C , so the retailer does not exert
the system-optimal level of effort. To coordinate the supply chain, Ferguson et al.
propose a target rebate contract, where the manufacturer pays the retailer a fixed
amount u per return below a set target T . The retailer’s profit under the contract
2
is r (ρ) = πr (β − βρ ) − aρ2 + uEX [T − X(ρ)]+ , where the last term is the ad-
ditional payment by the manufacturer for false failures under the target T . The
values for (u, T ) are chosen such that the retailer’s optimal effort level ρ ∗ , found
through r (ρ ∗ ) = 0, results in the centralized solution, that is, ρ ∗ = ρ C . Ferguson
et al. show that this contract is Pareto improving in a wide range of scenarios for
normal and uniform distributions of X(ρ).
The subject of consumer returns has been addressed by other papers in
the literature (Ketzenberg & Zuidwijk, 2009; Su, 2009; Shulman, Coughlan, &
Savaskan, 2009, 2011), although the focus of these papers is about the design of
optimal returns policies for retailers: the combination of retail price and restocking
fee that maximize retailer profitability. A restocking fee is a assessed on consumers
for a product returned to the retailer; higher restocking fees reduce consumer
returns but have a negative impact on sales. Restocking fees are imposed in order
to decrease the operational costs associated with returns, as illustrated in the model
by Ferguson et al. above.
Savaskan, Bhattacharya, and Van Wassenhove (2004) investigate the choice
of a collection strategy in a CLSC where new and remanufactured products are
perfect substitutes, demand is a linear function of price (as in Assumption 1),
and remanufacturing saves costs for the OEM. The retailer can exert effort to
collect used products and transfer them to the OEM for remanufacturing at a
unit transfer price w; another alternative is for the manufacturer to collect used
products herself; and finally another alternative is for the OEM to hire a third party
for collection. They find that the retailer collection is preferred. Savaskan and Van
Wassenhove (2006) extend these results to the case of competing retailers and find
that retailer collection is still preferred for products where retailers compete on
prices; manufacturer collection is preferred, however, for products where retailers
have less impact on prices (e.g., toner cartridges). Karakayali, Emir-Farinas, and
Akcali (2007) consider a CLSC comprised of a collector and a remanufacturer.
The collector acquires used products, which have different quality grades (indexed
by j ), through a unit acquisition price aj (a decision variable) and sells them to
the remanufacturer at a wholesale price wj . The remanufacturer remanufactures
a single part and sells it in the market at a price pr (decision variable). Demand
functions for number of used products acquired and number of remanufactured
parts sold are linear functions of the respective prices aj and pr . They analyze
the centralized case where the remanufacturer and collector are the same entity,
and two decentralized cases, where the remanufacturer and the collector act as
Stackelberg leaders in setting wj . They show that a two-part tariff (comprised of
a unit wholesale price wj and a fixed payment) in the decentralized case can be
used to coordinate the channel, that is, to achieve the same collection efficiency as
the centralized case.
There is some opportunity for research in this stream, particularly when
combined with take-back legislation. For example, how does take-back legislation
shape incentives for players in a CLSC, such as municipalities, collectors, recyclers,
OEMs, retailers, and suppliers? In addition, the literature on consumer returns is too
prescriptive, and there is not enough empirical research demonstrating the impact
of return policies on the behavior of consumers, manufacturers, and retailers.
TACTICAL ISSUES IN CLSCs

