Joint determination of supplier capacity and returner incentives in a closed-loop supply chain

Given the high variability of both quantity and condition of the returns, closed-loop supply chains depend on a mix of remanufactured and new components. Effectively managing the combined flow of returned and new components is imperative to minimize total system costs. This paper proposes a model that helps manage the flow of returns by determining the incentives to offer returners, while simultaneously determining a capacity contract with the supplier of new components. The model considers returns from multiple sources, where each source has different characteristics in terms of the quantity and condition of its returns. The model also accounts for uncertainties from the return sources, as well as the new components supplier. Such uncertainties result in a failure to meet the demand for components, incurring loss costs. Sensitivity analyses of a numerical example were conducted to illustrate the model and gain further insights. The results demonstrate noteworthy relationships between supplier-related costs and those associated with not meeting the required demand, as well as their influence on the incentives to offer and the supplier's capacity contract.