Remanufacturing facility installation decisions under product sourcing cost uncertainties: A real options approach

Abstract

In this paper, we investigate the strategic decision-making process of a Maintenance Repair and Overhaul (MRO) company considering the installation of a remanufacturing facility under product sourcing cost uncertainties (e.g., purchasing new products from third-party, and remanufacturing used ones). We consider the remanufacturing costs to consist of constant and variable portions. The variable portion is the acquisition cost of used products, which we consider to be correlated with the new product's purchasing costs. Assuming an indefinite lifespan for the remanufacturing facility and equivalent pricing and customer valuation for remanufactured and new products, we employ the real options approach and the quasi-analytical method for problem modeling and solution derivation. The study reveals that the decision to install a remanufacturing facility is influenced by various cost combinations rather than a single threshold. We derive and show the procedure to obtain these cost combinations. Significantly, we discover that unit-based variable subsidies, such as tax exemptions, can effectively reduce this cost threshold, making remanufacturing a more viable option. This insight is crucial for policymakers and businesses, highlighting the role of government incentives in promoting sustainable remanufacturing practices and contributing to the understanding of remanufacturing as a financially viable and sustainable strategy.