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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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    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. Tsan-Ming Choi, 2016. "Multi-period risk minimization purchasing models for fashion products with interest rate, budget, and profit target considerations," Annals of Operations Research, Springer, vol. 237(1), pages 77-98, February.
    3. Magni, Carlo Alberto, 2015. "Aggregate Return On Investment for investments under uncertainty," International Journal of Production Economics, Elsevier, vol. 165(C), pages 29-37.
    4. Giri, B. C. & Dohi, T., 2004. "Optimal lot sizing for an unreliable production system based on net present value approach," International Journal of Production Economics, Elsevier, vol. 92(2), pages 157-167, November.
    5. 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.
    6. Teunter, R.H. & van der Laan, E.A., 2003. "Valuation of inventories in systems with product recovery," Econometric Institute Research Papers EI 2003-29, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
    7. 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.
    8. Tsan-Ming Choi, 2016. "Multi-period risk minimization purchasing models for fashion products with interest rate, budget, and profit target considerations," Annals of Operations Research, Springer, vol. 237(1), pages 77-98, February.
    9. Corbacıoğlu, U. & van der Laan, E.A., 2005. "Setting the holding cost rates in a multi-product system with remanufacturing," ERIM Report Series Research in Management ERS-2005-072-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.
    10. 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".
    11. 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.
    12. 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.

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    Keywords

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    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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