As seen in Table 1, most tactical issues in CLSCs revolve around product (returns)
acquisition, and returns disposition, where disposition options include remanufac-
turing and salvaging (recycling or dismantling for spare parts). Remanufacturing
planning has the peculiar characteristic of non-uniformity of inputs (returns), which
has several implications: the firm needs to separate returns into different quality
categories (grading); this leads to an uncertain mix of inputs in each period, as
quantity, quality, and timing of returns are typically uncertain. More importantly,
different quality grades may have different cost and processing requirements (with
capacity implications), and graded returns can be salvaged or disposed of at poten-
tially different salvage values depending on their quality. Some returns are unfit
for remanufacturing, and need to be disposed of. I present here some of the more
basic models in this large body of literature, and discuss some of the variations and
extensions. For more comprehensive overviews, see Fleischmann, Galbreth, and
Tagaras (2010), Inderfurth, Flapper, Lambert, Pappis, and Voutsinas (2004),
and Guide (2000). I divide the discussion in three parts: single period acqui-
sition and disposition models, multiperiod disposition models, and multiperiod
capacitated planning models.
Single Period Acquisition and Disposition Models

This stream of research finds the optimal acquisition plan—how many returns to
acquire—and/or the optimal disposition plan in a single period, when there is some
source of uncertainty. Some papers assume only two categories of returns (good or
bad); good units are remanufactured at the same cost whereas bad units are salvaged
(Ferrer 2003; Zikopoulos & Tagaras, 2007). Other papers assume more granularity
in the quality of incoming returns, which implies different remanufacturing costs,
and focus on the optimal acquisition plan for product returns (Guide, Teunter,
& Van Wassenhove, 2003; Bakal & Akcali, 2006; Galbreth & Blackburn, 2006,
2010). I illustrate this stream with the integrated acquisition and disposition model
by Zikopoulos and Tagaras (2007), and comment on extensions.
Assume the firm has collected R returns, and the sorting procedure produces
r remanufacturable returns (thus, R − r returns are non-remanufacturable and
Souza 25
should be disposed of at a unit cost cd ). Out of the r remanufacturable returns,

the firm decides upon the remanufacturing quantity zr ≤ r to meet stochastic
demand D, which has a cumulative distribution function (cdf) F (·). Unit sales
revenue is pr , remanufacturing cost is cr , shortage cost is cP , and disposal cost
for unsold refurbished items is cd1 . The optimal solution to the unconstrained
version of this problem is given by the newsvendor model: F (zr∗ ) = prp−c r +cP +cd
r +cP +cd1
.
Here, the unit underage cost is pr − cr + cP + cd (margin plus shortage cost plus
opportunity cost of disposing an extra unit that could have been used to meet
demand), whereas the unit overage cost is cd1 − cd + cr (difference in disposal
costs plus remanufacturing cost). Given zr∗ , the optimal solution to the constrained
version of the problem is quite simple: if r ≥ zr∗ , then remanufacture zr∗ and
dispose r − zr∗ ; if r < zr∗ , then remanufacture all r units. This is the first part of
the decision process. The firm should also decide upon the amount of returns to
collect, R. They assume that returns originate from two collection sites; site i,
i = 1, 2, has stochastic yield (percentage of remanufacturable returns) γi ; these
random variables are correlated with a joint distribution g(γ1 , γ2 ). The firm then
determines the amount to collect from each site ri (such that R = r1 + r2 , and
r1 γ1 + r2 γ2 = r). They show that in some cases it is optimal to collect from a
single site, and in others it is optimal to collect from both sites.
Zikopoulos and Tagaras (2008) consider a variation of this problem where
there are inaccuracies in the sorting operation, so there is a probability α that
a (good) remanufacturable item is thrown away, and a probability β that a non-
remanufacturable unit is sorted as good, and it is further disassembled at a cost.
They determine conditions under which setting up a sorting operation before
disassembly is optimal. Ferrer (2003) considers an acquisition problem where
demand D is deterministic and there is a single source for returns, but the firm also
has the possibility of meeting demand by sourcing more expensive new parts from
an outside supplier. He shows that the optimal solution is generally not mixed, that
is, the firm either sources only new parts or only remanufactured parts if the supply
of returns is large enough.
Another stream of research considers product acquisition for remanufactur-
ing when returns have varying quality levels (that is, not only good and bad).
Consider the basic framework of Guide et al. (2003). There are N quality cate-
gories for returns; category i has remanufacturing cost cri . To improve the quality
of returns, the firm decides upon the acquisition price ai for quality category i
and realizes a corresponding return rate Ri (ai ), where Ri (·) is increasing in ai .
Because the supply of returns, which is determined by ai , constrains the amount
of products that can be remanufactured, the firm should set (optimally) the price of
remanufactured products pr∗ such that supply meets demand. The demand function

