Warranty as an Effective Strategy for Remanufactured Product

Warranty as an Effective Strategy for Remanufactured Product

Bifeng Liao (School of Economics and Management, Nanjing University of Aeronautics and Astronautics, Nanjing, China & School of Mathematics and Information Science, Yantai University, Yantai, China) and Bangyi Li (School of Economics and Management, Nanjing University of Aeronautics and Astronautics, Nanjing, China)
DOI: 10.4018/IJISSCM.2016070105
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Abstract

Consumers cannot fully evaluate the product quality before purchase. To reduce consumer risk, some manufacturers offer consumer warranty. Up to now, there are many studies investigating this role, but they seldom consider from the perspective of consumer utility. Consumers view remanufactured products as being of lower quality and are less willing to pay for them. It is important to incorporate the manufacturer's service and consumer heterogeneity in the model. Those employed in the remanufacturing industry are advised to increase the level of warranty associated with their remanufacturing products in order to command higher prices for their products in the marketplace. This paper firstly considers consumer utility, then develops three marketing settings to examine the impact of warranty services, and finally compares the optimal prices and profits among them. The results show that the manufacturer's warranty policy can enhance profit, and the profit is highest when both new and remanufactured products provided differentiated warranty.
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Introduction

In a forward supply chain, the materials flow unidirectionally from manufacturers to customers (Núñez-Muñoz & Montoya-Torres, 2009; Ramkumar et al., 2013). In a closed-loop supply chain (CLSC), there is a reverse flow that the manufacturer retrieves used products from the market where they are dispersed among customers. As recent events in the toner cartridge industry show that, Lexmark introduced the “Prebate” program in April 1998. This program allows the customers to get $30 if they are willing to return the used cartridges to Lexmark or destroy it. Forward flows consist of new products, and reverse flows consist of used products and remanufactured products. A product is considered a remanufactured product if its components come from a used product. It is defined as the process of disassembling, cleaning, inspecting, replacing and reassembling the components of a part or product to a like-new condition.

With the rapid development of technology, the problem of waste generation and management has become more and more serious. To deal with these challenges, the reclaim and disposal of waste are effective measures. Remanufacturing has been demonstrated in practice to be a preferred method (Jung & Hwang, 2011; Liu et al., 2011). In the worldwide, remanufacturing is becoming more prevalent, not only firms wish to do so, but also societal and governmental pressures to adopt remanufacturing. The enterprises are undertaking triple pressure in terms of environmental activism, legislative and profit performance. Many enterprises now take back their used products. There is greater economic benefit in remanufacturing used products than recycling them. The restoring end of used or end of life products in a manufacturing environment tends to be energy saving, less material consuming and has a lower impact on the environment than its manufacturing counterpart new products from virgin materials (Chen et al., 2012). Evidences can be found that the cost of taking back and remanufacturing a core is 40%~60% less than that of brand new product and leads to higher profit margins for the producer. A number of companies have recycling/remanufacturing programs. For example, a well-known manufacturer of photographic media and equipment, Kodak, has a successful remanufacturing program for their family of single use cameras. Xerox, the worldwide manufacturer of photocopy, has a program of recycling/remanufacturing for photocopiers and print toner cartridges. However, evidences suggest that maximum profitability is usually unrealized as remanufactured products are customary priced at 45%~65% of comparable new products in order to compete with the sales of new products.

As a result of the uncertain factors of the remanufacturing system, there are differences in the consumers’ willingness to pay (WTP) for remanufactured products and new products. Consumers view remanufactured products as inferior products and less willing to pay for them. Thus, the decision to remanufacturing is difficult because manufacturers have little guidance and industry practice is very various. It needs sophisticated tools for making effective and differentiated remanufacturing decisions.

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