Optimal Inventory Control of a Hybrid System with Quality Grade Differentiation



With the increased efforts to promote sustainability and with the spread of recovery technologies, many firms are seeking policies to effectively incorporate their recovery activities with their manufacturing decisions. Remanufacturing is one of the effective recovery mechanisms that can greatly enhance sustainability. However, the remanufacturing effort critically depends on the condition of the returns. In this paper, we consider a manufacturing/remanufacturing (hybrid) system wherein the returned items are differentiated based on the quality grade. We characterize the optimal policy structure that effectively coordinate manufacturing, remanufacturing and disposal decisions by using Markov Decision Processes (MDP’s). We first characterize the optimal policy structure for a case wherein manufactured and remanufactured items are considered identical. Then, we extend the results to models where one and two-way demand substitutions are applied. In a one-way demand substitution, customers are always offered a new item unless the system encounters stockout for new items.  In a two-way demand substitution setting the market for new and remanufactured items is segmented. We show that optimal policy structures are characterized by sets of state-dependent threshold levels for manufacturing, remanufacturing and disposal for which structural properties are established. We numerically investigate the value of quality grading and disposal optioins in such systems. In addition, we study the cost improvement of the optimal policies compared to heuristic structures previously developed in the literature and applied in practice.
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Dr. N. Mishra