Design of Closed Loop Supply Chain Networks

Introduction

With the increasing concerns over environmental degradation, legislative compliance, diminishing supply of raw materials, and consumer demands for eco-friendly products, companies have begun designing the traditional supply chain paths to form a closed loop to facilitate recycling and re-use of product returns. Along with that, the objectives of supply chain management have also expanded, from minimizing total costs and maximizing customer service to include minimizing adverse impact on the environment. In this setting, recycling of used products, repair, remanufacture and reuse are all strategies that can contribute to the sustainability of the manufacturing supply chains. While businesses, by themselves, may not necessarily address environmental concerns, legislations and governmental stipulations (EU, 2000; EU, 2003) coupled with genuinely dwindling supplies of minerals have forced them to adopt eco-friendly practices. Voluntary standards and customer expectations are making companies accountable for the impact of their products and operations on the environment. Largely driven by its profitable business propositions, closed loop supply chain (CLSC) practices help to achieve both financial success and environmental benefits (Flapper et al., 2005). Closed loop supply chain management can be defined as “the design, control, and operation of a system to maximize value creation over the entire life cycle of a product with dynamic recovery of value from different types and volumes of returns over time” (Guide & Wassenhove, 2009).

Returns in a CLSC could be categorized as Commercial returns, End-of-Use returns, and End-of-Life returns (Guide & Wassenhove, 2009). Commercial returns are the products returned by consumers in the initial period after the purchase, say, within 90 days; it may be due to defects, incompatible performance with user needs or consumer remorse. End-of-Use returns are returns due to a technological upgrade for functional products. End-of-Life returns are product returns due to technical obsolescence or it no longer contains any utility for the current user. The annual estimates of commercial returns (returned within 90 days of sale) in the United States are in excess of $100 billion (Stock et al., 2002; Guide et al., 2006). This paper considers commercial returns which could be potentially recovered by light repair operations or by refurbishing.

A strategic issue in supply chain management is the configuration of the network design that has a significant effect on its performance. It is easier to solve the forward and reverse logistics network design problems. However, establishing a reverse network independent of the forward network increases infrastructure costs, reduces the profit potential associated with remanufacturing as it overlooks the interdependence of the forward and reverse flows (Uster et al., 2007). Pishvaee et al. (2010) also emphasized the need for integrated design of the forward and reverse logistics to avoid sub-optimality. In this paper, we discuss the optimal design of a CLSC refurbishing network considering both forward and reverse supply chains. We develop a single period, single product mixed integer linear programming (MILP) model for the problem and illustrate it using a realistic example from the electronics industry.

The remainder of the paper is organized as follows: The paper begins with a section which provides a review of the literature. In the problem description and formulation section, we describe the CLSC network design problem and propose a MILP model for the problem. In the next section, we present an illustrative example to show the application of the proposed mathematical model. In the section that follows, sensitivity analysis is carried out to determine the effect varying customer acceptance rate for refurbished products and uncertainty in the percentage of returns on the network design. The next section discusses the managerial implications of the model. The last section presents some conclusions on the work and future research directions.