Optimal remanufacturing and acquisition decisions in warranty service considering part obsolescence

Abstract When a product enters the end phase of its life cycle, certain parts become obsolete and their supply is discontinued permanently. However, the manufacturer must still maintain sufficient inventory to satisfy customer warranty claims in the future. We study the spare parts inventory control problem under such a setting, where remanufacturing parts from product returns is adopted as the main approach to ensure sufficient supply. One novel feature of our model is the interrelationships among the installed base, product returns, and demand for spare parts, which lead to the endogeneity of demand. Specifically, we formulate stochastic dynamic programs for two scenarios, in which a firm either utilizes phase-out returns or proactively collects products. For the former scenario, we establish the optimality of a modified-base stock policy, and find that the inventory control target increases with the installed base size and part failure rate. For the latter scenario, we discover that a return-dependent base stock policy is optimal and conduct comparative static analyses for the acquisition and remanufacturing decisions, where their one-sided limited sensitivities in state variables (initial parts inventory and installed base size) are identified in a stationary environment. These findings are largely attributed the novel model with endogenous spare parts demand. Through extensive numerical studies, we investigate the benefits introduced by acquiring returns under a range of parameter settings. It is found that when the mismatch between warranty demand and part supply is higher, firms can enjoy more significant cost savings. Finally, the potential monetary loss when the relationships among the installed base, demand, and product returns are ignored is examined computationally. The extra cost incurred is significant and becomes higher when proactive acquisition is adopted.

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