(quantity sold) is D(pr ), so the firm sets pr∗ such that D(pr∗ ) = N i=1 Ri (ai ), or
−1
N
pr = D ( i=1 Ri (ai )). Thus, the firm’s optimization problem is
N

N
N
−1
max (a1 , . . . , aN ) = D Ri (ai ) Ri (ai ) − Ri (ai )(ai + cri ).
a1 ,...,aN
i=1 i=1 i=1
(14)
In Equation (14), the decision variables are the values of the acquisition prices
ai for each quality category i. Note that remanufacturing yield is not considered
in Equation (14). Bakal and Akcali (2006) consider a single acquisition price
a and a single unit remanufacturing cost cr , but model the resulting quality of
acquired returns such that yield rate (fraction of units fit for remanufacturing out
of all units collected) is t(a)γ , where t(·) is a concave function (so that a higher
acquisition price implies a higher yield), and γ is a random variable. Thus, the total
amount of remanufacturable units is R(a)t(a)γ . The firm then decides on a and
the remanufactured product’s price pr , with the firm facing a linear demand curve
D(pr ) = α − βpr . (Due to the random yield, the firm cannot set prices to exactly
match supply and demand, as in Guide et al. (2003)). Motivated by toner cartridges,
Galbreth and Blackburn (2006) consider an exogenous fixed acquisition price a,
but assume that total remanufacturing cost (excluding acquisition cost) decreases
in the total quantity of returns acquired R (the decision variable), such that the firm
crU
minimizes T C(R) = aR + x=0 xg(x)dx, where g(x) is the probability density
function for remanufacturing cost (with cdf G(·)), and crU = G−1 ( D R
), so that
the firm meets demand D from the acquired R units. The trade-off is that the
higher the total amount of returns collected R, the higher the acquisition cost, but
the total remanufacturing cost is lower because there are more returns of better
quality in the pool of acquired returns. Galbreth and Blackburn (2006) model the
distribution of returns quality (i.e., cost) through a known probability distribution
G(·), which is assumed to be invariant with respect to the quantity of returns
acquired. This assumption holds if the acquisition quantities are large enough such
that the probability distribution associated with the sample closely matches the
overall population of returns. Galbreth and Blackburn (2010) extend their 2006
model to the case where there is uncertainty in the condition of used products,
that is, in the actual distribution of cost within the sample of products acquired.
Their 2010 model is thus appropriate for cases where the acquisition quantities
are smaller, or where the firm has more limited information into the distribution of
quality of used products in the field.
Multiperiod/Continuous-Time Product Acquisition and Disposition

Models
In multiperiod or continuous time acquisition and disposition models, there is more
than one opportunity to acquire returns and/or make a disposition decision. Two
broad streams exist (Fleischmann, Bloemhof-Ruwaard, Dekker, van der Laan, van
Nunen, & Van Wassenhove, 1997): (i) repair systems, where there is a significant
correlation between demand and return streams, in that the total number of parts
in the system is constant (every return—defective part—triggers a demand for
repaired part), and (ii) recovery (remanufacturing) systems, where, due to the long
time lags between buying a new product and its end of use, return and demand
streams can be assumed to be independent. Again, the focus here is on recovery
systems; see Cho and Parlar (1991) for a tutorial and review on repair systems.
I present here the periodic-review model by Inderfurth, de Kok, and Flap-
per (2001) to illustrate some of the dynamics. There are n disposition options
for stochastic returns Rt at period t. Examples of disposition options include
Souza 27
disassembling for spare parts, light remanufacturing, and comprehensive reman-

