Remanufacturing strategy of an OEM contracting third-party collector in a reverse supply chain

Many original equipment manufacturers (OEMs) acquire used-products for remanufacturing from third-party collectors (3PCs). The quality of acquired used-products significantly affects the remanufacturing cost and depends on the collection efficiency of 3PCs. Therefore, in this study, we explore the optimal remanufacturing decisions of an OEM who acquires used-products from a 3PC with low or high efficiency in a reverse supply chain. The OEM employs a quality-based segmentation strategy and remanufactures two types of products, each remanufactured from used-products of different quality levels. We explore two scenarios. In the first, the OEM knows the collection efficiency of 3PC. In the second, the OEM faces information asymmetry about the collection efficiency of 3PC. The study designs different types of contract mechanisms under each scenario to optimize the OEM’s strategies. The findings reveal that in both scenarios, the OEM’s profit increases with high-quality used-products up to a certain threshold. Further, we observe that 3PC’s effort does not increase this threshold and hence the profit; however, OEM can increase this threshold by investing in marketing strategies and R&D. A key contribution of this study is that the optimal order quantities under both symmetric and asymmetric information are the same. The wholesale price, however, is lower in symmetric information model compared to asymmetric information model when OEM encounters high-type 3PC. Another important contribution is that the OEM’s remanufacturing cost does not affect the optimal strategies of the OEM.