The Optimal Disposition Decision for Product Returns

We model the optimal disposition decision for product returns. The manager decides which product returns to accept for processing at the remanufacturing facility, and which ones to sell immediately as-is at a salvage value. High congestion levels in the remanufacturing facility delay the sale of the remanufactured product at the secondary market, decreasing the value at which it can be sold; this may imply a more attractive salvaging option. This is particularly important for high-tech products with short life cycles, such as computers and printers. We propose a two-step policy. In the first step, the returned product's random processing time is observed, and a disposition decision is made: if the processing time is larger than a threshold k* the product is salvaged; otherwise the product is remanufactured at a second stage. We first show that such a policy is optimal, based on a modification of Harrison's (1975) model that allows for the salvaging option. We then provide an approximate procedure to compute k* in industrial settings. Our numerical study demonstrates the superiority of our policy over the current industrial practice ignoring the time value of money