Capacity investment and inventory planning for a hybrid manufacturing – remanufacturing system in the circular economy

Remanufacturing through circular economy conserves energy and materials while creating economic growth and employment. Thus, it is imperative to develop better systems that optimise the use of resources, maximise the value of the product, and minimise the total cost. Towards this, we present a two-stage stochastic linear model for a make-to-order hybrid manufacturing-remanufacturing production system by integrating capacity and inventory decisions. We consider the uncertainty in demand, core returns rate and yield to impose flexibility as both operations are considered with a collective production capacity on the same assembly line. We have considered a setting where demand for new and remanufactured products does not cannibalise each other’s demand (e.g. new parts for original equipment and remanufactured parts for independent aftermarket). Further, the capacity utilisation by core returns is considered in two ways: less capacity intensive case and more capacity intensive case. The developed model is solved for optimal inventory and capacity levels along with production quantities by maximising utilisation of resources and profit. We also present a closed-form solution by demand space partition to deduce the optimal policy of the firm. Based on our analysis, we have presented settings where remanufacturing can perfectly substitute manufacturing.