Optimizing product reusability under supply risk and outsourced refurbishment

Journal: IISE Transactions

Abstract: We study a firm’s reusability decisions under supply risk with outsourced refurbishment. Consumers are incentivized through a trade-in program that offers a fee to exchange used units for new ones when available. We model the infinite-horizon setting using a discrete-time Markov chain and derive the firm’s optimal product reusability, the price premium on refurbished units during supply disruptions, and the trade-in fee, when refurbishment is conducted in an external facility by transferring trade-in inventory. Increasing product reusability through improved design is beneficial as disruption risk rises, but beyond a risk threshold, a further increase in reusability reduces profit due to higher design costs and lower expected revenues. As supply risk grows and when sufficient trade-ins are available, the firm adopts either a proactive strategy, mitigating risk by raising reusability, or a reactive strategy, transferring risk to customers by increasing prices. The choice is determined by the magnitude of supply risk. Additionally, we characterize the firm’s optimal policies, analyze their dependence on key parameters, and establish the optimal trade-in fee. Encouraging additional trade-ins through higher fees is beneficial as disruption risk increases. A calibration to the Apple iPhone case demonstrates the framework’s applicability and managerial relevance.