Digital Supply Chain Through IoT, Design Quality, and Circular Economy

We consider a digital closed-loop supply chain (CLSC) single Original Equipment Manufacturer (OEM) and a single retailer. The OEM opts for the adoption of either a value or a waste-stream approach to closing the loop, while optimally deciding the wholesale price and the design quality strategies; the retailer focuses on marketing strategies and optimally controls her price. The quality expenditures contribute to knowledge created over the digital Supply Chain (SC) regarding the design quality performance, which plays a dual role leading to higher sales and returns’ residual value as well as to higher marginal production costs and lower return rate. The OEM solves this dual trade-off by evaluating the convenience of adopting either a waste-stream approach or a value-stream approach. In the former case, it makes no investments in any circular economy programs; in the latter case, he controls the return rate by investing in IoT technology within the context of circular economy programs. Our findings suggest that the shift from a waste to a value-stream approach leads to a payoff-Pareto-improving situation in a decentralized CLSC: Because the game is played á la Stackelberg, a separation occurs between operational strategies and the market size, which is determined by the pricing strategy. In contrast, this shift is not always convenient in a centralized CLSC, where the decision maker solves the trade-offs that quality entails only when the passive return rate and/or the remanufacturing efficiency are sufficiently high.