Implications of OEM Collaborating With its Third-Party Remanufacturer in Remanufacturing Operations

In the last decades, many brand name OEMs, including IBM and Benz, have started embracing remanufacturing operations through collaborating with the independent third-party remanufacturers. Based on observations from current practice, we formulate two theoretical models for an OEM who produces new products itself but with two possible options for remanufacturing: 1) forgoing remanufacturing operations and all unmet demand of remanufactured products are satisfied by third-party remanufacturers or 2) entering into remanufacturing operations under a collaboration with the third-party remanufacturers. Our results reveal that the OEMs began to embrace remanufacturing mainly because they want to protect the new product and reduce the cannibalization effect by limiting the secondary market. In particular, we find that, compared with forgoing remanufacturing operations, collaboration with the third-party remanufacturers is always beneficial for the OEM but may be detrimental to the third-party remanufacturer and our environment. To limit the perverse incentives of the OEM, a revenue sharing contract, in which both parties can reach the Pareto gains, has been developed for both parties. We also find the non-collaboration will be more friendly to the environment.