Periodic review policy for a two-echelon closed-loop inventory system with correlations between demands and returns

In this paper, we consider a two-echelon closed-loop inventory system with remanufacturing as the recovery option for returns, and develop deterministic and stochastic models for the system under periodic review where demands and returns are correlated. For the stochastic situation, we consider two cases – emergency shipment and allocation – depending on whether the shortage quantity, if any, at the higher echelon is expedited on an emergency basis or allocated to the lower echelon, respectively. Numerical examples are provided, followed by a discussion of results. One of the major findings of this research is that although correlations between demands and returns reduce the variability of net demand, which is expected to bring down the total cost of the system, the same, on the contrary, may actually go up or go down with correlations between demands and returns depending on the set-up and the parameters of the system. Finally, concluding remarks are presented.