ufacturing. Disposition option j faces stochastic demand Dj t at time t, has pro-
cessing lead time λj , unit processing cost crj , and unit shortage cost bj . Unit
holding cost for returns is h, and holding cost for option-j processed units is hrj .
The firm then decides on the disposal quantity vt and disposition quantities zj t at
time t. Denoting by α the one-period discount factor, the firm solves the following
stochastic optimization problem:
⎡ ⎡
T
n
TC = minvt ,z1t ,...,znt E ⎣ α t−1 ⎣cd vt + crj zj t
t=1 j =1
⎛ ⎞

n
n
+ h ⎝ut−1 − vt − z j t + Rt ⎠ + hj (yj,t−1 + zj,t−λj − Dj t )+
j =1 j =1
⎤⎤

n
+ bj (Dj t − yj,t−1 − zj,t−λj )+ ⎦⎦ .
j =1
In Equation (15), the expectation is taken with respect to Rt , D1t , . . . , Dnt ; ut

and yj t are the ending inventory of returns and processed units for option
j at time t,
respectively; they satisfy the balancing equations ut = ut−1 − vt − nj=1 zj t + Rt
and yj t = yj,t−1 + zj,t−λj − Dj t . The optimal solution structure for Equation (15)
is fairly complex, but Inderfurth et al. (2001) show how a heuristic policy with a
simpler structure—a base stock policy for returns coupled with base stock policies
for each of the disposition options—performs well under a linear allocation rule
for returns to the different reuse options. (A base stock policy for an option j
maintains the inventory position of processed units constant at zj∗ , where the
inventory position is defined as the inventory on-hand minus backorders plus in-
processing, or in transit, inventory.)
Ferguson, Fleischmann, and Souza (2011) consider two disposition options:
remanufacturing or dismantling for spare parts. Remanufacturing is more prof-
itable, on a per unit basis, but has more uncertain demand than spare parts’. Using
a formulation similar to Equation (15), but under profit maximization, they find the
structure of the optimal policy for the special case where dismantling yields only a
single part. When dismantling yields multiple parts, each with its own independent
stochastic demand distribution, they are only able to provide the structure of the
optimal policy for a single period model; the problem is much harder to solve in
a multiperiod setting. Solving the disposition problem with multipart dismantling
in a multiperiod setting would be a significant contribution to the literature.
Many models in the literature consider a hybrid system, where demand can
be met by remanufacturing a returned item or by manufacturing (procuring) a
new item from a supplier (Figure 2); these two options have different lead times
and costs. Hybrid systems are particularly appropriate for managing inventory of
spare parts, or in products such as Xerox copiers, where some parts can be ob-
tained from remanufacturing used products. There are two broad types of models:
continuous review and periodic review systems. van der Laan et al. (1999) derive
optimal inventory policies for push systems (where remanufacturing is initiated
Figure 2: Hybrid inventory control system with remanufacturing and manufac-

