A heuristic substitutions policy to control inventories for a hybrid manufacturing/remanufacturing system with product substitutions between three markets considering customers’ behavior and remanufacturing limitations.

A heuristic substitutions policy to control inventories for a hybrid manufacturing/remanufacturing system with stochastic demand considering downward substitutions between three markets (new/once remanufactured/twice remanufactured units of one product) is presented. The policy governs whether or not to allow substitution options between the markets, as well as the related quantities, where the behavior of customers related to the substitution options is explicitly taken into account. The main aim of substitution, apart from immediately fulfilling demand, is to manage the availability of returns to improve the net profit and the fill rates. The values of the policy parameters are determined via simulation-based optimization. To justify the use of the heuristic policy, a simplified Markov decision process to obtain the optimal policy is provided. The performance of the heuristic policy is examined via numerical experiments. The results show that profitability and serviceability can be improved using the proposed policy, even if the actual substitutions result in a direct loss. It is also shown that substitution is not useful if the used product holding costs are beyond a certain value. Exceeding this value may even give rise to no longer remanufacture. Investigation of the effect of return rates reveals that higher return rates result in a higher net profit and higher serviceability. Further, the importance of making customers willing to accept substitution options is shown. Suggestions for further research are indicated.