Determining optimal quality levels and prices in a hybrid manufacturing / remanufacturing system

Abstract

Setting the quality and price of products are two important issues for firms involved in remanufacturing. The aim of this study is to develop and solve a mathematical model that seeks optimum values for quality levels and prices of remanufactured products as well as prices of manufactured products. A base model and two extensions of it are formulated in order to maximize the total profit of an Original Equipment Manufacturer (OEM) having a hybrid manufacturing / remanufacturing system. It is assumed that a remanufactured product’s quality level can not exceed the quality level of its manufactured version and the unit cost of remanufacturing is a linear function of the quality level. Customer preference is modeled by using gravity based approach and total demand is shared by the products of the OEM and a competitor’s product according to this preference function. As the formulated models are nonlinear and nonconvex, the simplex search method developed by Nelder and Mead is used to solve the models. Since the method has originally been proposed for unconstrained problems, some modifications are necessary to handle quality and price constraints. A number of experiments are carried out to obtain the best values of the decision variables and to see how they are affected by the changes in the problem parameters. The effects of changes in the market, in the manufacturing environment and in the quality levels of manufactured products are discussed in detail.