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An NPV and AC Analysis of a Stochastic Inventory System with Joint Manufacturing and Remanufacturing

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  • van der Laan, E.A.

Abstract

While the net present value (NPV) approach is widely accepted as the right framework for studying production and inventory control systems, average cost (AC) models are more widely used. For the well known EOQ model it can be veri_ed that (under certain conditions) the AC approach gives near optimal results. This paper investigates whether the same holds for two-source systems with joint manufacturing and remanufacturing. It appears that the performance of the AC approach stands or falls with the right choice of the holding cost parameters. Through the analysis of a deterministic model a theoretical basis is provided for choosing the parameters. Then, given this set of holding cost parameters, the performance of the AC approach is tested in a stochastic model.

Suggested Citation

  • van der Laan, E.A., 2000. "An NPV and AC Analysis of a Stochastic Inventory System with Joint Manufacturing and Remanufacturing," ERIM Report Series Research in Management ERS-2000-38-LIS, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
  • Handle: RePEc:ems:eureri:47
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    File URL: https://repub.eur.nl/pub/47/erimrs20001006160847.pdf
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    References listed on IDEAS

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    1. Richter, Knut & Dobos, Imre, 1999. "Analysis of the EOQ repair and waste disposal problem with integer setup numbers," International Journal of Production Economics, Elsevier, vol. 59(1-3), pages 463-467, March.
    2. Erwin van der Laan & Marc Salomon & Rommert Dekker & Luk Van Wassenhove, 1999. "Inventory Control in Hybrid Systems with Remanufacturing," Management Science, INFORMS, vol. 45(5), pages 733-747, May.
    3. Grubbstrom, Robert W. & Thorstenson, Anders, 1986. "Evaluation of capital costs in a multi-level inventory system by means of the annuity stream principle," European Journal of Operational Research, Elsevier, vol. 24(1), pages 136-145, January.
    4. G. Hadley, 1964. "A Comparison of Order Quantities Computed Using the Average Annual Cost and the Discounted Cost," Management Science, INFORMS, vol. 10(3), pages 472-476, April.
    5. Hofmann, Christian, 1998. "Investments in modern production technology and the cash flow-oriented EPQ-model," International Journal of Production Economics, Elsevier, vol. 54(2), pages 193-206, January.
    6. Fleischmann, Moritz & Bloemhof-Ruwaard, Jacqueline M. & Dekker, Rommert & van der Laan, Erwin & van Nunen, Jo A. E. E. & Van Wassenhove, Luk N., 1997. "Quantitative models for reverse logistics: A review," European Journal of Operational Research, Elsevier, vol. 103(1), pages 1-17, November.
    7. Klein Haneveld, Willem K. & Teunter, Ruud H., 1998. "Effects of discounting and demand rate variability on the EOQ," International Journal of Production Economics, Elsevier, vol. 54(2), pages 173-192, January.
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    Citations

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    Cited by:

    1. Zhou, Li & Naim, Mohamed M. & Ou Tang & Towill, Denis R., 2006. "Dynamic performance of a hybrid inventory system with a Kanban policy in remanufacturing process," Omega, Elsevier, vol. 34(6), pages 585-598, December.
    2. Magni, Carlo Alberto, 2015. "Aggregate Return On Investment for investments under uncertainty," International Journal of Production Economics, Elsevier, vol. 165(C), pages 29-37.
    3. Musa, Abubakar & Sani, Babangida, 2012. "Inventory ordering policies of delayed deteriorating items under permissible delay in payments," International Journal of Production Economics, Elsevier, vol. 136(1), pages 75-83.
    4. BayIndIr, Z. Pelin & Dekker, Rommert & Porras, Eric, 2006. "Determination of recovery effort for a probabilistic recovery system under various inventory control policies," Omega, Elsevier, vol. 34(6), pages 571-584, December.
    5. repec:spr:annopr:v:237:y:2016:i:1:d:10.1007_s10479-013-1453-x is not listed on IDEAS
    6. Carlo Alberto Magni, 2015. "ROI and profitability index: A note on managerial performance," Department of Economics 0048, University of Modena and Reggio E., Faculty of Economics "Marco Biagi".
    7. Teunter, Ruud & van der Laan, Erwin, 2002. "On the non-optimality of the average cost approach for inventory models with remanufacturing," International Journal of Production Economics, Elsevier, vol. 79(1), pages 67-73, September.
    8. Corbacioglu, Umut & van der Laan, Erwin A., 2007. "Setting the holding cost rates in a two-product system with remanufacturing," International Journal of Production Economics, Elsevier, vol. 109(1-2), pages 185-194, September.

    More about this item

    Keywords

    Net present value; average costs; holding costs.; inventory control; remanufacturing;

    JEL classification:

    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
    • M - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics
    • M11 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Production Management
    • R4 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Transportation Economics

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