turing sourcing.
Inventory of
Returns Inventory of
parts
Remanufacturing
Returns
Demanded
Rt parts
Manufacturing
as early as possible—as soon as there are enough returns for a batch), and for
pull systems (where remanufacturing is initiated as late as possible, depending
on forecasts, current inventory positions, etc.) in a continuous review setting with
fixed remanufacturing costs. Toktay, Wein, and Zenios (2000) study a hybrid sys-
tem with continuous review and no fixed ordering cost, and propose a base-stock
policy for managing the manufacturing of new components; their biggest contri-
bution is to provide a methodology for estimating the demand parameters, which
depend on the products’ sojourn time with the customer and the probability that
a customer returns a used product. Aras, Boyaci, and Verter (2004) also consider
a continuous-time setting with no fixed remanufacturing costs, but they consider
two types of stochastic (Poisson) returns: returns of higher quality have a lower
remanufacturing lead time than returns of lower quality.
When parts are managed using a periodic review system, Inderfurth (1997)
shows that the structure of the optimal policy for a hybrid system is not a base-
stock policy if the two sourcing options—remanufacturing and manufacturing—
have different and positive lead times. Thus, one needs heuristic approaches;
some are provided by Kiesmueller and Minner (2003), Teunter, van der Laan,
and Vlachos (2004), and Inderfurth and Kleber (2012). Kiesmueller and Minner
(2003) propose a heuristic policy structure with two base stock levels for each
period (one for manufacturing, and one for remanufacturing) and propose some
basic newsvendor-based heuristics for computing the base stock levels. Zhou, Tao,
and Chao (2011) consider that returns are of K different qualities, and show that
if remanufacturing and manufacturing have identical lead times the optimal policy
is comprised of K + 1 different base stock levels, one for each quality grade
(remanufacturing), and one for manufacturing. When lead times are different, they
propose a heuristic based on K + 1 base stock levels. Inderfurth and Kleber (2012)
add a third option where in addition to the two options displayed in Figure 2, one
can place a large final order (at a lower cost per unit) at the beginning of the
planning horizon. They also propose newsvendor-based heuristics for computing
the two base stock levels and show that they perform very well. Tao, Zhou, and
Souza 29
Tang (2012) introduce random remanufacturing yield and propose three heuristics.
Ferrer and Ketzenberg (2004) numerically extend the hybrid one-period model
by Ferrer (2003) (discussed in the previous section) to a multiperiod setting.
Ketzenberg, van der Laan, and Teunter (2006) provide an estimate for the value
of information in a hybrid system, where the value of information is defined as
the reduction in inventory costs (holding and shortage) as a result of reducing
uncertainty in demand, returns, and remanufacturing yield.
In a series of papers, DeCroix and his co-authors study multiechelon inventory
policies for hybrid systems under periodic review in multistage supply chains.
DeCroix, Song, and Zipkin (2005) study a serial supply chain where product returns
join new products directly in stock, without the need for remanufacturing. They
show that an echelon base-stock policy is optimal. An echelon base stock policy
maintains an echelon inventory position at stage j constant at zj∗ , where the echelon
inventory position at j is defined as inventory on-hand at j and at all downstream
stages j − 1, . . . , 1 minus backorders at stage 1 plus on-transit inventory to j .
DeCroix and Zipkin (2005) study complex assembly systems where there can
be returns of end products; these returns are disassembled and a fixed subset of
the recovered parts join existing inventory of those parts for future assembly.
They propose some heuristic inventory policies and show that they perform well.
DeCroix (2006) extends the single-stage hybrid system with remanufacturing of
Inderfurth (1997) to a serial multiechelon supply chain. DeCroix shows that if
product recovery occurs at the most upstream stage, then the optimal policy at
that stage is similar to that of Inderfurth, with three parameters: remanufacture-
up-to, order-up-to, and dispose-down-to levels, evaluated in terms of the echelon
inventory position as defined above; the optimal policy for downstream stages is a
simple echelon base-stock policy.
Periodic review or continuous-time product disposition approaches most
often assume unlimited capacity, a stationary environment, and a single product
case. The vast majority of these papers also assume that returns come in a single
quality and thus, the unit remanufacturing cost is a constant. These assumptions
can be relaxed with mathematical programming approaches, which we review next.
Multiperiod Nonstationary Disposition Models

