Channel Choice and Coordination in a Remanufacturing Environment

The importance of the reuse of components and materials from post-consumer products has been widely recognized in the literature and in practice. In this paper, we address the problem of choosing the appropriate channel structure for the collection of post-consumer products from customers. Specifically, we consider a manufacturer who has three options for collecting such products: (a) she can undertake the collection effort herself, (b) she can provide suitable incentives to an existing retailer (who already has a distribution channel) to undertake the collection effort, and (c) she can subcontract the collection effort to a third party. Based on our observations in the industry, we model the three options described above as decentralized decision-making systems with the manufacturer being the Stackelberg leader. When considering decentralized channels, we find that ceteris paribus, agencies who are closer to the customer, i.e. retailers, are the most effective undertakers of the collection effort for the manufacturer. Coordination mechanisms are then characterized, which enable the different players to achieve profits that are equivalent to the profits in a coordinated channel.