Remanufacturing supply chain coordination through option contracts under uncertain demand

In this paper we study the role of option contracts in a remanufacturing supply chain (RSC) where a remanufacturer acquires and remanufactures used products, and then resells via a retailer facing uncertain customer demand. As a benchmark, we first derive the optimal decisions of acquisition prices and order quantities in centralized and decentralized scenarios excluding the opportunity of option contracts. We further investigate the option contracts scenarios, including the unidirectional option contract and the bidirectional option contract, and then examine the impact. By characterizing the properties in optimal decisions and conducting numerical examples, we illustrate that both option contracts can coordinate the RSC, and subsequently Pareto improvement can be achieved. Nevertheless, both players in the RSC prefer the bidirectional option contract to the unidirectional one due to profits improvement if the prices of option contracts are relatively high. In addition, although the financial and environmental objectives are in conflict under option contracts, they align if the RSC is coordinated. Our work illuminates how different option contracts drive entity’s preferences regarding financial and environmental benefits in a secondary market, and also paves the way for proposing option contracts in a remanufacturing environment.