In multiperiod production disposition, the firm matches supply of returns, re-
manufacturing capacity, and demand in a non-stationary environment. There are
multiple quality grades for returns, and two disposition options in any period: re-
manufacturing or salvaging (a generic term that could mean dismantling for parts
or recycling). The literature generally considers the expected value of demand
and returns in each period and, similarly to regular (forward) production plan-
ning problems, suggests a rolling horizon approach as a practical way of dealing
with uncertainty. Problems are formulated as a linear program where the decision
variables are quantity of quality-i returns remanufactured in period t, salvaged
in period t, inventory of quality-i returns at the end of period t, and inventory
of remanufactured products in period t. The objective function minimizes pro-
duction, holding, and backlogging cost, minus the salvage value, and constraints
include inventory balancing constraints for returns and remanufactured products

and production capacity constraints.
Ferguson, Guide, Koca, and Souza (2009) derive analytical properties for the
optimal production plan, but the focus of their research is on finding the value of
grading returns into a finite number of quality categories (as opposed to all returns
going into a single pile), and the “optimal” number of quality categories. They find
that most benefits are derived from using five quality categories (e.g., worst, bad,
average, good, best) for categorizing returns. Guide, Pentico, and Jayaraman (2001)
provide a framework and formulation for hierarchical remanufacturing planning
when there are multiple products, although they do not conduct a comprehensive
numerical study. Golany, Yang, and Yu (2001) do not consider multiple quality
grades, but they assume that demand can also be met with new products (a hybrid
system) and they consider a fixed cost to remanufacture in a period, which results
in an integer program. Denizel, Ferguson, and Souza (2010) consider the case
where the outcome of the grading process (that is, the number of returns obtained
for each quality grade) is random in each period, and thus the linear program
becomes a multistage stochastic program. They demonstrate the advantages of
the stochastic programming formulation, as it detects infeasibilities that are not
possible in the deterministic formulation. For example, returns with worse quality
grades consume more capacity; if the firm realizes “bad” outcomes (many returns
have bad quality) a few periods in a row then the problem may be infeasible if
backlogs are not allowed or restricted, even though, in expectation, the firm has
enough capacity.
CONCLUSION
In this article I present a literature review and tutorial on CLSCs, where I define
the basic terminology, present basic modeling frameworks, and comment on main
results and extensions. I divide discussion in terms of strategic and tactical decisions
in CLSCs.
In terms of strategic decisions, research has focused on whether an OEM
should remanufacture, trade-ins and leasing as a strategic source of returns, pro-
ducer response to take-back legislation, CLSC network design, incentives and
coordination among CLSC members, and to a lesser extent, on the impact of prod-
uct recovery on new product design. Research in tactical decisions has focused
on the used product acquisition strategy (when, how much, of which quality),
and product disposition decisions (that is, what should a firm do with product
returns: remanufacture, dismantle for parts, recycle, etc.). There is a significant
stream of research in hybrid inventory management systems, where remanufac-
tured and new products are perfect substitutes (that is, the firm has two sourcing
options—remanufacturing and manufacturing); these systems are mostly found in
the management of spare parts inventory.
There are many areas for future research. More empirical research is wel-
come (Vachon & Klassen, 2010), particularly on documenting acquisition and
collection costs, remanufacturing costs, and the overall market for remanu-
factured products (including prices, warranties, and channels). The cost struc-
ture, in particular, drives a lot of the results, so it is imperative that research
Souza 31
incorporates realistic cost structures (e.g., economies or diseconomies of scale,

