Designing coordination contract for closed-loop supply chain based on material recycling.

• Author: Yan, Nina

1. INTRODUCTION

   Closed-loop supply chains concern the integration of material flows, financial flows, and information flows throughout both forward chain and reverse chain, reflects a generalization and extension of traditional supply chain concepts. Over the past 15 years, closed-loop supply chains have gained considerable attention in industry and academia (Majumder and Groenevelt, 2001, Guide,2009, Kannan et al.,2009, Jayarama and Tan, 2010). Economic, marketing, ecological, and legislative drivers increasingly are leading supply chains begin to focus their attention on product (or materials) return, remanufacturing, repair, recovery, recycling and reuse, which incorporate traditional production and distribution activities with reverse logistics.

   Reverse logistics is a process whereby companies can become more environmentally efficient through recycling, reusing, and reducing the amount of materials used. In the literature dealing with reverse logistics one can essentially find quantitative modeling, case studies, and theory building. In this review, we mainly suggest the following references for overviews on reverse logistics modeling. Pishvaee and Torab (2010) propose a bi-objective probabilistic mixed integer programming model to deal with uncertainties in closed-loop supply chain and integrate the network design decisions in both forward and reverse supply chain networks. Savaskan et al.(2006) focus on the interaction between a manufacturer's reverse channel choice to collect postconsumer goods and the strategic product pricing decisions in the forward channel when retailing is competitive. Prahinskia and Kocabasoglub (2006) reviews the literature in reverse supply chains (RSCs) and develops 10 research propositions to be studied using empirical research methods. Plambeck and Wang (2009) study the impact of e-waste legislation on new product introduction and find that "fee-upon-sale" type of legislation decreases the rate of new product introduction, and consequently, the quantity of e-waste, but does not provide firms the incentive to design products for recyclability. Jung and Hwang (2007) study a remanufacturing in a reverse logistics chain with one OEM and one remanufacturer under taking-back requirement. They show that the remanufacturers can be a potential competitor for the OEMs by cannibalizing the sales of the OEM's new product but the OEMs have the advantage of being free of take-back quota when remanufactures are active in collecting end-of-use products. The research on coordination of forward and reverse logistics decisions is still in its infancy stage. The current sporadic output of papers on the coordination of closed-loop supply chains shows that there is still a need for much attention on this field. In our paper, most of our researches focus on this topic, and aim to find whether the wholesale price contract can coordinate the closed-loop supply chain, and on which condition. Our analyses may be of a help to deep insight into closed-loop supply chain coordination, for both theoretical researchers and practical practitioners, especially for those in Chinese manufacturing industry.

   The rest of the paper is organized as follows. Section 2 introduces our model framework, notation and assumptions. Section 3 analyzes the centralized system of open-loop and closed-loop supply chain, and compares with their benefits. Section 4 analyzes the decentralized system of closed-loop supply chain, and identifies the condition of the contract realizing supply chain coordination. Finally, a few concluding remarks are provided in Section 5.

2. MODEL FRAMEWORK, NOTATION AND ASSUMPTIONS

   2.1 Framework description

   From the situations of material recycling in Chinese manufacturing industry, there are mainly three return channels: (1) in-house production return materials, namely return materials during the production process of manufacturers; (2) social return materials, namely from products depreciations after being used; (3) outside purchase scrap materials. Because the production costs of using scrap is much lower than that of using raw materials, so manufacturers may often purchase scrap directly, almost from overseas in China. In Chinese practice, the social return channel is the most important resources of scraps, partially because this kind of operation is more environmentally friendly.

   Combining above practical operations with supply chain management theories, we establish a framework of closed-loop supply chain process based on materials recycling (Fig.1). The real lines represent material flows and financial flows in...