fixed vs. variable costs, and so forth). Research in consumer behavior and the
market for remanufactured products is nascent, so a more comprehensive under-
standing of the market for remanufactured products is needed across different
industries. Despite some attempts, I believe that the interface between new product
design and recovery activities (remanufacturing and recycling) is an open area of
research. In addition, the CLSC literature has focused heavily on remanufacturing,
and there is relatively little research on recycling. Recycling has been incorpo-
rated in research dealing with take-back legislation, but the comprehensive design
of products and respective CLSCs for recycling is a needed research area. From
an environmental perspective, LCA studies have shown that remanufacturing is
not always the environmentally preferred option, despite savings in material and
energy during production (e.g., Quariguasi-Frota-Neto & Bloemhof, 2012). For
example, old refrigerators should not be remanufactured but recycled, because the
bulk of their environmental impact (in excess of 80%) is in the use stage of the life
cycle, and thus, newer and more energy efficient refrigerators are preferred. When
measuring environmental impact, it is thus necessary to take a life cycle assessment
(LCA) perspective and report on the environmental impacts of producers’ choices,
not only in terms of virgin material consumption (a standard metric reported in
the literature), but also in manufacturing, distribution, use with consumers, and
end-of-life.
From a methodological perspective, I believe there continues to be a need
for practice-driven classical operations research and optimization models that can
be used as decision support, and where numerical studies are based on values
observed in practice. I also believe that there is a need for more empirical research,
particularly econometric models that use actual (in the sense of not perceptual)
data, as in Subramanian and Subramanyam (2012), and behavioral research with
lab experiments.
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ley School of Business, Indiana University. Prior to Indiana, he was an associate
professor at the Smith School of Business, University of Maryland, and he visited
Georgia Tech’s College of Management during his sabbatical semester in 2007.
He also worked at Volkswagen of Brazil in new product development and product
planning prior to entering academia. His research focuses in closed-loop supply
chain management and sustainable operations. He is a senior editor for Production
& Operations Management and an associate editor for Decision Sciences. He is the
author of the book Sustainable Operations and Closed-Loop Supply Chains (Busi-
ness Expert Press, 2012), and co-edited the book Closed Loop Supply Chains:
New Developments to Improve the Sustainability of Business Practices (CRC
Press, 2010). He won the Wickham Skinner EarlyCareer Research Accomplish-
ments award in 2004 and the Wickham Skinner Best Unpublished Paper Award
from 2008, both from the Production & Operations Management Society (POMS).
He was the president of the College of Sustainable Operations of POMS from 2010
to 2012.

Closed Loop Supply Chains A Critical Review, and Future Research (2013)

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Decision Sciences © 2012 The Author

Volume 44 Number 1 Decision Sciences Journal © 2012 Decision Sciences Institute

Closed-Loop Supply Chains: A Critical

Subject Areas: Closed-Loop Supply Chains, Remanufacturing, Reverse Lo-

Figure 1: Closed-loop supply chain for Cummins (simplified).

Representave ﬂows only

or part, remanufacturing consists of six different steps: full disassembly, thorough

Table 1: Examples of strategic, tactical, and operational issues in CLSCs.

Strategic • Network design: location and size of collection centers,

exhaustive literature review of the CLSC literature—this would be too ambitious

STRATEGIC ISSUES IN CLSCs

Assumption 1: Consumer willingness-to-pay (wtp) for the new product is uni-

Remanufactured and new products are vertically differentiated—consumers

Strategies for product take-back: leasing, trade-ins

Challenges to Assumptions 1 and 2

Product Take-Back Legislation

Impact of Product Recovery on New Product Design

Orsdemir, Kemahlioglu-Ziya, and Parlakturk (2011) study a situation where an

as new products, incorporating the redesign), and remanufactured (used products

CLSC Network Design

Incentives and Coordination in CLSCs

The solution to this problem is ρ C = [ (πr +π

TACTICAL ISSUES IN CLSCs

Single Period Acquisition and Disposition Models

should be disposed of at a unit cost cd ). Out of the r remanufacturable returns,

Multiperiod/Continuous-Time Product Acquisition and Disposition

disassembling for spare parts, light remanufacturing, and comprehensive reman-

In Equation (15), the expectation is taken with respect to Rt , D1t , . . . , Dnt ; ut

Figure 2: Hybrid inventory control system with remanufacturing and manufac-

Multiperiod Nonstationary Disposition Models

include inventory balancing constraints for returns and remanufactured products

incorporates realistic cost structures (e.g., economies or diseconomies of scale,

Esenduran, G., & Kemahlioglu-Ziya, E. (2012). Complying with take-back leg-

Gilvan C. Souza is an associate professor of operations management at the Kel-

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